The ongoing theme of improving rail service as a means to capture market share away from trucking again appeared in comments from Class I railroad executives speaking at recent investor conferences.
To frame the discussion around rail service, CSX executives started by looking at what factors and conditions led market share away from rail to truck.
The railroads need to demonstrate that the service they provide is consistently reliable, according to CSX President and CEO Joe Hinrichs. who pointed to situations in which the railroads historically hauled greater volumes of motor vehicle components such as frames and sheet metal but because of inconsistencies in rail service, those volumes shifted away from rail and to other transportation modes.
Providing excellent service should be “the foundation of any discussion around growth,” Hinrichs said at Baird’s investor conference on Nov. 8. “We have industry-leading service levels, but we know there’s a lot more we can do. We’re not anywhere satisfied with where we are. We know we can get better.”
CSX CFO Sean Pelkey, speaking at Stephens’ investor conference on Tuesday, echoed Hinrichs’ remarks.
“I’ve been to several customer locations over the years. And every time I go, I’m really frustrated because I look at the number of truck bases they’ve got and all the outbound product getting loaded up into the trucks and the empty rail cars are sitting right next to them,” Pelkey said.
“But you just see the amount of opportunity that’s there. Most of the plants that are rail served, in many cases, are also truck served. So in some cases, those plants that might be running 50-50 rail and truck, can they very quickly shift to 60-40 rail? Absolutely. If we’re running well for 30 days, those kinds of shifts occur. And you know what, if we’re not running well for 30 days, they’re going to shift right back to truck very quickly,” Pelkey continued.
Other Class I railroad executives also identified the need to improve rail service.
Customers “frankly need to see rail service [reach] targeted levels through an economic cycle,” said NS President and CEO Alan Shaw at the Stephens conference Wednesday. “There are a lot of customers right now who would want to ship more with us today if we could present the capacity to them. … I know there’s a lot more out there as we continue to demonstrate our ability to deliver good service in an economic cycle.”
Union Pacific CEO Jim Vena noted that providing excellent service can mean different things to different customers. What parcel companies might define as excellent service may differ from what bulk customers may want. Some customers might want UP’s trip compliance to be in the high 90s, while other customers might place a premium on how fast UP can turn rail cars, Vena said Tuesday at the Stephens conference.
“I know that we can grow this business. If you go around our network, there are so many things that we can do to leverage it. We have to understand that not only can we win when we’re competitive against other railroads — if we’re the best and we have the best margin … but we can grow with our customers and we can leverage our network that we have and the kind of products that we move and in Mexico,” Vena said.
How the railroads plan to bolster rail service
To improve rail service, Hinrichs said one way is to focus on the outlying factors.
“It’s not just did your car load or did your intermodal train get there on time, but also were we there when you need us to load empties,” Hinrichs said. “We need to reduce the standard deviation of outliers. If we get there 90% of the time but the other 10% [is] five days late, that’s a huge problem, right? It’s not just on the averages. We’ve got to narrow the standard deviation of our performance.”
Moving data onto the cloud can also be a way to enable more efficient real-time decisions and help CSX (NASDAQ: CSX) improve its trip plan compliance in the next 24 to 72 hours, Pelkey said.
“There’s more meat that needs to be put on the bone in terms of the way that we share that with investors and that will come in time. But our investment in technology has gone up a little bit,” said Pelkey, who pointed out those investments help bolster rail safety through autonomous track inspection and predictive technology to ensure locomotive health.
According to Vena, one key advantage that UP (NYSE: UNP) has over its peers is speed. The railway can run up to 70 miles per hour on certain stretches of its network, including from Omaha, Nebraska, westward. Another advantage is UP’s access to six gateways at the U.S.-Mexico border, as well as its 26% ownership of the FXE Railroad in Mexico.
UP needs to optimize its accessibility to West Coast ports 一 and not just focus on the ports of Long Beach and Los Angeles, but also partner with others in Portland, Oregon, Seattle and Oakland, California, Vena said.
