Short Line Update
Class I railroads have reported respectable 3Q net income growth. The merchandise carload sector (everything but coal, intermodal, auto), where short lines live, is holding its own. Within the merchandise commodity group, we’re finding that among short lines the strongest results occur where high-rated commodities moving in leased equipment dominate the franchise.
Short lines that can turn cars quickly and connect with scheduled Class Is can lower the per-ton lease cost for their customers, thereby adding value to the latter's supply chains. You will recall that Illinois Central (IC) and CN were the first to implement Precision Scheduled Railroading (PSR) and their supply-chain orientation has served them well.
CP was next to join the PSR community, and their revenues, volumes, revenue per unit (RPU), and operating ratios have improved markedly. Next was CSX, and, after some initial growing pains, is turning the corner as measured by volume growth, RPU, and operating ratio.
UP is the latest to embrace the tenets of PSR. On their 3Q earnings call, they told listeners what they aimed to achieve by starting the process on the former Missouri Pacific (MOP) lines and rolling it out across the system. Some observers are leery about this approach, saying it has to be all or nothing. I disagree. PSR started on the north-south IC (very carload-centric and roughly parallel to the MOP) and was rolled out across the entire CN Network. UP will do the same, having already said the ex-SP Sunset Route is next.
PSR will be the order of the day across North America. NS President Jim Squires said they’re moving that way. At the BNSF shortline meeting, COO Katie Farmer said their PTC progress already incorporates the principles of PSR. KCS has a similar message. Thus short lines (and their customers) will benefit chiefly from advances in predictability and reliability.
The connecting Class Is running to plan runs the same way, every day, so there’s never a problem with advance consists or interchange windows. Pre-blocking for the distant node by short lines helps Class Is skip classification yards and shortens transit time between OD pairs. Customers benefit from tighter inventory control, decreasing working capital on the balance sheet and improving cash flow.
In short, to borrow my friend Tony Hatch’s term, this is the Rail Renaissance Redux and I’m pleased to see it.
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