A Union Pacific locomotive engineer based in the Pacific Northwest who had just received his notice of exemption from travel restrictions proudly told Railway Age Contributing Editor Bruce Kelly, “We’ve gone from building America to saving it.” This UP field employee in Train & Engine Service has embraced his railroad’s slogan, “Building America,” and his heartfelt statement takes it to a higher level—from motto to mantra.
That, dear readers, is what this industry is all about, and it goes beyond the role railroads have as a provider of essential services, freight and passenger. Indeed, it illustrates the resiliency, hope and solidarity that the world needs in order to deal with and vanquish the COVID-19 pandemic. It also illustrates that our industry will continue to do what it does best, moving products and people, while Wall Street weeps and wails, and hedge fund billionaires— shaking with fear over the prospect of trading in their Rolex watches for rattling tin cups filled with plugged nickels—plead with Capitol Hill to shut the nation down for 30 days, lest their stock portfolios evaporate. (Yeah, Mr. Ackman—remember him?—I’m talkin’ about you.)
But let’s not kid ourselves. The situation is dire. The world hasn’t faced a health crisis like this in 102 years, when the 1918 Flu Pandemic infected 500 million people—27% of the global population—and killed 50 million, a 10% mortality rate. “While the 1918 H1N1 virus has been synthesized and evaluated, the properties that made it so devastating are not well understood,” says the CDC. “With no vaccine to protect against influenza infection and no antibiotics to treat secondary bacterial infections that can be associated with influenza infections, control efforts worldwide were limited to non-pharmaceutical interventions such as isolation, quarantine, good personal hygiene, use of disinfectants and limitations of public gatherings, which were applied unevenly.”
Sound familiar? (By the way, COVID-19, the coronavirus, is not the “Chinese Flu,” as some call it, even though it is believed to have originated in Wuhan, China. A century ago, it was considered acceptable to use terms like “Spanish Flu,” which the 1918 H1N1 was labeled. The Ebola Virus was not called the “African Flu,” even though it is believed to have originated in Sub-Saharan Africa in 1976. One would hope we’ve gotten past such labels in the 21st century. So let’s not go there, OK? We’re better than that.)
But let’s be clear: Though what we’re going through does involve money, or lack of it, it’s not about money. Yes, that’s the idealist in me talking (you know, the guy who looks at a classic 1960s muscle car and doesn’t see an investment, but a work of automotive art to be enjoyed and driven).
OK, let’s look at how we’re doing, business-wise. Is it as poor as we might imagine? We all know that rail freight traffic is suffering in some sectors, and has been for some time. It will probably get worse, in the short term. Yet, our train hasn’t derailed. It’s negotiating some sharp curves and steep grades. Take a close look at some of the numbers, for example, Susquehanna Financial Group’s Rail Industrial multiple-year pattern graphic (thank you, Bascome Majors). It shows, with a 15-year pattern of trailing four-week calculated averages as a plot line, that commodity and industrial rail freight is still in motion:
So, based upon multiple data sources, “broader industrial merchandise rail traffic is continuing to hold up well,” says Susquehanna Financial Group.
“At least for now, rail freight is moving what the market demands from its rail carriers,” Jim Blaze, our Contributing Editor, says. Jim, like many economists, is a contrarian. He delights in pointing out what is often not said at railroad earnings calls. He doesn’t accept multi-colored CFO PowerPoint slides at face value. But, bearing in mind that Jim is a railroader with decades of practical experience, take a look at these observations:
“As a positive note amidst trade confusion and medical coronavirus travel and social contact restrictions, here’s my rail freight market view:
- “Rail freight volumes overall remain reasonably robust, moving essential bulk goods that still help power our society.
- “While coal’s future as an electricity source might not be long-term, there is still a critical supply chain of rail delivery for more than one-quarter of U.S. energy needs. That’s going to continue for the next decade or so, and certainly through this medical emergency period.
- “Rail freight doesn’t involve a lot of person-to-person close contact. It’s a rather isolated physical movement. There are no truck stops, searches for parking, searches for fueling or similar “proximity to disease transmission” activities involved. Transactions are along private rights-of-way.
- “Rail carload freight provides a diversification of both supply chain and disease mitigation. It’s still a good option.
