Post EHH Changes for CSX

[QB 52.32]

So rr503, this brings us right back to my original point, that you dispute, not to expect growth requiring additional infrastructure capacity that can't financially justify long-term capital investment. You do realize that much infrastructure capital investment that supported growth 3, 5, 10, 25 years ago came from government coffers, at least in the East? Prudent long-term growth will only be supported for markets tending toward some mix of higher cubic density, longer hauls, higher volumes and, in some instances, special handling requirements. Regional railroads do not provide an example for Class 1's and much of their infrastructure capital investment comes from or with the assistance of government sources. Your example of short-haul markets the likes of CN and CSX focused upon the Port of NY/NJ, in addition to others at CSX unchanged from pre-EHH to post-EHH, come from available linehaul network infrastructure capacity, not from terminal capacity. So, yes, there is short-haul potential but not where it requires additional linehaul capacity infrastructure private capital investment. PSR may just allow a more fine-tuned and focused approach to filling capacity, including targeting in shorter-haul markets.

The line of thinking of some analysts and "railroad industry professionals" criticizing specifically larger railroads for their failure to capitalize on market opportunities is often rhetoric told through a lens of PR and image, bias and click-baiting, and incomplete or dated sourcing that leads to inaccurate or incomplete conclusions. And, push back against EHH & PSR, despite the positive and significant transformation at CSX, can be particularly strong because the apple cart has been upended. Of course management focus shifts once strategic OR is attained, but, make no mistake, there is no retreat.

Class 1 railroads, including CSX post-EHH, will only change their behavior if the playing field changes.

[mmi16]

Class 1 railroads, including CSX post-EHH, will only change their behavior if the playing field changes.

When you have just about eliminated your Sales and Marketing forces - you don't know when the playing field changes.

[QB 52.32]

2019 CSX operating ratio came in at 58.4, widening their lead over NS to 630 bps, 1 year and 160 bps ahead of their 2020 target and with NS 470 bps from their 2021 target.

EHH's disruptive approach to PSR implementation had ~4 times the positive performance impact at CSX than Squires' less disruptive PSR implementation at NS has had when roughly compared over the same implementation timeframe. Though 4th quarter 2019 saw NS PSR implementation starting to dig in, given where they're trying to get to within the next 2 years the possibility of rationalization toward the degree that CSX implemented, like closing more hump yards or line sales, bears watching.

Noteworthy and interesting from the marketplace, JB Hunt publicly reported that CSX's approach to fast, though disruptive, PSR implementation is preferable to the slower approach taking place at other Class 1's (ie., NS) and Schneider publicly reported that CSX's service reliability now is on par with truck.

With CSX 2020 capex projected to remain at 2019's level, NS' new CFO is surprised how capital-intensive the business is and wants to push back and test NS' approach to capital expenditures, with 20% of their 2020 capex going to fix their slow adoption of AC traction.

Post-EHH, in 2019 CSX management continued their response to free-market-based demand and capital allocation with solid results.

[ccutler]

Yes, CSX is doing well, and their demonstrating strong investment returns is a favorable signal for the entire railroad industry. I would be pleased to see more NS lines sold to short line operators. Thinking about the Buffalo & Pittsburgh line, once a CSX subsidiary in steep decline and one of many examples, it flourished under then-local management and is now a major source of carload traffic.

Class I railroads are terrible marketers for carload traffic, and they would all be smart to realize that and sell off as many local lines as possible. Having local operators incentivized to maintain and attract local business is a model short lines embrace and where Class Is tend to fail.

[mmi16]

Class I railroads are terrible marketers for carload traffic, and they would all be smart to realize that and sell off as many local lines as possible. Having local operators incentivized to maintain and attract local business is a model short lines embrace and where Class Is tend to fail.

Considering that PSR has effectively eliminated any attempt at Marketing, they might as well sell off their entire property to a organization that can market their services.

Any service you don't actively market is soon in decline.

[NRGeep]

Class I railroads are terrible marketers for carload traffic, and they would all be smart to realize that and sell off as many local lines as possible. Having local operators incentivized to maintain and attract local business is a model short lines embrace and where Class Is tend to fail.

Considering that PSR has effectively eliminated any attempt at Marketing, they might as well sell off their entire property to a organization that can market their services.

Any service you don't actively market is soon in decline.

As long as the shareholders get theirs...

[QB 52.32]

I'm not cynical when it comes to PSR. Sure, there's debate to be had about the human cost of job losses or how the PSR benefits are used, but that's bigger than railroading. When it comes to Class 1 marketing, PSR has had a positive impact by improving service reliability. Strategic initiatives like extracting value for the service in pricing, channel decisions like wholesaling intermodal or light-density lines to others who retail the product, or reducing sales & marketing staff to match technological innovation or channel decisions predates PSR.

