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The Importance of Being Competitive · Talk Track by Telegraph

• 0:02
  SPEAKER_02: I'm Sydney Schreiber.
• 0:03
  SPEAKER_00: And I'm Harris Liggan.
• 0:04
  SPEAKER_00: You're listening to Don't Dwell On It, the podcast where we pause just long enough to figure out what's really moving freight rail forward.
• 0:13
  SPEAKER_00: Let's get into it.
• 0:16
  SPEAKER_02: All right, welcome back to Talk Track, a telegraph podcast where we talk about and respond to the events of the day that are affecting the railroading community.
• 0:25
  SPEAKER_02: And by that we mean railroaders, shippers, railcar lessors, you know, really everyone.
• 0:30
  SPEAKER_02: And I'm really quite excited to introduce to our guest to you today.
• 0:34
  SPEAKER_02: His name is Dr.
• 0:34
  SPEAKER_02: Jason Miller.
• 0:35
  SPEAKER_02: He is the Eli Broad Endowed Professor of Supply Chain Management at the Broad College of Business at Michigan State University.
• 0:42
  SPEAKER_02: Many of you who would take the time to listen to this podcast have probably encountered Dr.
• 0:46
  SPEAKER_02: Miller's work in myriad other places, including thoughtful contributions to the Wall Street Journal, the Journal of Commerce, Railway Age, among many others.
• 0:53
  SPEAKER_02: And if you'll allow it, Jason, I'd just also like to point out that I think part of what you're doing with your commentary on LinkedIn and your commentary in the press is really redefining what having impact as an academic means and what it means to be a public intellectual, particularly in the business research space.
• 1:10
  SPEAKER_02: So thank you for what you do and thank you for taking time to join us today.
• 1:14
  SPEAKER_01: Hey, I'm just so thankful you're willing to have me on.
• 1:17
  SPEAKER_02: Anytime.
• 1:18
  SPEAKER_02: Gosh, well, I will jump right into it.
• 1:21
  SPEAKER_02: You know, you are putting a lot of thoughtful things out there.
• 1:23
  SPEAKER_02: One that caught our eyes in the offices of Telegraph recently was your commentary as part of the Railroads Reimagined series with Railway Age.
• 1:31
  SPEAKER_02: And basically, I read you as saying, look, this proposed UPNS merger won't actually fix what's ailing America's Class I railroads.
• 1:41
  SPEAKER_02: Did I read that right?
• 1:42
  SPEAKER_02: And if not, could you sort of explain your broader thesis here to this audience?
• 1:47
  SPEAKER_01: No, I I would say that is correct, and that when we look at, you know, you know, take take railroading today versus back 2004, 2005, 2006, especially 2006, which is really I'm going to call peak railroad.
• 2:02
  SPEAKER_01: You know, back then we were moving 17 million car loads a year, roughly.
• 2:07
  SPEAKER_01: Um you know, intermotor was growing like a weed.
• 2:12
  SPEAKER_01: In comparison today, yes, intermotor volumes are higher today.
• 2:16
  SPEAKER_01: I mean, they're about, you know, 14 million-ish today versus 12 million back in 2006.
• 2:22
  SPEAKER_01: But that car load piece has fallen from that almost 17 million down to just 11.5 million, maybe up to 12 million if it's a really phenomenal year.
• 2:32
  SPEAKER_01: We haven't been at 12 million since um, so you'd have to go back to 2019.
• 2:39
  SPEAKER_01: And so my general view is when you look at this merger from a carload shipper standpoint, there's little to like about this.
• 2:46
  SPEAKER_01: I don't think I've encountered a single carload shipper that is enthralled about this merger possibility because they simply view it as a situation that could lead to, you know, even more essentially having a I, you know, I um like what my colleague uh Val here at Michigan State calls it a superclass one.
• 3:05
  SPEAKER_01: This would truly be a unique entity in and of itself, even compared to you know, BNSF is now a distant second in terms of size.
• 3:14
  SPEAKER_01: And so you have essentially the superclass one existing.
• 3:18
  SPEAKER_01: It reduces in some cases um shipper choice.
• 3:23
  SPEAKER_01: It makes, I think everybody is a little hesitant on the idea that you know it will be seamless interchanging now between UP and CSX, for example, if you need to go west coast to Florida after this merger.
