Has the Brake Dust Settled?

William Beecher

Midyear Report, Railway Age July 2024 issue: 2024’s tumultuous first half should transition to a calmer period. But then again …

The first six months of 2024 found a lot of people in this industry scratching their heads, shaking them in disbelief or banging them against the wall (figuratively, of course, but one never knows, right?). Boiling on a hot stove like a pot of pasta, reaching a point well past al dente, was a sticky lump of indigestion-inducing ingredients:

1) A bitter proxy battle characterized by name-calling and grenade-throwing.

2) A National Transportation Safety Board investigation into a February 2023 derailment that, despite the hard work and integrity of the NTSB, was concealed in a dark political cloud.

3) A nonsensical Federal Railroad Administration rulemaking on crew size that reeked of politics.

4) A Surface Transportation Board rulemaking on reciprocal switching that, although deemed relatively easy to swallow, still caused a fair amount of choking.

5) OK, that’s enough!

All of this overshadowed measurable progress in service quality and safety, successful launch of new services in several key corridors and many other positive developments. But except for the trade (that would be us) and enthusiast press, those subjects don’t make the news. What else is new?

We need a break, some quiet time, a breather. Will the second half of this year could look a bit less disconcerting? Well … 

For 2024’s first half, at least from an investor perspective, “all the focus has been on Norfolk Southern’s fight with Ancora,” Railway Age Wall Street Contributing Editor Jason Seidl, TD Cowen Managing Director, Industrials-Airfreight and Surface  Transportation, remarked at our recent Rail Insights conference. “Then it shifted toward ‘can the railroads actually post some improvement as we move throughout the year?’ We’re really looking for what the rail industry will look like when the freight environment rebounds, because we’ve been in a freight recession for the better part of two years. It first showed up in the truckload industry and then permeated throughout the rest of the supply chain. When is it going to end? Many have tried to call the turn, and they’ve been wrong. I have three decades of transportation experience under my belt, whether as an analyst or as an operator in the trucking and parcel industry. I’ve never seen a downturn that has lasted this long, by our numbers. 

“We assume that the truckload market will start to look a little bit better later this year. And then as we go into 2025, that should help out the pricing side for some of the rails, when you look at truck-competitive business and the intermodal sector. But until then, I don’t think the rails are going to get any help. There’s going to be a little bit of pressure as we move throughout the remainder of 2024.”

While this downturn lasts, what does Seidl think railroads should be doing, other than working on their service product and relationships with employees, and on their reliability on technology? What are the opportunities?

“The railroads have failed to grow volumes over the past decade, so growth is the key,” said Seidl. “Shippers do want to use the railroads more. They’re just a little bit gun shy in how they’ve been treated over the years, whether it’s ease of doing business, or it’s some pricing they felt was unfair when they were captive or whether the service product was inconsistent. That’s what I hear a lot of times in my role with the Northeast Association of Rail Shippers from the people that attend our conferences: ‘We’d like to use the railroads, but we just can’t risk it. The service quality is not there.’ If we as an industry can improve service quality and supply chain visibility, and also increase the ease of doing business, that’s going to go a long way to winning back some of the business that, quite honestly, rightfully belongs on the railroads.”

Seidl has been a NEARS Board member for the better part of 20 years. Comparing shipper experience from his perspective back then to what it is now, on a scale of 1 (much worse) to 10 (vastly improved), how does he rate it?

“We’re somewhere around a 5,” said Seidl. “We’ve improved, but we’re nowhere close to where we need to be. If you go back, I don’t think any of the railroads were actively talking about the levels of service improvement that they’re looking to do now. If you go back 15 years or so, the start of PSR and OR (operating ratio) gains relly dominated the marketplace—at least the headlines. We’re heading in the right direction, but it’s going to take a few years to get to the point where we need to be, even just how we look at service. 

“Going back to when I started in this industry, all you talked about was cars on line and train speeds and terminal dwell. These are all components of service, but what shippers look at is plan compliance. Are you getting it there when you say you will, on a consistent basis? That’s what the shipping community is really concerned about these days.”

“I look to some of the new services that have sprung up post-CPKC merger, and I’m really encouraged. We follow Schneider National, and they’ve been raving about the service CPKC is giving them from Mexico into Chicago. They’re saying it is truck-like service. If CPKC can keep that up, they’re going to win business off the roads.”

What exactly is “truck-like service?” Other than consistency, it is speed and visibility. “A network going from two to one really matters,” Seidl noted. “It helps the speed a little bit. Then there’s ease of doing business. There has been a little bit of cultural change at the railroads over the years. They’re starting to realize that you need that component when you’re interfacing with your customers. It’s having supply chain visibility. 

