“You might have seen what we’ve sort of said publicly on Pan Am. We did confirm that we have had discussions with Pan Am about that property. Beyond that, I’m not going to comment any further,” said CSX’s Mark Wallace at the Baird investors conference Thursday. Wallace is the executive vice president for sales and marketing for CSX.
Wallace continued, “But more broadly, listen. We evaluate how we deploy cash the same way that we always have and we always will, right? We look at investments, whether they’re internal investments or things that we’re going to do strategically. We look at high-return projects and whether … it’s a great return for our shareholders and whether it helps our customers longer term.”
Wallace was referring to recent reports that CSX has been inquiring about acquiring Pan Am. Pan Am has come up in recent months as a company that could be open to an acquisition or for leasing.
Wallace added that as CSX evaluates potential investments, the company looks at whether the investment would extend the company’s reach and how the investment would benefit shippers.
“If we can take our model and overlay that model onto another property and produce the types of returns and results that we have at CSX or ShipCSX, then I think those are things that we would consider doing. So we’re always on the lookout for interesting projects. But that’s sort of how we evaluate those options, whether it’s internal investments or things that we’re considering externally,” Wallace said.
Recently, CSX competitor Norfolk Southern (NYSE: NSC) responded to CSX’s actions via a Nov. 6 letter to the Surface Transportation Board (STB) saying that it is concerned about a potential acquisition because Norfolk Southern (NS) has joint control with Pan Am over Pan Am Southern, an affiliate. NS is concerned that the way in which CSX is seeking ownership avoids the board’s approval of the acquisition.
In response to NS’ letter to the STB, CSX said it “has been in discussions with Pan Am Railways Inc. regarding a possible transaction. As part of this effort, CSX has engaged directly with Norfolk Southern to understand any issues they might have.”
Besides offering comments about CSX’s dealings with Pan Am, Wallace also talked about how it is seeking more highway-to-rail conversion opportunities. CSX has taken steps recently to “revamp” and enhance its marketing efforts, utilize new technologies and focus on data and analytics to win customers. Coupled with CSX’s efforts to improve rail service, CSX is “winning share even in this challenging environment,” Wallace said.
To find those conversion opportunities, CSX is looking at where it currently operates and asking existing customers that use both truck and rail whether they would consider moving more volumes to rail. CSX is also speaking with potential customers that have traditionally relied on trucks but are open to talking with CSX about rail because of the tightening truck market, Wallace said.
CSX has been able to convert customers to rail in the aggregates sector, as well as in metals and forest products, Wallace said.
CSX is having conversations with potential and existing customers and is “really turning tables a little bit and saying, ‘We want to be a bigger part of your overall transportation spend and what else can we do to you to improve your flow to get your products to market?’” Wallace said. “So those are conversations that are ongoing and we expect to have more success in the coming quarters and years on that front.”
Union Pacific watching train lengths
One of the ways that Union Pacific (UP) has been able to reach productivity savings has been to lengthen trains. UP has also been focusing on freight car velocity and reducing terminal dwell.
To achieve longer train lengths, UP has been constructing 15,000-foot sidings along some areas of its network and it intends to continue lengthening sidings in 2021, according to Jennifer Hamann, UP’s chief financial officer.
But while UP’s physical infrastructure is one factor toward lengthening trains, others factors include ensuring volume density along the lanes and providing good service to customers, according to Hamann.
“I don’t know that we know the limit of what that [train length] can be. It has to be kind of a composite look in terms of what are all the factors that are available to us. The footprint, the physical infrastructure: Is it going to limit us?” Hamann asked last Tuesday. “It’s really going to be dictated more by the volumes that are coming off where they’re coming on and how we’re able to design the transportation plan around that, to have that long train length as we meet our customers’ demands.”
During the presentation, Hamann reiterated UP’s volume guidance for the fourth quarter, saying that volume growth will be in the “low single digits, which would be the first quarter with positive year-over-year growth in two years.”
As a result, UP expects full-year volumes to be down by 7% or so. Productivity savings will also exceed $700 million and that, coupled with UP’s pricing strategy and the volume outlook, could result in an operating ratio in the 50s, Hamann said. Operating ratio (OR) is a tool some investors used to gauge the financial health of a company, with a lower OR implying improved health.
Meanwhile, the surcharges that UP placed upon certain intermodal services on the West Coast were in order for UP to protect some of their network capacity, according to Hamann.
“We have programs with some of our domestic intermodal customers where they commit to giving us so much volumes over the course of the year and we commit to giving them box availability. And that’s really what the surcharges are about, helping protect those customer commitments,” Hamann said. “I think they achieved what we wanted them to achieve. It’s really about better control of the flows. And I think that they were successful in that and we’ll keep them in place as long as we think we need to relative to the rail environment.”