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By Tony Hatch

Greetings and welcome back from summer break, if you were able to get one (I snuck up north for 24 hours to Boston to see Manny [Ramirez] in a new uniform.)
 
Are the rails a safe bet? Norfolk Southern Corp. issued a 100-year bond, which I hope to see retired. That says something, doesn’t it? But the rails are more than safe — there are dynamic, new investors (institutional, hedge fund and private equity) kicking tires all of the time. The rails also are confident. How so? Some 2,100 railroaders attended the American Railway Engineering and Maintenance-of-Way Association's (AREMA) annual conference late last month in Orlando. And it's a global thing — just last week, new high-speed rail lines were announced in South Africa. Why is the world turning to rail as a solution?  Emissions?  Infrastructure?  Cost structure? Energy independence? How about to avoid 10 hours of parking-lot-like traffic jams as was just experienced on the main highway to Beijing (I kid you not)? Again, rails are beyond “safe,” as we’ll see and hear at RailTrends 2010 (see below).
 
Rail engineers convene in their thousands. Last month, I keynoted at AREMA's annual event (Note: AREMA members are the guys who actually spend the big capital dollars). A record number of attendees (that 2,100 number) and presenters were in the house, setting the stage for what should be a monster event in fall 2011 when AREMA joins with the Railway Supply Institute, Railway Engineering-Maintenance Suppliers Association and Railway Systems Suppliers Inc. to produce Railway Interchange 2011.

At AREMA 2010, we heard:

• A terrific valedictory from retiring Union Pacific Railroad Vice Chairman of Operations Dennis Duffy, who highlighted UP’s strong recovery in ops and culture; it's clear also that UP is restarting its growth capital projects — all of us in the industry will miss Dennis, perhaps UP most of all.

• A presentation on Norfolk Southern’s just-opened Heartland Corridor, which won AREMA’s annual William W. Hay Award that recognizes excellence in engineering — and we could see why.

• An update on CREATE, the early, underfunded PPP (of “national significance,” said SAFTEA-LU) that is continuing to fight the good fight and is perhaps 30 percent complete, with $740 million in funding (spent or committed) and yet still $2.4 billion underfunded, heading into the next big transportation bill in ...? CREATE is making progress, and is attacking some of the biggest bottlenecks in the country.

• A neat (sorry) presentation involving Axion, an interesting manufacturer of recycled plastic rail ties & structures.

• And a terrific if sobering panel on positive train control (PTC) — the ~$15B “unfunded mandate” with a 2015 due date. PTC also is the subject of a great panel at RailTrends 2010 (and the subject of a nice cover story in the August issue of RT2010 partner Progressive Railroading). All of the major rail PTC project managers were there, including thought leader Jeff Young of the UP. The panelists said they see no business benefits — at all — from PTC until 2020 or 2025 (the FRA has a 22:1 cost/benefit estimate out there); they also were pessimistic about any government help here, despite it obviously being a perfect target for a PPP. In fact, the panelists saw many challenges ahead (new, untested equipment, interoperability) that belie the statements in some trade publications (“suppliers meet the PTC challenges” — emphasis mine).
 
RailTrends 2010 — our best yet. Please join us in NYC for RailTrends 2010 on Sept. 28-29 at the Affinia Manhattan. (www.railtrends.com). Highlights? There are many. Take our coal panel featuring the Southern Cos. — like our Wal-Mart presentation last year, this will prove to be a revelation. As ever, we will hear a variety of opinions from D.C., including from association/organizations that support rail "re-reg" (as defined by the Rockefeller bill) such as the National Industrial Transportation League and Bruce Carlton — and those who do not (the Association of American Railroads' esteemed leader Ed Hamberger). FRA Administrator Joe Szabo will also be on hand to talk about PTC etc., which will be timely. There, too, will be Surface Transportation Board member Francis Mulvey in a session titled "The STB Looks Ahead." We'll also have a panel (as we do every year) on the dynamic intermodal sector. New Florida East Coast CEO (ex-CSXI) Jim Hertwig will present a trial run for perhaps a larger public presence as Fortress considers its rail future. Along with covering regional rails, we will hear from two short lines, one public (Genesee & Wyoming Inc., courtesy of President and CEO Jack Hellmann) and one not (yet?) The Watco Cos. (courtesy of CEO Rick Webb) on a shipper/marketing panel that should prove to be a fascinating case study on how to achieve “new business.” You’ll hear from me, on the analyst panel with UBS analyst Rick Paterson. We’ll also have Toby Kolstad on car values — interesting not just for bankers, lenders and car leasing companies, but an excellent bottoms-up look at rail volumes.

