RailTrends 2010 was our best ever.  Takeaways continue to support the “rail renaissance” thesis, albeit not without some risk, are below.

Last month’s RailTrends 2010 conference supported my “renaissance” thesis.  While I gave initial highlights, the following is a deeper look….see you at RT11!:

• Covering the Capital: RT10 presented a full, comprehensive series of discussions on the three major government issues of the day (Re/reg, PTC and passenger rail interface) and, in sports parlance, for investors the conference yielded one win, one tie and a loss.  I believe we have passed the high-water mark of the rail re/reg movement despite the noise (testy hearings etc) from Washington.  The discussions at RT seem to confirm that – the odds of S2889 (the Rockefeller/Senate Commerce bill) passing are very, very low for 2010 and should drop significantly next year – this alone is a significant takeaway.  But nothing is easy.  To his credit, Bruce Carlton of the NITL defended his shipper organization’s endorsement of s2889; the audience, meanwhile, worried about creeping “re/reg lite” coming not form legislation (beaten back) but from STB regulation….
• PTC is still the $10B “unfunded mandate” with as yet unproven technology with no positive news yet, anyway, on government funding despite its obvious case for it – Jeff Elliott of Oliver Wyman presented their case that as currently envisaged, PTC will yield only ~$400mm in business benefits (it may cost the industry capacity!); the emerging HSR passenger movement may be threatened by the political tide (it seems to be in the Tea Party’s cross hairs), and provides some capacity risk even in its HrSR form, offset (to what degree?) by funding opportunities (the AAR’s Ed Hamberger called it the double-edged sward”, much as carbon legislation is, or in truth all of Washington’s rail interface….).
  
• The Federal Railroad Administrator Joe Szabo highlighted the preliminary National Freight Report that I have referenced elsewhere, endorsing modal share shift towards rail/intermodal – and stated firmly that “we will not allow (resurgent passenger rail taking away needed freight capacity) to happen”!  STB Commissioner Frank Mulvey gave his usual summary of regulatory events before the Board while NRC’s Chuck baker gave a great summary of overall legislative events and proposals.
  
• A general sense that we the economy is growing steadily is not yet spectacularly; several carriers in the audience were more upbeat offline than in their public presentations….
  
• Intermodal opportunities have moved from the “possible” category to “probable” and we heard excellent presentations on the subject from FEC, Trac (Fortress), Hub and as part of his sterling keynote address, BNSF’s Matt Rose.  Both IANA’s Joni Casey and fortress/Trac’s Adam Bridges discussed chassis – pooling, “roadability”, etc; this is nuts & bolts stuff but presents both an obstacle and a huge efficiency opportunity, what Casey called the “game-changer”.  Hub’s Chris Kravas (sp?) fully endorsed the mega-opportunity that is true domestic intermodal.
  
• Matt Rose won Progressive Railroading’s annual Innovator Award, and following in CN’s Hunter Harrison’s footsteps from last year, gave a rousing address.  Matt looked back at three major innovations that got rails to where they are today, in the early innings of the “railroad renaissance” (my phrase, not his): the diesel (and AC diesel) engine; the Staggers Act de-regulating the industry in 1980; and technology to date.  Three current/future innovations include, interestingly, PTC, extended Life Cycles of assets (better materials and better detection/planning; and “New Business Practices” (in coal, certainly in Ag, in intermodal with “Logistics Parks”, perhaps soon in carload with “AIM”) that have made railways into marketing companies, and truly BNSF has been a, if not the, leader there….The future will hinge on three things – (nextgen technology; public policy and people leadership.
  
• Cars are always covered well by RT – we had an audience full of experts and our usual excellent presentations by the Railway Supply Institute (Tom Simpson) – warning that passenger success doesn’t mean much to freight car builders and on creeping TSW (truck size & weight) issues - and from Toby Kolstad, who called for the beginnings of a railcar recovery next year with production rising form 13.8K to 20-24K in 2011….
  
• Mega-utility Southern Companies represented the annual shipper viewpoint presentation and took us through their fuel sourcing strategic options considering the upcoming changes in emissions legislation and/or regulations – although the changes provide real risk for the long-time backbone of the rail commodity base, and natural gas is plentiful, we heard their declaration “don’t count out coal” loudly and clearly, as well as their clarion call for rails to act as partners in this fight.  2011 looks to be a big decision year….
  
• Genesee & Wyoming’s presented its best case for its patient but yet still aggressive strategy I have ever heard; Australia looks like another big winner (again) for GWI; meanwhile Florida East Coast (FEC) had a “coming out” presentation under new CEO (intermodal veteran leader) Jim Hertwig.
  
• Rails can win beyond intermodal – we heard a great case-study example of a win/win between CSX, shortline Watco and a major chemical customer, Solutia – with opportunities to use this model elsewhere.
  The annual “Wall Street Panel” featured my usual ranting and Rick Patterson of UBS who looked at operating leverage through the cycle (concluding that we are in mid-cycle with more – from long trains, etc – to come) and introduced his excellent “coefficient of efficiency” – stressing how much volume increases relate to service declines.  This is also central to my thesis that to service & productivity are central to success in the next cycle….in gaining modal share (crucial to rail growth, shipper capacity needs and public policy); in gaining incremental margins and improving returns (central to investors to support the big capital programs required); in pleasing governments and regulators (assuming that is possible) and in growing the field workforce – a virtuous circle which is truly the end point of the rail renaissance!
  

Any thoughts/suggestions and/or comments for Railtrends 2011 always appreciated!

Anthony B. Hatch