• 3:37
  SPEAKER_01: I think a lot of people are you know a little uncomfortable about that in the shipper community.
• 3:43
  SPEAKER_01: And on the intermodal side, this idea that you're gonna unlock just this tremendous amount of additional intermodal volume, I'm not really seeing where that's gonna come from.
• 3:53
  SPEAKER_01: And a large part of that is because if you look at how importers have diversified ports of entry in the US, this is not 2004, 2005, 2006, where the West Coast is accounting for roughly two-thirds of containerized imports from China.
• 4:09
  SPEAKER_01: Today that number under normal times is down to you know 50%, if not slightly below.
• 4:16
  SPEAKER_01: And so you just don't have the type of market share of ultra-long haul intermodal that you used to.
• 4:24
  SPEAKER_01: And even when we look at the evolution of the U.S.
• 4:26
  SPEAKER_01: domestic manufacturing footprint, you know, ultra-long distance moves are in general by truck a rarity.
• 4:34
  SPEAKER_01: And, you know, um, you know, you're when you you know you were at MIT, your former colleagues are doing a lot of phenomenal research out of the CTL as part of you know, master's thesis work and whatnot, you can see these histograms saying, look, it's a very small share.
• 4:49
  SPEAKER_01: A truckload shipments move, you know, 800 miles plus.
• 4:52
  SPEAKER_01: And so I just am not seeing that there's this massive market to be unlocked, even if you're able to shave, let's say, a day, a day and a half off of a you know, transcontinental intermodal train.
• 5:05
  SPEAKER_01: How much market share really do you get due to this merger versus due to other services that have already been in put put in place?
• 5:14
  SPEAKER_01: I mean, JB Hunt with Quantum.
• 5:15
  SPEAKER_01: We just had Schneider announcing a new premium intermodal service as well.
• 5:20
  SPEAKER_01: And so to me, the question is do you need the merger to unlock these benefits or can you do this within the existing ecosystem?
• 5:29
  SPEAKER_02: You know, that's really interesting.
• 5:31
  SPEAKER_02: And I I want to take a second to kind of double-click on part of your thesis there as I understand it.
• 5:36
  SPEAKER_02: So we had this peak in 06, we've been declining since.
• 5:40
  SPEAKER_02: I think we're sort of building to an argument that the merger is not the prescription for that particular malady.
• 5:46
  SPEAKER_02: But what do you think explains the decline in car load volume in particular, 06 to today?
• 5:52
  SPEAKER_01: So it's a combination of a few factors.
• 5:54
  SPEAKER_01: So by far, by far, by far, most important is coal.
• 5:57
  SPEAKER_01: Uh coal movements have plunged.
• 5:59
  SPEAKER_01: Their coal mining is about 50% today what it used to be, based on the industrial production data.
• 6:05
  SPEAKER_01: And just from 2018 to 2024, we lost 1.4 million carloads a year in terms of originated freight traffic by the class ones.
• 6:17
  SPEAKER_01: And so that secular decline in coal is gonna, you know, has been number the number one cause.
• 6:24
  SPEAKER_01: Then you've got sort of a combination of factors.
• 6:28
  SPEAKER_01: You have the sort of short-lived petroleum boom of like call it 12 to like 15 back during peak fracking and a little bit afterwards before the pipeline capacity got built and we were doing a lot of crew by rail.
• 6:42
  SPEAKER_01: Um, you had the decline of long-distance fracking sand movements when there was the realization that, hey, if I'm in the Permian Basin in West Texas, eastern New Mexico, local sand gives me 95% of the efficiency that the perfect sand from Wisconsin and Missouri does.
• 7:01
  SPEAKER_01: Maybe we shouldn't train this stuff across the country.
• 7:03
  SPEAKER_01: That doesn't make too much sense.
• 7:05
  SPEAKER_01: Um, and then you've had secular declines in terms of building materials.
• 7:09
  SPEAKER_01: I mean, we're not building houses today anywhere, anywhere near like we were in 04 through 06.
• 7:15
  SPEAKER_01: Um and also even sectors like paper.
• 7:18
  SPEAKER_01: Uh paper production in the U.S.
• 7:19
  SPEAKER_01: today is down substantially from where it was back in that, you know, 04-06, and even more so from the late 1990s levels.