“Rail is a bit lower there. RailPulse is coming along, but is still a few years away. We’re looking at other industries that permeate throughout the supply chain that are doing a far better job than rail. For example, if you look at some of the medical device shipping companies, they can log on, look at their shipment, and know what angle it’s sitting at on the air cargo plane. What’s the temperature inside the shipment? There are so many variables you can check in real time. That’s what rail is competing against—the expectations the shipping community has. At the very least, let me know where my shipment is and when is it coming to me. Let me be able to access that, whether it’s through an online portal or an app. And I think that’s what the shipping community wants. Amazon has created a lot of expectations with the younger generation coming up that our generation didn’t quite have in terms of shipments. As these people come into the supply chain and are going to be future logisticians, they’re going to have those expectations.

“I think the rails want more business. During the past year they’ve focused on their service product because it was in a bad way when they got on the wrong side of the labor structure and wound up behind the eight ball. It took some time to catch up. But we’re facing a market that’s difficult to compete in right now, especially given where some of the OTR (over-the-road) rates are on the spot side.”

What about capex? Nick Little, Director of the Michigan State University Center for Railway Research Education, asked Seidl: “How can railroads compete with trucking when railroad capital costs, including maintenance and renewal of infrastructure and equipment, is such a high proportion of expense? 

“If the railroads can earn their cost of capital, it’s going to encourage investment throughout the rail network,” Seidl answered. “If they don’t earn enough, they will not invest, and that will hurt the supply chain. Encouraging investment in the rail network is a positive thing for everybody, and you can only do so by letting the rails have an appropriate return.”

The threat of stepped-up regulation is perhaps the main hurdle to growth. It’s considered pretty onerous, for example, with the FRA rulemaking on crew size, which in truth won’t have an immediate effect because of current labor contracts in place. Then there’s reciprocal switching, whose effect at this point isn’t clear. Activist STB Chairman Marty Oberman has retired, but Robert Primus, his replacement, most likely is an activist. He might be a little less friendly to the industry, based on his past decisions and questioning demeanor during hearings. He was the lone STB Commissioner to say the CPKC merger was a bad thing and vote against it. It was not, as we all know, and it has created new rail-to-rail competition. One wonders if Primus wishes now that he could change his vote? 

How does Seidl perceive the current regulatory atmosphere? Bearing in mind that 2024 is a Presidential Election year, and things could change depending upon who gets in the White House, where does he see the situation headed?

“I would say that, years ago, the pendulum was completely over to the other side,” Seidl answered. “It was all the way in the railroads’ corner, and it was very tough to be a shipper. The pendulum has swung the other way. Shippers have more of a voice with the STB and FRA than they have had in the past. Marty Oberman was to me a chairman who did what he said he was going to do. All you had to do was listen to him. He would tell you what his plans were going to be, and he always followed through. I always appreciated that on my end. I believe the election is going to have big consequences for that, but I want to caution everyone out there that it’s not going to happen right away if there is a change in Administrations. It’s not like come January, we’re going to see a complete change. Remember, both Obama and Trump did not fill all the open seats on the STB. We in this industry may live and breathe railroading and transportation, but it’s not everybody’s first choice in Washington to pay attention to. Naming new people to the STB is probably something that’s going to happen over time.”

Returning to the current climate in the investor community, and taking into account the NS/Ancora proxy battle, which after all the noise quieted down and the dust settled, turned out to be exactly what most people expected, what’s the mood?

“It’s cautious right now,” Seidl said. “Throughout my group, people don’t know where we are with the economy. They’re hoping that it doesn’t slide further. They’re looking at some of the import numbers and wondering if this is a little bit of a pull forward, and maybe the back half of the year could be a little slower than expected. Investors are cautious right now on the rail space. As we move toward 2025, that’s going to be the meat on the bone, if you want to put it that way. If we can start growing the industry, get in a better position on pricing and win some of this freight back from the highways, I think 2025 could look a heck of a lot better than 2024, if things go the railroads’ way. The economy is on ‘okay’ ground, although not as solid as maybe some would like. I see us continuing to be shaky into the second quarter. The big question is going to be, what is the outlook for the back half of the year, from not only the railroads but also the trucking industry.

“The industry and people like [CSX President and CEO] Joe Hinrichs are pushing things in the right direction. But from my observations over the years, the railroads, in trying to make a 90-degree right-hand turn, are akin to maybe a large steamship trying to do the same thing. You can’t expect them to do that. It’s going to take some time. As long as we’re seeing progression toward the end goals, which are consistency of service, supply chain visibility, and ease of doing business, it’s a positive thing for the industry. And then over time, we’re going to regain some of that freight, and I think we’re going to be a much better rail network than we were before.”