Next-Gen Freight Rail Sets Agenda for the 2020s

FINANCIAL EDGE, RAILWAY AGE APRIL 2021 ISSUE: The tone and context of Railway Age’s Next-Gen Freight Rail conference held virtually on March 10, 2021 changes rapidly when viewed through the blockbuster announcement of Canadian Pacific’s (CP) acquisition of Kansas City Southern (KCS).

One can only wonder what messages Creel and Ottensmeyer were sending to each other in the private chat of the conference platform: “How cool would it be if we could announce it right now?” “Oh, that’d be so awesome, NO ONE’s expecting this. There’d just be silence.” “LMAO. C’mon let’s do it.” “Ugh, my BOD would kill me.” “Me too ;-).”

Kidding aside, the conference highlighted initiatives from the railroad perspective and one slight divergence between railroads and industry observers regarding the future of rail freight.

There was optimism on behalf of the railroads for post-pandemic growth. There was enthusiasm for top-line revenue growth at the Class I and from the short line levels. There were discussions on ESG and what rail CEOs are thinking about in 2021. 

At the other end of the spectrum, the non-railroad participants emphasized the necessity for railroads to improve service, and for all railroads to change their operational and growth focus from the shorter term to the longer term.

— “There is conflict between the railroad definition of growth and a customer focus on what growth might mean.” —

Union Pacific (UP) Chairman, President and CEO Lance Fritz shared enthusiasm for loadings growth in 2021 and beyond. He discussed UP’s new intermodal ramp in the Twin Cities and opportunities to originate and terminate new levels of intermodal traffic. This is an opportunity to increase consumable market share in that region. UP can take inbound loads from the Port of Los Angeles and create outbound opportunities to additional destinations growing traffic and getting loads off the highways. Domestic intermodal growth is an opportunity for railroad growth, revenue and environmental health. Fritz also dangled the idea of diesel alternative fuels (“batteries and something else”) in UP’s future, without detail.

Pat Ottensmeyer, President and CEO of KCS, discussed opportunities available for growth associated with USMCA, KCS’s involvement and optimism related to nearshoring, and opportunistic new trade flows. In the context of the newly announced CP purchase of KCS, this is a key element for North American traffic growth on a north to south basis that can exploit this supply chain. Ottensmeyer reaffirmed KCS’s focus on ESG and greenhouse gas reductions with few planned details. 

Dan Smith, CEO of Watco Companies, discussed how Watco sees the opportunity to grow by doing the things that the Class I’s do not do. What does that mean? Smaller (shorter) hauls and service-oriented shipper service. Watco sees itself as the quintessential partner for the Class I’s. Watco’s continued expansion into terminal port operations is its primary ESG play where it’s working to curb greenhouse gases. Watco feels that opportunities for expansion are on the company’s ongoing horizon.

The railroad side closed with Keith Creel, CP’s President and CEO, who was honored as Railway Age’s 2021 Railroader of the Year. Creel discussed CP’s top-line growth and leveraging CP’s strength working with customers to improve service, decrease costs and increase the customer bottom line while improving CP’s top-line revenue. He identified delivery reliability as a growth mechanism. Creel described CP’s level of service (for example, moving intermodal between Vancouver and Chicago) as “truck like.” He stated that CP will not over-promise, but focus on leveraging excellence for growth and using expertise to enter new markets and expand sustainably.

Creel highlighted CP’s effort to reduce greenhouse emissions by removing truck-carried loads off the roads and improving railcar capacity. He stated that he expects CP to be operating a hydrogen-fueled switching locomotive by the end of 2022.

On the non-railroad side, Jason Seidl, Managing Director from Cowen and Co., discussed how intermodal growth needs to come with increasing customer service focus. Seidl is very acute in discussing this point. There is conflict between the railroad definition of growth and a customer focus on what growth might mean. 

Gil Lamphere, Chairman of Midrail LLC, discussed the railroads’ focus on cost cutting and EPS at the expense of long-term sustainability. Lamphere sees this in all aspects of the industry from asset maintenance to service levels. He advocates predictive maintenance to develop availability, reliability and a service product.

Watching the railroads manage the perceived conflicts between profitability, growth, service, reliability, OR and PSR has been “must see” railroad viewing for many years. One attendee said they have been watching the same problems for 40 years. The Next-Gen conference suggests we won’t have to wait another 40.

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