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COVID-19 uncertainties, PSR part II: What’s on the minds of rail execs

Longer trains are here to stay, company leaders say

Company leaders of Class I railroads share what's on their minds at a recent investor conference. (Photo: Jim Allen/FreightWaves)

Train lengths, e-commerce and mergers and acquisitions were among the topics discussed by four Class I railroads at the Credit Suisse 8th Annual Industrials Conference last week. Here are some highlights:

Kansas City Southern talks service design adjustments, longer sidings

Kansas City Southern (NYSE: KSU) hopes to implement the third phase of its PSR program in 2021.

Although this phase could be the most challenging, it also could be the most rewarding, according to Sameh Fahmy, executive vice president of precision scheduled railroading (PSR) for Kansas City Southern (KCS).

While KCS expects to provide more details about phase three in its fourth-quarter 2020 earnings call in January, it could include making infrastructure adjustments to accommodate longer trains. This could include lengthening sidings. 

But because adding sidings takes time, KCS is also considering modifying its service design so that it builds blocks of cars in yards more inland so as to alleviate the work at the yards near the border and address the bottlenecks at the border, Fahmy said. For instance, classification work could occur deeper in Mexico than close to the border.

Service design changes might also include actions such as reviewing trip plan compliance every day for time-sensitive intermodal customers and working with manifest customers on refining first-mile and last-mile loading and unloading. 

In earlier phases, KCS sought to improve network velocity (phase one) and lengthen train and control costs tightly (phase two). Although KCS’ tight management of costs was a silver lining of the COVID-19 pandemic, about 400 people in its network have been affected by the coronavirus.

For the third phase, “we want to go back to the growth story of phase one,” Fahmy said, which includes reemphasizing velocity but also keeping trains long.

In the immediate term, KCS is recovering from a weeks-long protest that prevented movements from the Port of Lazaro in Mexico. If the line can remain open and protest-free, “we’re certainly hopeful that we can make up some of that lost [volume] ground before the end of the year,” Fahmy said.

Pan Am acquisition good for growing CSX’s network: CSX

CSX (NASDAQ: CSX) CFO Kevin Boone reiterated his company’s view that its acquisition of New England short line operator Pan Am Railways will benefit CSX’s customers.

“We think from a customer service perspective, there’s a lot of opportunity to add a lot of value there. And there are some investments we can make to grow the business over the long term as well,” Boone said.

Boone also alluded to additional growth opportunities that could arise from the acquisition of Pan Am.

“When you can touch water, those are very, very valuable assets. And so we see a lot of value there over the long term, medium term. And they have a great team that … helped us understand the opportunities that exist and what we can really do in the network, and we think there’s some very good growth,” Boone said. “If you look historically, they’ve been able to grow a little bit faster than … what we’ve been able to achieve. So we think the growth profile is attractive for us. And we’re excited about what we can do on top of that.”

As CSX looks at 2021 and especially the second half of 2021, the wide range of macro-economic predictions only shows how hard it is to determine any outlook, according to Boone. The uncertainty of how the COVID-19 pandemic plays out is the key unknown, he said.

“We’re thinking a lot about what [2021] looks like and … we were summarizing all the macro analysts out there and what their forecasts are. We have some that are forecasting high single-digit industrial production growth and some that are down mid-single digits. I’ve never seen it so wide in terms of what the expectations are out there,” Boone said. “So it makes it hard to predict going into next year, what does the second half of 2021 really, really look like? How quick do we get the vaccines out and those kind of things? What we have been looking at a lot is in the trailing four- to six-weeks trend and what does that really imply on a go-forward basis when you overlay the seasonality?”

Supply chain disruptions stymie intermodal growth: NS

Although intermodal demand is “white hot” right now, the supply chain disruptions in North America are inhibiting further growth, according to Norfolk Southern (NYSE: NSC) Chief Marketing Officer Alan Shaw.

Tight drayage capacity, a slowdown in warehouse productivity associated with pandemic protocols despite strong demand for warehousing and port congestion on the West Coast are factors that are limiting the upside for growth, Shaw said. 

Some commodities remained under pressure in the fourth quarter, such as chemicals because Gulf Coast chemicals production is still recovering after what seemed to be back-to-back hurricanes in the third quarter. Plant downtime has also put pressure on auto volumes, Shaw said. 

Norfolk Southern (NS) is quickening the pace of operational changes brought about by PSR, such as taking the hump yard out of Macon, Georgia, before peak season to work out any operational kinks. The railroad has closed six humps in the past 18 months, according to NS CFO Mark George.

NS is also seeking to turn railcars around quicker and fully utilize the horsepower capability of its trains, George said. 

The railroad is “not adverse” to any short line acquisitions, but NS has more short line connections than any other Class I railroad, George said, alluding to CSX’s purchase of Pan Am.

Lower costs help UP enable search for additional opportunities: UP

Union Pacific (NYSE: UNP) is seeking to increase locomotive and workforce productivity in the fourth quarter, and some changes have started to show. For instance, train length grew in November to over 9,000 feet while volumes between the third quarter and the fourth quarter to date have been essentially flat, according to Union Pacifc (UP) CEO Lance Fritz.

Although Fritz said UP’s pricing strategy hasn’t changed, what has changed is the company’s cost profile because of the various operational changes it made as a result of PSR. Because of the lower cost profile, UP has been able to pursue or bid on additional market opportunities, Fritz said. 

“That gives us great opportunity both on the pricing side as well as on the securing business side. And we’re seeing that across the board happening,” Fritz said.

Although market headwinds remain for sectors such as energy, “the opportunity for truck conversion is enormous,” Fritz said.

Meanwhile, the industrial markets appear to be recovering in the fourth quarter, with plastics starting to show strength while industrial chemicals, steel and building and construction material is “OK,” Fritz said. Export grain is supporting grain volumes while a strengthening housing market is helping lumber volumes, according to Fritz. E-commerce also continues to be strong, he said.

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Related articles:

CSX confirms plans to acquire Pan Am Railways

Norfolk Southern strives to ramp up efficiency

Union Pacific eyes Upper Midwest for intermodal opportunities

Kansas City Southern sees opportunities ahead amid lingering headwinds

Joanna Marsh

Joanna is a Washington, DC-based writer covering the freight railroad industry. She has worked for Argus Media as a contributing reporter for Argus Rail Business and as a market reporter for Argus Coal Daily.