A bidding war has broken out for the Kansas City Southern, but it’s actually more like a chess game. Here are some observations about what it all could mean, especially in terms of railroad “real estate,” from my economist observation post.
Resiliency is among the key takeaways from Sergio Rebelo, who kicked off the recent 2021 Rail Equipment Finance (REF) Virtual Conference. He is the MUFG Bank Distinguished Professor of International Finance at Northwestern University’s Kellogg School of Management.
After a thorough review of my mergers and acquisitions career work, I have reached the conclusion that the Canadian Pacific-Kansas City Southern (“CPKC”) combination has several less-than-optimal locations where overall system performance affecting three nations—the U.S., Mexico and Canada—could be addressed and improved during Surface Transportation Board review.
Several shipper trade associations, a major agricultural shipper and four of the remaining five North American Class I railroads have asked the Surface Transportation Board to review Canadian Pacific’s proposed acquisition of Kansas City Southern under the more stringent 2001 merger rules. A few argue that the smallest Class I rail carrier, KCS, should not get a “gentle pass” STB review. As to the merger itself, most support it, with a few notable exceptions.
Precision Scheduled Railroading overall so far is not anywhere near “precise-delivery railroading.”
Alternate research suggests that it is too early to walk away from the electrification discussion.
Staring into the 2021 abyss, the outlook for rail-hauled chemical traffic looks like a mixed weather forecast: “Early morning fog, changing to overcast skies, with a high-pressure system moving in later for sunny skies.” The fundamental assumption is that the COVID-19 pandemic will gradually abate as immunization shots take hold.
There’s not much statistical sense in using 2020 data as the benchmark when looking ahead to 2021. The statistical coverage of railway freight volume changes in Canada, Mexico and the United States is excellent. But after the extreme changes week-over-week due to the COVID-19 business impacts, maybe it is time to consider a different method.
The six Class I railroads that practice the marketing-term model called Precision Scheduled Railroading (PSR)—all of the “Big 7” except BNSF—are now reporting third-quarter financial results in the remaining days of October. There is, however, an opportunity for a more holistic quarterly briefing. There is an argument for a new checklist of service metrics that would be of interest mostly to customers and, perhaps, public policy groups. However, instead of a balanced scorecard from the carriers, we are mostly seeing accounting reports that cater exclusively to analysts.
There has been lots of surging intermodal volume reported since August. So, intermodal is coming back, correct? All is right with the intermodal world? It is sunny skies and good news ahead? Hold that thought. Ask one simple question. What is your actual level of confidence about that optimistic projection? Is it sustainable? Is there 100% certainty? No, a perfect outlook about the future is unreasonable, given the complexity of intermodal supply chain lengths and the number of players involved. Somewhere better than 50-50 and perhaps 75% probable might be a reasonable upside projection.
