Tony Hatch: RailTrends 2010 recap

by Tony Hatch

Panelists at this year's RailTrends 2010 conference (Sept. 28-29 in New York City) provided an assortment of insights and ideas. What pervaded: a sense that the economy is growing steadily, if not yet spectacularly, although several carriers in attendance were more upbeat offline than in their presentations. Accenture's Brooks Bentz, a RailTrends presenter and sponsor, summed it up perfectly in the title of his presentation: "Why Being a Railroad Will Be a Good Thing — For a Long Time." Anyway, a few take-aways:

Covering the Capitol. Attendees heard/participated in a series of discussions on the three major issues of the day: "re-reg," PTC and the freight/passenger-rail interface. I believe we've passed the high-water mark of the rail re-reg movement, and RailTrends discussions seemed to confirm it: The odds of S. 2889 (the Rockefeller/Senate Commerce bill) passing in 2010 are very, very low and should drop significantly next year. The audience, though, worried about "re-reg lite" coming not via legislation but from potential STB regulation. Speaking of PTC: It's still the $10 billion unfunded mandate with as-yet unproven technology. Oliver Wyman's Jeff Elliott presented the case: As currently envisioned, PTC will yield only about $400 million in business benefits over 20 years. It also may cost the industry capacity! Meanwhile, the political tide may threaten the high-speed rail (HSR) movement, which also provides capacity risk even in its higher speed rail form, offset (to what degree?) by funding opportunities. AAR's Ed Hamberger called it the "double-edged sword," much as carbon legislation is, or in truth, all of Washington's rail interface.

More D.C. FRA's Joe Szabo highlighted the preliminary National Rail Plan, which endorses modal share shift toward rail/intermodal. Could passenger rail absorb freight capacity? "We will not allow that to happen!" he said. STB Commissioner Frank Mulvey detailed the regulatory events before the board; NRC's Chuck Baker summed up upcoming legislative events and proposals — from HSR to the big-picture rail realm.

Intermodal. Opportunities have moved from "possible" to "probable," and we heard presentations from Florida East Coast (new CEO Jim Hertwig), IANA, TRAC Intermodal, Hub Group and, as part of his sterling keynote, BNSF's Matt Rose. IANA's Joni Casey and TRAC's Adam Bridges discussed chassis pooling and "roadability" — nuts-and-bolts stuff that present both an obstacle and an efficiency opportunity that Casey called the "game-changer." Hub's Chris Kravas endorsed the mega-opportunity that is true domestic intermodal.

'Innovator' award. BNSF's Rose received Progressive Railroading's "Railroad Innovator Award" and discussed three seminal rail innovations: the diesel (and AC diesel) engine; the Staggers Act; and technology to date. Future innovations include, interestingly, PTC, as well as extended life cycles of assets that have made railroads marketing companies ... and BNSF has been a, if not the, leader there. The future, he said, hinges on next-gen technology, public policy and leadership.

Rail cars in context. RSI's Tom Simpson noted that passenger-rail success doesn't mean much to freight-car builders; he also talked about the creeping truck-size-and-weight issue. Toby Kolstad predicted the rail-car recovery will begin in 2011, with production rising to the 22,000-to-24,000 range.

Coal conundrum. Rob Hardman of Southern Co. took us through the mega-utility's fuel-sourcing strategic options, given the upcoming changes in emissions legislation and/or regulations. The changes provide real risk for the long-time backbone of the rail commodity base. But we heard Hardman's "don't count out coal" declaration loud and clear, as well as his clarion call for rails to act as partners in this fight.

GWI's best 'case' and a 'win-win.' Genesee & Wyoming's Jack Hellmann presented the best case for the company's patient, yet still-aggressive strategy I have ever heard. Australia looks like another big winner (again) for GWI. We also heard a great "win-win" story between CSX, short-line Watco and chemical customer Solutia — with opportunities to replicate the model elsewhere.

From The Street. The audience heard from me (my usual ranting) and UBS' Rick Paterson, who examined operating leverage through the cycle (we're mid-cycle, he said). He introduced his "coefficient of efficiency," stressing how much volume increases relate to service declines. It's also central to my thesis: Service and productivity will be crucial in the next cycle in terms of rails gaining modal share and incremental margins, improving returns, pleasing governments and regulators, and growing the workforce — a virtuous circle that is truly the end point of the rail renaissance!

Tony Hatch is an independent transportation analyst and consultant, and program consultant for Progressive Railroading's RailTrends conference. Email him at abh18@mindspring.com.