- “There’s lots of track capacity, and lots of backup freight cars and locomotives.”
Need more not-so-negative notes? Here’s Railway Age Wall Street Contributing Editor Jason Seidl of Cowen and Co. (one of the good guys):
“Over the past 150 years, the North American rail industry has survived several pandemics, two world wars, numerous recessions and oppressive governmental regulations. It remains well-equipped to survive extreme economic swings. While we acknowledge that the current situation is very fluid, we felt it necessary to re-examine the outlook for the remainder of the year and next year. Accordingly, we have reduced our full-year 2020 and 2021 expectations given our current view on coronavirus impacts. We have modeled for 2Q2020 to be the hardest hit. That said, we continue to believe that, even as 2020 results will be significantly lower than expected just a few months ago, railroads remain well positioned to handle this downturn with good balance sheets and operations that have been streamlined over the past few years due to PSR implementation (emphasis mine). Additionally, rail pricing has continued to be strong quarter after quarter and is expected to remain above cost inflation, even in the downturn.”
Need some more reassurance, a balanced perspective that paints a realistic, but not rosy, picture? Here’s Blaze, again:
“Here is what to look for in the coming weeks:
“The difference in oil prices (spreads) will start to favor coastal and offshore oil sources, and likely cause a decline Y/Y of inland crude-by-rail movements. Sales of new automobiles will fall, thus impacting future week-to-week automobile traffic volumes moved by rail. (Auto carload traffic is highly profitable.) Corporations and governments may also be deferring capex projects that normally require movement of everything from forest products to primary metals and stone and gravel, all railway-hauled products. Changes to overall manufacturing and industrial production will likely result in lower energy use, thus reducing some rail-hauled oil and coal traffic.
“On a positive note, there should be some marginal increase in rail intermodal over the coming weeks out of West Coast ports as vessels from China start to arrive more frequently. There might be some domestic intermodal and carload merchandise increases as regional warehouses that serve the food industry try to restock. However, a negative offset in the coming weeks will be the drop in overall consumer purchasing as people worry about their potential drop in discretionary personal and family income, and as retail businesses close or cut back hours.”
That’s the business perspective. It’s important. It’s unsettling, because there are no guarantees. But in this crisis, the bottom line is not simply the bottom line on a balance sheet. There’s more at stake here than spotting railcars or getting people to their destinations or tamping ballast or inspecting a grade crossing, safely. This is what we need to keep in mind as we conduct business, whether it’s in front of an office computer screen or at the throttle of an 8,000-foot freight train or manning the doors on a subway car or cleaning ballast or inspecting an interlocking controller.
The underlying message here is that, regardless of pandemics and other “acts of God,” our industry must—and will—stay on the move. To do our jobs, we’ll have to add surgical masks, latex gloves, microbial wipes, bars of soap and bottles of hand sanitizers to the steel-toed safety shoes, safety glasses, reflective vests and hard hats we wear as Personal Protective Equipment. We’ll care for ourselves and for our fellow railroaders, but we’ll also care for the communities we serve. We’re ready to be pressed into service to deliver humanitarian aid, or turn rolling stock into rolling medical facilities that can be transported to anywhere our tracks go. We can deliver doctors and nurses and first-responders, as well as medical supplies. And if the U.S. Military is pressed into action to prevent large groups of people from congregating in the streets and infecting each other, we can deliver the equipment it needs. We’ve done it before, and we’ll do it again, whatever it takes.
MESSAGE FOR CEOs AND CFOs
First-quarter earnings reports will be coming out soon. Here’s what we at Railway Age believe you need to do. Again, Jim Blaze:
“Indeed, rail can continue to deliver basic goods and services that can help sustain and then lead a recovery. That needs to be the message rail senior officers deliver during their upcoming April investor briefings.
“In troubled times like these, it’s important to use your experience and your thinking skills like a radar to probe through the fog of a confused battlefield scene in a search for critical strengths. You can’t shelter in place. You can’t act like you are trapped on a beach being hammered by enemy fire.
“Dump the cash flow and stock buyback report card investor slides. Replace them with slides that illustrate ‘logistics-mission-accomplished-while under-fire’ successes. You need to re-emphasize rail freight’s relevance, through images, and with substance.”
Ask not what our nation can do for railroads. Ask what railroads can do for our nation.