But most of all, we are thrilled that BNSF's Matt Rose, he of the private railway and employee of Warren Buffett, will make what will surely be seen as a rare visit to NYC and accept Progressive Railroading’s “Railroad Innovator Award.” RailTrends returnees will remember how amazing Hunter Harrison was in accepting the inaugural award. I have always thought that CN and BNSF represented two different models, discipline and growth, to achieve superior returns on investment in the railway world, and it will be terrific to hear from the growth model even as the new model will be a combination thereof. And how is it not spending time with the Street? Is being private advantageous?  Matt will surely discuss — I am very grateful for his rare presence. This is merely a highlight summary of what we try to do at RT: In a well-conferenced industry, we try to be eclectic but more — multidisciplinary. We hope to interest all folks who are invested (literally or not) in the railway financial future ... and we hope to see you there.
 
Freight/Passenger interaction – broken logjam? Little noticed, perhaps, was the news that the state of Washington and BNSF concluded an operating agreement that freed up some $590 million in government funding. One prominent expert in this field called me to suggest that this was a precedent-setting deal, whereby the onerous operating rules and penalties suggested by the government (FRA) were negotiated out in favor of getting the funds flowing and the ready shovels, well, shoveling. This could have national implications (while I was in Florida late last month, the Orlando papers were pleading for such an agreement between Florida and CSX and Amtrak), and set the stage for more PPPs, more dollars — and more and better cooperation between passenger and freight rail.
 
Rail traffic is ending the summer much stronger than anyone, including the carriers or shippers, could have anticipated. Through Aug. 28, traffic was up 12.5 percent YOY.  This will lead, naturally, to upward revision in Q3 estimates (which will still prove too low, if history is any judge). One major railroad business unit head told me that he was “shocked by the volume strength,” although the inventory numbers showed that strength might last well into next year even without a consumer rebound. There is the secular “story” going on, of course, in commodities such as export coal, and in grain (not just the wheat shortage but the rise in incomes vs. the decline in arable land) and especially in domestic intermodal (domestic containers have increased YOY for 20 straight quarters). But the secular case isn’t large enough on a weekly basis to cover up a surprising cyclical strength. International intermodal remains robust — is it an early “peak season” or the general strong rebound in trade? My chips are on the latter. Truck traffic remains strong as well, +7.4 percent in July (the eighth-straight month of YOY increases); there is even talk about a trucking “renaissance” (due to capacity cutbacks and bi-modal development), which almost made me ill till I noted that the Journal of Commerce noted the true source of the now ubiquitous phrase, as applied to rail.
 
However — this week’s numbers can (will) be interpreted by some as “slowing” as they came in about 1 percentage point less than the last few weeks had been running, so some will seize on this as “the beginning of the end,” with no real basis for that other than the headlines. It’s true that many of the weekly numbers trail the 4WRA and QTD results (with one notable exception in grain, as to be expected), as the comparisons get increasingly difficult. However, I don’t see any signs, yet, of cyclical weakness (despite the auto sales numbers, etc., etc.). Every carrier was up, of course, with some slowing in Canada ... but still strength belying the downwardly revised Q2 Canadian GDP numbers, wouldn’t you say? The stored fleet is down now to 23.4 percent of the total (from about 33 percent), with many of these cars destined for eventual scrapping now that the rails are running so much better.