• 7:28
  SPEAKER_01: And when you think specifically the type of paper volumes that we've lost, it was the type that was very conducive to moving by truck or by rail, excuse me, in comparison to today, where it's a lot of things like cardboard boxes that are typically rather short distance shipments, so they're going to move by truck essentially regardless.
• 7:46
  SPEAKER_01: And so it's a combination of secular headwinds in terms of uh you know coal mining.
• 7:54
  SPEAKER_01: The crew crude by rail is certainly down from where it was in sort of that peak fracking period.
• 8:00
  SPEAKER_01: You don't have the long-distance fracking sand movement.
• 8:03
  SPEAKER_01: You've got other manufacturing sectors like paper that have never gotten back to pre-global financial crisis levels.
• 8:10
  SPEAKER_01: And so that sort of joint um you know set of forces has pulled down carload volume.
• 8:15
  SPEAKER_01: And this is where when I look at you know a merger possibility, I ask myself, is there that much freight out there available that we could convert truckload to carload?
• 8:27
  SPEAKER_01: And that is a completely different story than truckload to intermodal, because you're looking at four to five times the amount of freight.
• 8:35
  SPEAKER_01: And the answer, as far as I can see it, is the shippers that are using carload are already using car load, and this merger is not there, there's essentially no marginal shift with this, um, which then gets us to an intermodal question.
• 8:49
  SPEAKER_01: And when you look at U.S.
• 8:51
  SPEAKER_01: intermodal activity, there's sort of three peaks that we can observe.
• 8:55
  SPEAKER_01: And I'm going to include truck trailers as I talk about intermodal because I don't want to um essentially handicap um the 2018 period where we still had a lot more TOFC before PSR was all the rage.
• 9:08
  SPEAKER_01: So the three sort of peak intermodal periods are 2018, the back half of 2020 through about the first couple months of 21 outside of the February 2021 polar vortex, and actually late, late 2024, early 2025.
• 9:25
  SPEAKER_01: The three things those periods have in common is very, very, very strong growth of containerized imports, especially to the West Coast, because either a prioritization of speed before 19 tariffs went into place in China because of all the inventory getting drawn down by the incredible consumer goods spending in the back half of 21, first part of 22, or back half of 20, first part of 21, and then East Coast port strike concerns in late 24, early 25 tariffs, etc.
• 9:57
  SPEAKER_01: And so that's where I look and say, okay, if intermodal volumes are really fluctuating more based on West Coast containerized import dynamics, does this merger help with that and unlock that?
• 10:09
  SPEAKER_01: And I again I don't see necessarily the answer, not especially when you've added so much transloading capacity in the East Coast over the last few years.
• 10:19
  SPEAKER_01: So for a lot of importers, you know, if stuff's going to, you know, Ohio, it doesn't necessarily make as much sense anymore to bring in through LA, transload, put it into a 53-foot domestic intermodal container, ship it across the U.S., you know, interchange in Chicago, dump off in Ohio and dry.
• 10:38
  SPEAKER_01: Now you're probably just going to come in on the East Coast, and at best that's a shorter distance intermodal movement, or you know what?
• 10:45
  SPEAKER_01: New York, New Jersey, you may be better off just putting that 53-foot truck trailer and rolling with it.
• 10:50
  SPEAKER_02: Yeah, yeah.
• 10:51
  SPEAKER_02: Gosh.
• 10:51
  SPEAKER_02: So so to that end then, if if I sort of hear you saying, look, that those car load numbers aren't coming back, and the best days we've seen in intermodal volumes had some sort of peculiarities to them that we shouldn't bet on.
• 11:05
  SPEAKER_02: You know, do you think that then, and I'm asking you to be, you know, obviously to be speculative here, has UP just sort of prescribed themselves the wrong medicine?
• 11:14
  SPEAKER_02: Is the recovery of volumes what they're chasing with this deal?
• 11:18
  SPEAKER_02: Or do you think, you know, this is medicine they're prescribing to themselves for a completely different problem?
• 11:23
  SPEAKER_01: I I think where they're seeing it more as the operational efficiencies that'll come from being able to engage in various forms of consolidation.
• 11:32
  SPEAKER_01: I mean, to me that seems to be more the more where I can see the benefits come is it's not really a top-line revenue game as much as more of a uh, you know, in the PL statement, we're trying to get our opacts down in in various ways by consolidating.
• 11:48
  SPEAKER_01: So to me, that's where I could see um a little bit more of an argument, maybe from an investor standpoint, that maybe that maybe this is more justifiable.
