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Freight Report: The CPKC Edition
Reporter's Notebook: March 17, 2023
Welcome Please Haul My Freight: Edition 39. In this notebook, we delve into the nitty-gritty of the US Surface Transportation Board’s decision to approve the CP-KCS transaction:
WARNING: This notebook is going to dive deeply into opinion. As I always write, my opinions represent Ari Ashe, the person. They do not represent Ari Ashe, the reporter. They do not represent S&P Global, the Journal of Commerce, or anyone else.
OVERBLOWN: The question most people ask me is what do I think of CPKC? My answer is that if the transaction succeeds in generating brand new rail volume, it will not be because of intermodal. It will succeed because of grain, energy products, and other non-containerized bulk freight. Intermodal will not drive the success of this transaction. Read below on why…
DOMESTIC INTERMODAL: Keith Creel said at TPM22 on stage that the domestic intermodal single-line rail option between Mexico and the US Midwest must begin with private container owners. Mark Szakonyi did a great job poking and prodding about non-asset IMCs, but Mr. Creel came back to the same talking point that asset-owning IMCs will drive the first stage of domestic intermodal growth in Mexico-US.
Here is where I’m skeptical of CP’s long-term vision.
Which asset-owning IMC will partner with CPKC? Let’s cross the obvious names off the list:
J.B. Hunt (who opposed the CPKC transaction) and Hub Group (who is a long-term partner of Union Pacific and Canadian National).
Let’s cross off the IMCs who don’t really have Mexico business:
COFC Logistics, STG Logistics, and Swift Intermodal.
Who is left that has enough containers and scale to jump in? C.H. Robinson and Schneider National.
C.H. Robinson is going to align with CPKC. The IMC community is skeptical about the transit times on the CPKC route to Chicago. Most IMC executives calculate the CPKC route as two or three days longer than the BNSF and Union Pacific routes. I’m not an expert on the mileage and geographic elevation challenges to CPKC vs. BN vs. UP, but folks like Ted Prince and Braden Kayganich know it. See Braden’s write-up on the STB decision too.
That leaves Schneider National. Big Mexican intermodal player.
Schneider with one question: Given the goodwill between Schneider and Union Pacific’s new partnership, why would Schneider thumb its nose at Union Pacific to partner with a competitor? Union Pacific booted Canadian Pacific out of the EMP program, so we know there are hurt feelings. Why would Schneider insult their new “bestie” (BAE, BFF, etc) like that?
INTERNATIONAL INTERMODAL: Yes, the Port of Lázaro Cárdenas is an alternate for Los Angeles and Long Beach when congestion occurs again. But do you think a huge swatch of ocean carriers and BCOs are going to use Lázaro Cárdenas? To me, if ships are anchored outside Southern California, these are six options you’d consider long before Lázaro Cárdenas (in no particular order): a) Oakland; b) Seattle-Tacoma; c) Vancouver-Prince Rupert; d) Houston/US Gulf Coast; e) the US East Coast; f) Eastern Canada.
I don’t see how Lázaro Cárdenas is an option that is any better than the other six. If it was a better option, then IPI service would have succeeded long before now.
Here is what one NVOCC source told me:
“If there's congestion in L.A. or Long Beach, all of the other options through US ports are the first option for our customers, then Canadian ports second. If the customer has the choice, they pick a US routing to go inland on the rail versus Canada because you have a double customs clearance issue. So there's potential for extra problems if they use a Canadian route. That's why we still see the ocean carriers pricing, Vancouver or Prince Rupert routing to Chicago $200 cheaper than the US ports off the West Coast because there are extra problems potentially. It can help if there is congestion, but I don't think customers are going to choose Mexico over Oakland, Seattle, or an East Coast discharge.”
Now I’m going to delve into some highlights of what Chairman Martin Oberman said in his nearly two-hour press conference:
ON THE PORTS AND RAILS: To use the vernacular of today’s generation, Chairman Oberman threw shade on US ports and US railroads; they just don’t seem to vibe. Use Urban Dictionary if you need help.
I asked Oberman a question about what he would say to the Federal Maritime Commissioners who urged STB to reject CPKC:
“Competition in the rail industry is good. It's not exactly like during the pandemic the US ports were functioning well. Every American citizen could have benefited from better movement of goods from the US ports. So I think that is part of the public benefit for the country to have more access. That would be my hope and my answer to the FMC commissioners and the real answer is what we said in our decision.”
Then Oberman really was critical of the US railroads:
“Hopefully this will cause the US railroads to up their games in our US ports. And I would make this observation about these railroads. This is my observation. But one of my frustrations is that there has not been a lot of entrepreneurial energy. CP has been very entrepreneurial. CP since I've been on the board bought a shortline railroad through Maine to get to the port of St. John to stimulate container traffic for the Atlantic. CP entered a joint venture with Maersk to enhance the movement of containers off the Port of Vancouver.
You did not until very recently see that kind of energetic activity among the big US railroads. Finally, this past year the Port of Los Angeles and Long Beach announced that it was going to make an investment with BNSF in a transload yard in Barstow, California. Thank you. It's overdue.
On the East Coast. It was the Port of Savannah, not the railroads, that developed five popup yards to move containers off the terminal. Then CSX and NS said ‘fine, we'll come along.’ Why weren't they initiating that development?
I would hope that to the extent intermodal traffic is stimulated from ports in Canada and the port in Mexico, it will stimulate these American railroads to get into the game at a more vigorous level.”