[ccutler]

Yes the organizational behavioral problems predate PSR, and PSR is the breaking-the-gordian-knot solution to those problems. Nonetheless, I submit that a well-run Class I should market just as well as a short line, but that's just not the case. Carload traffic is down about 8% in the last year while trucking volumes are up. I get that half of that loss was coal, but it still shows that PSR hasn't recaptured any material net traffic in the USA...yet.

[QB 52.32]

Class 1's and shortlines are 2 different animals. Keeping in mind that marketing is more than just selling, customer service or advertising, generally speaking if Class 1's behaved like shortlines they'd either require much more government assistance and/or infrastructure ownership or defer maintenance and lower capital investment over the long run.

Carload derives its demand from industrial, energy and agricultural activity, which has some headwinds. Boosting service reliability through PSR while using technology to improve how rail integrates with customers and within supply chains is a big step in increasing its utility for customers. And, on Class 1 scale with ~94% of industry revenue, that's gonna have a bigger sustainable industry impact than following a shortline marketing model.

[ccutler]

Thanks QB 52.32, I hope your forecast is correct. I drive I-80 through Pennsylvania pretty often, and see truckloads of steel coils, cement, hazardous chemicals, lumber/forestry products traveling long haul. Those loads are natural high-density traffic that should move mostly by rail, yet it seems that even that traffic moves on trucks, so:
1. is the 60% o/r too aggressive, driving away so much traffic with higher shipping rates that the railroads are actually missing future profit growth and undermining their customer base? or
2. do railroads face a huge opportunity to recapture traffic from the trucking industry?
Thus far it appears that railroads may be driving traffic away with higher shipping rates, optimizing short term profits and improving operations but compromising their future.

[gokeefe]

Even though I too am dubious of PSR it is worth noting that the "chase every load" philosophy is reminiscent of Penn Central. We all know where that ended up.

[QB 52.32]

Thanks QB 52.32, I hope your forecast is correct.

Thank you, ccutler. Me, too! Though I'm willing to accept lower volume if it means longer-term, less-risky sustainability.

When I hear CSX's CEO Foote talking about new and organic growth from truck, though taking time given the nature of the beast, and, indications he's walking the talk, I believe that is part of the plan. I also hold out hope that once PSR gets carriers to the strategic place they want to be, it'll allow and they'll pursue a shift in focus to the strategic markets that make sense with innovation through technology and new initiatives (and maybe even that final round of mergers EHH thought necessary).

In terms of your I-80 truck traffic observations, I guess you'd have to ask how you define "long haul" and bore down to what the business is ie., is it actually moving from a rail transload (lumber, steel, chemicals), is it a low-volume and/or short-haul move, or, is it moving via highway because rail doesn't compete because of service and/or price? My simple guess is that it's a combination of all three.

[QB 52.32]

1Q2020 CSX operating ratio 58.7, down 80 bps from 1 year ago and 500 bps ahead of NS who reported adjusted OR of 63.7.

Beyond the dramatic end of quarter Covid-19 traffic loss, coal traffic loss challenged both carriers, down 15% on CSX and 31% on NS with total traffic volume down 1% on CSX and 11% on NS. Year-over-year, CSX grew both volume and revenue/unit in the merchandise carload sector and held intermodal volume steady.

CSX reported no change to their 2020 capital expenditure plans with NS knocking out 20% of their planned spend, though not coming out of their sizable (~20%) spend going toward fixing their slow adoption of AC-traction.

[BandA]

One man crews will last exactly until the first accident with fatalities.

Replying to an old post, but see Lac Megantic, Quebec, 7/6/2013 on the MMA (Montreal, Maine & Atlantic), 47 dead. viewtopic.php?f=47&t=151084. Liability exceeded the insurance limits + the value of the railroad.

[mmi16]

1Q2020 CSX operating ratio 58.7, down 80 bps from 1 year ago and 500 bps ahead of NS who reported adjusted OR of 63.7.

Beyond the dramatic end of quarter Covid-19 traffic loss, coal traffic loss challenged both carriers, down 15% on CSX and 31% on NS with total traffic volume down 1% on CSX and 11% on NS. Year-over-year, CSX grew both volume and revenue/unit in the merchandise carload sector and held intermodal volume steady.

CSX reported no change to their 2020 capital expenditure plans with NS knocking out 20% of their planned spend, though not coming out of their sizable (~20%) spend going toward fixing their slow adoption of AC-traction.

CSX has always had 'sharp pencil' in the accounting and finance department to be able to publish the numbers senior management desires ... how real the numbers are is another question.