• 11:57
  SPEAKER_01: But I I just am I'm skeptical of the top line revenue gains simply because again, when you look out there at sort of these secular forces, I really ask myself, how many shippers are going to transition over from super long haul truckload to um you know intermodal?
• 12:18
  SPEAKER_01: Maybe it's a little bit, but is it enough to justify this merger?
• 12:23
  SPEAKER_01: I think those are two different questions.
• 12:25
  SPEAKER_01: And I do think that we have seen this year some loss of that super long haul truckload to intermodal rail.
• 12:33
  SPEAKER_01: Um and I bring that up because we've had too many data points are suggesting this.
• 12:38
  SPEAKER_01: So, for example, Freight Waves has repeatedly been bringing up that their tender volume data for very long haul, which for them is 800 plus miles, is is dropped much more than shorter haul movements.
• 12:50
  SPEAKER_01: One explanation you got a little bit of lost market share to intermodal.
• 12:54
  SPEAKER_01: You have behavior of truckload spot market pricing data that like DAT publishes that's up a little bit on a couple cents per mile, but the market still seems quite loose.
• 13:08
  SPEAKER_01: That would be consistent with losing some of those ultra-long distance movements over to intermodal, which is going to shorten up the average length of haul, which is going to inherently result in a higher dollar per mile.
• 13:19
  SPEAKER_01: You've got Cash ship uh the Cass uh truckload index showing a little bit of a uh dollar per mile uptick again in a generally weak market, that you can't help but wonder if there's a compositional shift happening.
• 13:33
  SPEAKER_01: Whereas in contrast, take the back half of 2021, we know CAS's data struggled with the fact that you had so many more ultra-long distance truckload moves because you had all this freight pulling in through the West Coast, but because the Class One's networks were so snarled up, BNSF and UP were metering traffic to the Midwest.
• 13:54
  SPEAKER_01: And so you were putting more of these ultra-long distance moves in the road, which was then pulling down dollar per mile figures for some of the data.
• 14:05
  SPEAKER_01: And so this is when I do think that there has been probably a little bit of market share for that ultra-long distance, you know, roughly 40,000 pound shipment type of moves converted over to rail, but we've done that without a merger, and that's the key thing.
• 14:21
  SPEAKER_01: We've done that through things like quantum.
• 14:24
  SPEAKER_01: And so that's where I do ask myself again, do you need a merger to unlock some of these benefits versus not?
• 14:32
  SPEAKER_01: And yes, there could be benefits.
• 14:34
  SPEAKER_01: You could be seeing, okay, we could run for I think, you know, um, with the CEO of UP saying, hey, we're looking at a thousand less uh, you know, interchanges needed in Chicago.
• 14:45
  SPEAKER_01: Well, it's like four to five intermodal, you know, intermodal unit trains basically.
• 14:51
  SPEAKER_01: Those could flow straight from the west coast further eastbound.
• 14:54
  SPEAKER_01: Again, do we are we in a situation though where uh that that justifies a merger to get an extra you know four or five non-interchanged unit trains a day to create a super class one railroad?
• 15:09
  SPEAKER_01: That is where I think it's again an open question.
• 15:13
  SPEAKER_02: You know, I I really like that take, and that's a really thoughtful way to think about you know which freight moves by which mode as a result of some of these trend these trends.
• 15:22
  SPEAKER_02: I wonder if we think about it from the other side, so if we if we take this notion that I think you've laid out a strong case for that, hey, you know, if if volume is what you're trying to fix, the merger is not what's going to fix it, let's think about the other side of that.
• 15:36
  SPEAKER_02: And now, you know, I'm thinking about sectoral concentration.
• 15:40
  SPEAKER_02: We know that shippers are saying whatever benefit you're chasing on the merger side, uh on the UP side, here's all the cost that you're standing, uh you stand to pose for me.
• 15:50
  SPEAKER_02: Have you thought about sectoral concentration and and has your work looked at where you think concentration really increases, which sectors are especially vulnerable here?
• 15:59
  SPEAKER_01: Yeah, so when we look, and again, this is one where we have to basically speculate and say, hey, let's take 2024 volume data, um, carload uh origination data, let's split it by railroads and just basically say, okay, what would UPNS represent?