Now I think that’s a little unfair. BNSF wanted to invest in the Southern California International Gateway (SCIG) until the courts knocked it down on environmental concerns. Although I’ve never asked Georgia Ports Authority CEO Griff Lynch the question directly, I think CSX and Norfolk Southern were active in the discussions of pop-up storage yards in 2021 and 2022. It may have been initiated by the GPA, but I have no reason to think CSX and Norfolk Southern were reluctant partners in any way.
BNSF-UP: BNSF and Union Pacific sought protections against CPKC raising fees to interchange traffic in Texas. BNSF and UP argued that if CPKC were to jack up the rates, then it would reduce competition rather than enhance it by using the price to encourage shippers to CPKC. The STB rejected the claim stating there was no evidence such a situation would happen. I asked Oberman about this matter:
“At the time that KCS bought the Mexican railroad and the same concerns were raised, but there hasn't been one complaint brought against KCS to the board about anybody being foreclosed at Laredo. BNSF moved a lot of its traffic to Eagle Pass. Their concerns were charitably put overstated. I would say the same about UP. It's not like these railroads have a great record of having opened themselves up to competitive access.”
Mic drop. For the aforementioned reasons, I don’t see a situation where BNSF and UP intermodal customers are going to switch to CPKC.
NS-CSX MERIDIAN SPEEDWAY: Norfolk Southern also raised concerns that CPKC would flood the Meridian Speedway with bulk traffic, harming intermodal shippers who depend on that route to send containers to/from Wylie, Texas. Again here, STB wrote the concerns were speculative, at best.
I asked Oberman about this matter:
“As to the Meridian Speedway, CSX came in here and asked us to undo a board decision approving the joint venture between NS and KCS that was decades old. That had nothing to do with this transaction. I mean, the horse was out of the barn. It was really I thought, speaking for myself only, inappropriate in the context of this merger. Likewise, NS and KCS had a well-constructed contractual arrangement for the operation of the Meridian Speedway, and NS wanted us to remake the contract for that. There was no basis to credit any of the fears that those railroads expressed in any of these areas.”
As the STB wrote, CPKC has a 70% ownership stake in the Meridian Speedway-Wylie route, so there is no financial incentive to harm intermodal customers.
ATTACKING THE NUMBERS: More evidence of why intermodal won’t drive the CPKC’s success is in the STB decision itself. STB members expressed serious reservations about the volume projections from CPKC. The STB agreed with IHS Markit’s on truck-to-rail conversion forecasts but was skeptical of FTI’s conclusions on rail-to-rail conversions. The STB concluded the forecast of 138,000 annual intermodal loads on CPKC may not be accurate.
I agree for all the reasons mentioned above that FTI’s projections may be too high on how many customers will abandon their current rail partners for CPKC.
When asked about all the concerns — intermodal forecasts being too high, Houston becoming jammed with traffic, the Meridian Speedway becoming clogged, Chicago’s Metra seeing more delayed commuter trains, and neighborhoods worried about more trains blocking rail crossings — Oberman quoted one of the greats:
“About the future projections and I don't think it's going too far afield to quote one of my favorites. Yogi Berra, 'Predictions are difficult, especially about the future.' This is why we have instituted an unprecedented seven-year oversight period.”
LET THE GOOD TIMES ROLL: One point most people forget is the connection between automotive shipments and intermodal shipments. So I wanted to conclude by highlighting one section of the STB’s decision:
Automotive parts suppliers will be among those who benefit from these new intermodal services. Shipments move between parts suppliers in the U.S. Midwest and Ontario and auto assembly plants in central Mexico reached via KCS-served intermodal terminals, and in reverse from parts manufacturers in Mexico to assembly plants across the United States and Canada.
Why do I highlight this? Those who attended the JOC Inland 2022 in Chicago last September will recall I asked Union Pacific about fears that it will abandon the EMP and UMAX programs in the next decade.
One reason why UP’s Kari Kirchhoefer said it would never divest from the rail-owned container fleet is that automotive shippers use the EMPs in Mexico.
One additional point from a source, who would want to remain anonymous:
“Auto parts from CP Bensenville to Detroit will require a rubber-wheel interchange to 59th Street where they will be hauled by CSX to Detroit. And if you want to go to Ontario through the Detroit tunnel you need to use low cube containers to double stack due to clearance issues which limit the use of high-cube 53s or newer auto racks.”
True, the auto shippers would have to crosstown between CSX 59th/Bedford Park and CP Bensenville/Schiller Park (depending on container size and routing). Also true that Canadian National is the only railroad that can double-stack containers via Sarnia. CP must single stack, or work with a CSX route through Buffalo to Ontario.
Both limitations will hinder intermodal growth, for now.
A CALL TO ACTION: Are you an IMC or domestic intermodal shipper reading this notebook? Are you Hub Group, J.B. Hunt, Matson Logistics, Schneider National, STG Logistics, Swift Transportation, or a non-asset IMC? Or are you a shipper who uses one of the aforementioned intermodal providers?
If you answered ‘yes’ to any of the above questions, then we want you to participate in our JOC Intermodal Service Scorecard surveys. Our first survey is now out and will run through the end of April.
The premise is simple: An Angi’s, Consumer Checkbook, or Home Advisor of the intermodal industry. Who provides the best domestic intermodal service? Let us know who is at the top and bottom of your lists.
Send me an e-mail or message on LinkedIn if you’d like to participate.
Any opinions in this blog represent the author’s views, not the Journal of Commerce or S&P Global. Any rumors in this notebook are just that: rumors. Unconfirmed. Not news stories.
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