Commentary

NEARS 2022 Conference: Day One Takeaways

Written by Jason Seidl, Matt Elkott and Elliot Alper, Cowen and Company
image description

At the NEARS (North East Association of Rail Shippers) Fall 2022 Conference, participants say they are still waiting to see consistency in rail service. Technical metrics are gradually improving, but in our view, fluidity will not show significant improvement until first-half 2023. On the first day of sessions (Sept. 21), many attendees expressed surprise that CSX reached outside the rail network for its new CEO. Also, Surface Transportation Board Chairman Martin Oberman foreshadowed a more proactive STB. Our key takeaways follow.

Cowen insight from Day One sessions:

  • The shippers’ panel included supply chain managers in the chemicals, steel and scrap metal businesses. Shippers continue to face inconsistent service, and we believe improvements will start being felt only toward the end of first-half 2023. New rail hiring is increasingly coming from younger employees who will likely take time to achieve productivity levels of their older predecessors. Contention around work-life issues could also suppress productivity. Panelists emphasized that the U.S. Class I’s have lagged behind the short lines and Canadian carriers in providing reliable service.
  • CSX offered an update on service improvement efforts and the ongoing leadership transition at the company. On the labor front, CSX is training roughly 60 conductors per week and, with the T&E headcount currently standing at 6,830, the company is on track to achieve its hiring target of 7,000 such workers this year. Attrition rates are reportedly approaching normal levels per the company’s expectations at second-quarter earnings. Volume recovery will still be gradual, in our view, as hiring targets have been consistently lowered throughout the year across Class I’s. We were encouraged to hear of incoming CEO Joe Hinrichs’ focus on culture and fresh perspectives. There were many attendees whom we spoke with behind the scenes who believe there could be some management changes at CSX coming after the new CEO gets his proverbial feet wet.
  • Some presenters felt that railroads can attract some share from trucking—which commands approximately 80% of the North American freight market—if consistent, reliable service can be achieved. Some freight can only be delivered by truck or rail based on the retailers’ capacity. Nonetheless, participants in the shippers’ panel said that 5%-10% of their freight could be transferred to rail and emphasized that this relied on real service improvements.
  • On rail service, STB Chairman Martin Oberman confirmed that the agency continues to receive service complaints despite improvements in technical service metrics like velocity and dwell. In certain pockets, rail service metrics remain substantially below historical averages, and the embargoes brought on by last week’s strike scare have interrupted progress that was already quite slow. We continue to view the STB as one that has a very pro-shipper focus.
  • The Chairman once again foreshadowed a more proactive STB. Opining on the labor dispute and close shave with a strike, he suggested that a more robust system of regulations is needed to avoid coming too close to the brink. No specific measures were discussed. The STB also has plans to reassess exemptions that certain commodity groups enjoy from the agency’s oversight.
  • ESG considerations are increasingly important to shippers. Panelists’ presentations suggest that even smaller shippers are now beginning to incorporate ESG targets. (We had highlighted this development among larger shippers at our annual conference.) U.S. Steel emphasized its collaborative approach with the railroads and other service providers in assessing ESG objectives. Intermodal transport is approximately 3.3x more fuel efficient than a trucking haul, and we believe this adds to rail competitiveness in the long term. CSX confirmed our view, stating that ESG is not merely a boardroom phenomenon anymore.
Tags: , , , , , ,