• 16:17
  SPEAKER_01: And you know, in general, for most commodities that are tracked by the Surface Transportation Board, you end up getting a railroad that is over 40% at that point.
• 16:28
  SPEAKER_01: So for example, intermodal UPNS is about 45%.
• 16:32
  SPEAKER_01: Uh, BNSF is a very respectable 34%.
• 16:35
  SPEAKER_01: So, you know, if you would assume the BNSF and CSX are going to start getting a lot closer on the other side of this, uh, that's an entity that's actually even larger on intermodal aggregate at the end of the day.
• 16:48
  SPEAKER_01: Um, coal movement actually really isn't affected because BNSF actually has the uh leading market share on that, even in the case of a merger.
• 16:58
  SPEAKER_01: Uh, chemical shippers.
• 17:00
  SPEAKER_01: This is one where this is an ugly proposition.
• 17:04
  SPEAKER_01: It's 54-ish percent UPNS.
• 17:06
  SPEAKER_01: So this is a massive uh chemical hauler.
• 17:09
  SPEAKER_01: Um, crushed stone and gravel 45.
• 17:12
  SPEAKER_01: Motor vehicles is a pretty impressive 47 at that point.
• 17:17
  SPEAKER_01: And you know, that's always been historically the BNSF really not never was much into the uh auto space as much as UP, and then you're combining it with an Eastern Railroad that inherently is going to have more uh more car or more uh motor vehicle and equipment volume just because that's where the manufacturing's at.
• 17:36
  SPEAKER_01: So I mean you've got you know a pretty you know almost majority there.
• 17:42
  SPEAKER_01: Um, you know, m movement of metals, so steel and whatnot.
• 17:46
  SPEAKER_01: Uh UPNS is a 56% market share.
• 17:50
  SPEAKER_01: Um, so I mean a lot of these you can see there is certainly some concerns.
• 17:54
  SPEAKER_01: Uh food and kindred products, 45% with UPNS.
• 18:00
  SPEAKER_01: Um again, you get spaces like petroleum, it actually does it's basically no different than BNSF.
• 18:07
  SPEAKER_01: So basically, UPNS is BNSF for petroleum products.
• 18:13
  SPEAKER_01: Um and so it it is without a doubt a mega entity, probably the chemical shepherds, or I would say, of anybody the most exposed with this.
• 18:23
  SPEAKER_01: And that's also why the um boys at the American Chemistry Association has been so vocal about not wanting this merger, um, in particular calling attention to sort of the competitive dynamics that take place in the Chicago, St.
• 18:37
  SPEAKER_01: Louis, Kansas City triangle area, where a lot of shippers may currently have the option of two and now they come down to one.
• 18:46
  SPEAKER_02: You know, let me zoom in here just a little bit because I I find that sectoral play out so interesting.
• 18:52
  SPEAKER_02: And of course, on my mind is what you just mentioned about the chemical industry, with they've been you know really quite vocal against this.
• 18:58
  SPEAKER_02: Uh you may have seen the bipartisan letter that came out last week essentially asking the SDB to pay special attention to protecting farmers and ranchers.
• 19:06
  SPEAKER_02: So I guess, you know, and again asking to be speculative here, but I think it's it's really interesting to hear your take.
• 19:12
  SPEAKER_02: Chemicals don't want it.
• 19:13
  SPEAKER_02: We know that chemicals are intermediate inputs to lots of manufacturing, so I think we can draw a connection there.
• 19:19
  SPEAKER_02: There's agricultural concerns.
• 19:22
  SPEAKER_02: Who then is in sort of Lutnik and Trump's ears when they say sounds good to me?
• 19:27
  SPEAKER_01: I mean, you know, put it this way, I don't think it was uh I it was uh a coincidence that the uh CEO of UP gave a nice donation for the uh new uh expanded uh ballroom in the east wing of the White House.
• 19:42
  SPEAKER_01: I mean, I I don't think that was just a random donation.
• 19:45
  SPEAKER_01: Um and you know, and and this is a reality.
• 19:49
  SPEAKER_01: I mean, it's like when you look at the PPI for rail carload, basically it's like you know, when I teach in a rural education program here at Michigan State, I'm like, hey, here's the here's this.
• 19:59
  SPEAKER_01: Unless diesel plunges in price, you just basically bank on somewhere between two and five percent year-over-year increase for carload.
• 20:06
  SPEAKER_01: I mean, that's just what the the they're gonna do.
