We hosted a June 15 call with Marty Oberman, Chairman of the Surface Transportation Board, on Thursday. We see a reciprocal switching ruling well before year-end, and a bottleneck ruling potentially in 2024. Rail service continues to be at the forefront of the STB’s agenda. The CPKC merger has increased competition through new north-south lanes, though further Class I consolidation is increasingly unlikely.
Reciprocal switching: Chairman Oberman noted that the STB continues to work “feverishly” on reciprocal switching rules, suggesting to us that a proposed rule is highly likely to be announced well before the end of the year. The rule proposal will be followed by a comment period, the duration of which will be set at the discretion of the Board. Oberman expressly pointed out that the aim of the rules would be to generate the threat of competition and incentivize better service, indicating that switching rules are likely to have sufficiently expansive applicability to shippers. He also noted that U.S. shippers typically observe better competitive options in Canada, where switching rules are in place.
Our take: We came away with the impression that the Chairman sees little downside to switching rules, and that the due diligence under way at the Board is largely an act of thoroughness. These takeaways are likely a negative for the rail stocks, and we believe subjecting the Class I’s to increased competition will likely place pressure on pricing.
STB future priorities: The STB will remain actively involved in modifying rail regulation, with the Chairman citing a bucket list of priorities that will emerge in the near future. A rulemaking on bottleneck segments and the development of new shipper-appropriate service metrics were called out specifically. We believe that in the event Oberman is reappointed to another five-year term at the end of December this year (or at the very least takes the one-year extension that is afforded him), the STB’s focus on enhancing competition among the Class I’s will remain robust.
Service quality: Oberman continues to be “quite concerned” with the service quality of the U.S. rails; a misjudgment on the velocity of furloughs during COVID was met with a precipitous volume rebound, leaving the rails shorthanded. In 2023, the Eastern rails have improved their service and network significantly better than their Western counterparts. CSX stands out as a leader, mostly attributed to President and CEO Joe Hinrichs’ leadership and experience as a rail shipper.