As Vena alluded to during UP’s third-quarter 2023 earnings call in October, the railroad is also seeking to streamline decision-making within the company by enabling those closer to day-to-day operations to make operating decisions. The company recently said it targeted layoffs of 5% of its 5,600 managerial employees as a way to reduce the bureaucracy in UP’s decision-making process.
“We had nine layers to go from myself down to the people … doing the work in the operating department. There’s no way that you need that many people,” Vena said, adding that those laid off were offered positions elsewhere in the company, including some unionized roles as locomotive engineers and conductors.
Vena described decision-making at a level closer to day-to-day operations as a way of shifting the company culture. “You frame exactly what the authority is. You let people have that authority. You let them make it at the right level. The young man who today works at El Paso has a way better idea of what the impacts are. And if he understands [that] the goal is to provide the service we sold to the customer … as efficient[ly] as possible, when he’s … seeing what traffic has come to the border for the day, he has a way better idea to be able to say, ‘How do I use those crews in a better manner?’”
That effort to change company culture, coupled with day-to-day operational goals such as running longer trains and sweating assets, also helps UP maintain productivity during times of economic downturn, according to Eric Gehringer, UP executive vice president of operations.
When UP is sweating its assets, “you’re really trying to figure out with every day and every decision that’s made, how do you do that better today than you did yesterday?” Gehringer said at the Stephens conference.
Class I rail executives look ahead
Executives were hesitant to speculate when macroeconomic conditions might improve in 2024.
Geopolitical instability globally is another factor that could weigh on the railroads’ marketing prospects, according to Shaw. But the e-commerce peak, which occurs after Thanksgiving, should provide NS (NYSE: NSC) with a boost.
Nonetheless, despite next year’s uncertainties, “we have the capacity to handle more business and we’re attracting more business,” Shaw said, noting that in the last six to seven weeks, NS is seeing volumes at levels not seen in 18 months amid improving network fluidity.
Vena said UP aims to outpace growth in the industrial economy.
“We need to be excellent at service so that our customers and other customers that look at the railroad industry say, ‘We want to be on the railroad.’ That’s where our growth is going to be and the business is out there. … So where would I be happy? I think I’d be happy that we grew faster than what the industrial economy gives us. And that’s a goal to start off with. That would not be my long-term goal, but let’s get there first.”
As for a longer-term view of where UP plans to position itself in the next three to five years, the railway is considering hosting an investor day sometime in the back half of 2024, according to CFO Jennifer Hamann, who noted that will depend on where the economy shakes out.
Meanwhile, CSX and NS executives pointed to future industrial development opportunities in growing population areas such as the U.S. Southeast.
This dynamic of industrial development “is as exciting as it’s been in my nearly 20-year career at CSX. I don’t think we’ve seen this much activity in those two decades,” Pelkey said.
Potential opportunities in 2025 and 2026 for CSX could come from automotive production plants in the Southeast, such as the Rivian plant outside Atlanta, the Ford plant outside of Memphis, Tennessee, and the Hyundai plant in Georgia, according to Hinrichs, who said hauling aggregates because of construction activities is another potential opportunity for CSX.
Shaw also noted manufacturing growth in the Southeast as well as the Midwest. For instance, the electrical vehicle market is worth $70 billion in North America, with $30 billion of that occurring near NS’ network.
“I’m really confident that we’re going to have a lot of strength in our merchandise franchise going forward because of onshoring,” Shaw said.
Recently announced partnerships among the railroads, such as NS’ partnerships with Canadian railway CN and Florida East Coast Railway, could also help to grow rail volumes, according to Shaw.
“We have to think of ourselves as competing in this supply chain ecosystem. And if all we’re doing is throwing costs over the fence at a customer or a short line partner, that end-to-end solution probably isn’t going to be effective, and it’s probably not going to win versus truck. We’ve got to partner with them to make that interface much more efficient. And that’s ultimately how we’ll win,” Shaw said.