• 20:09
  SPEAKER_01: I mean, uh whereas intermodal is a completely different animal in that pricing is entirely based on what the dry van truckload sector is doing.
• 20:19
  SPEAKER_01: And where you have seen with the class ones is a lot more discipline over the last over this last truckload market cycle versus in 1819.
• 20:30
  SPEAKER_01: When rates really went up in truckload in 18, they started coming down fairly sharply in 19.
• 20:36
  SPEAKER_01: The class ones didn't adjust quickly enough, and they started to lose uh uh some of the market share back to the truckload space.
• 20:43
  SPEAKER_01: They've been very disciplined this time around, keeping intermodal savings, you know, pegged to around 25% give or take, based on uh Journal of Commerce's indices.
• 20:54
  SPEAKER_01: And so that that's where it's a different revenue picture.
• 20:59
  SPEAKER_01: And again, even UPNS, even combined together, they're they still don't have pricing power from an intermodal standpoint, because intermodal, there is no true pricing power like in carload, because at the end of the day, if truck if it's a 10% savings to put you know, to put it on rail, I'm probably just gonna put it on a truck and call it a day at that point, because I'm gonna get uh shorter transit time and historically more reliable service.
• 21:28
  SPEAKER_02: You know, let's zoom in there because that was another piece that I really enjoyed from your recent commentary.
• 21:33
  SPEAKER_02: You were noting that essentially per mile truck pricing and intermodal railroad volumes peak concomitantly, and I think you've kind of spoken to that mechanism.
• 21:41
  SPEAKER_02: But could you lay out that mechanism for our listeners and then sort of the bottom line of what I'm asking is, because I know you're you're really one of our thought leaders on trucking rates, where are they going and what does that then imply given this mechanism for intermodal volumes?
• 21:56
  SPEAKER_01: Yeah, so so what you can kind of really think about is the the trend.
• 22:00
  SPEAKER_01: The truckload sector goes through these cycles in terms of essentially demand, some type of exogenous force occurs and it causes demand to increase and increase significantly.
• 22:13
  SPEAKER_01: And 2019 was a blah year in trucking.
• 22:17
  SPEAKER_01: And rates went down, freight volumes went down, and as a result, intermodal pricing had to come down because as trucking rates come down, if intermodal prices don't come down, you just have market share lost because shippers will transition over to truckload.
• 22:33
  SPEAKER_01: Once intermodal savings, the magic number on contracts seems to be like if it's below 15% or even around 15%, a lot of it just gets put on a truck at that point.
• 22:45
  SPEAKER_01: Right now we're around 25.
• 22:47
  SPEAKER_01: And then we go, we have the COVID hit, just chaos in 2021.
• 22:54
  SPEAKER_01: Consumers are flushed with money because of stimulus, they're buying more goods, there's been a ton of capacity loss with jobs that were lost in trucking at the onset of the pandemic.
• 23:05
  SPEAKER_01: Rates trucking-wise reached record levels by late 21, early 22, and then they started to plunge down.
• 23:13
  SPEAKER_01: And with that, containerized imports also started to plunge down.
• 23:18
  SPEAKER_01: And so you had this, you know, essentially period where intermodal volumes are great in the back half of 20, okay in the first part of 21, really bad in the back half of 21, though, because of the network snarls.
• 23:33
  SPEAKER_01: Things got a little bit better in 22, but then container as import volumes plunged.
• 23:38
  SPEAKER_01: And 23 was just a god-awful year for intermodal.
• 23:41
  SPEAKER_01: 23 was like the worst year since 2015.
• 23:44
  SPEAKER_01: Um and then 24 was better because our imports picked back up.
• 23:48
  SPEAKER_01: Um and you know, that is just the continued story imports pick up, um, intermodal picks up.
• 23:57
  SPEAKER_01: That's where 26 gets to be an interesting question because we've got you know the highest tariff rates in a century, basically, um, or certainly the increase in tariffs in a century in place, and we're trying to figure out where imports are going to be next year.
• 24:12
  SPEAKER_01: Um because whereas, and this is probably one of the biggest misnomers, most freight that's moved in truck by truck is or originates at a domestic manufacturing plant.
• 24:24
  SPEAKER_01: That's like 60% of it on a 10-mile basis.
• 24:27
  SPEAKER_01: So at the end of the day, trucking volumes actually aren't that sensitive to imports.
• 24:32
  SPEAKER_01: But intermodal volumes are phenomenally sensitive to imports.
• 24:36
  SPEAKER_01: And so that's where, as well, if we're in a period of essentially stalling out containerized import growth, I don't see where again you now are having to pick market share away from the truckload space.
• 24:52
  SPEAKER_01: Unless the truckload sector really kicks back up and starts to see rates increase, that becomes harder to do.
• 24:58
  SPEAKER_01: Um we've basically been on the truckload side.
• 25:01
  SPEAKER_01: Rates have been declining or flat since Q2 of 22.
• 25:08
  SPEAKER_01: There's been no significant enough uptick for me to get excited.
• 25:14
  SPEAKER_01: All through 25, you've been hearing statements, oh, the market's about to turn, the market's about to turn, and it just hasn't.
• 25:22
  SPEAKER_01: Um, it's been first, okay, English language uh proficiency enforcement tend to think that's been dramatically overblown, um, not only in terms of degree of magnitude, but also in terms of degree of deterrence that uh government mandates have.
• 25:39
  SPEAKER_01: I say that as someone who's cut my teeth studying motor carrier safety.
• 25:43
  SPEAKER_01: So that is like what I primarily research.
• 25:46
  SPEAKER_01: And for the actors that are violating the English language proficiency laws by having drivers who are not capable of communicating appropriately in English, they don't care about safety in the first place.
• 25:59
  SPEAKER_01: So saying you're going to enforce it to a small carrier with two trucks where that truck's likely to get inspected once every eight months, yeah, that that's not that much of a deterrent.
• 26:11
  SPEAKER_01: Um and so that hasn't had the effect.
• 26:14
  SPEAKER_01: We actually just uh had a stay put on the uh non-domicile commercial driver's license rule.
• 26:21
  SPEAKER_01: Um and so we're trying to see how that, you know, how the appeals court will eventually rule on that.
• 26:27
  SPEAKER_01: But while that stays in place, that kind of hits the pause button on this.
• 26:31
  SPEAKER_01: Um, so that may even slow down things.
• 26:34
  SPEAKER_01: But at the end of the day, it's about domestic manufacturing activity, and we're just not seeing signs yet of a significant enough uptick that it'll flip the market.
• 26:45
  SPEAKER_01: Um, and the big chat and one of the big challenges is a lot of the inputs our manufacturers need are now more expensive.
• 26:52
  SPEAKER_01: Uh, Reuters was just reporting that aluminum prices for uh linden metal exchange um aluminum delivery uh delivery to the Midwest has hit record levels, and that's primarily because of the tariffs.
• 27:06
  SPEAKER_01: And so you're looking at our you know producers here in the U.S.
• 27:10
  SPEAKER_01: that put aluminum in goods that we export are now paying somewhere between 25 to 40 percent more than what is being paid um by a rival in Europe.
• 27:21
  SPEAKER_01: It's hard to compete when you're somebody in Europe's paying uh 30% less.
• 27:26
  SPEAKER_02: So we've had, I think, uh a really you know fascinating, high-level discussion.
• 27:31
  SPEAKER_02: While I still have you for a couple minutes, I'd like to do a little bit of sort of role-playing questions, two questions.
• 27:36
  SPEAKER_02: First one, I want to think about, you know, and I'm really I'm imagining particular customers that I'm lucky enough to get to work with here at Telegraph.
• 27:43
  SPEAKER_02: And let me put on that hat and say, let's say I'm a shipper, I move mined aggregates from somewhere on the West Coast, they come by rail to somewhere in the Midwest for you know my manufacturing facility, my assembly.
• 27:57
  SPEAKER_02: You know, what do I really want in 2026?
• 27:59
  SPEAKER_02: I want good, reliable service and low rail rates.
• 28:03
  SPEAKER_02: In your view, if you're just you know speaking to this particular uh role-playing exercise, is there some potential good from this merger that would come to me as that shipper of aggregates west coast to central United States?
• 28:17
  SPEAKER_01: Potentially.
• 28:18
  SPEAKER_01: I don't see though, again, the question is the marginal benefit that you're gonna get.
• 28:23
  SPEAKER_01: Unless you're doing an interchange, I find it difficult to see where that is.
• 28:28
  SPEAKER_01: And then the question is even going to be is there enough volume that you're gonna actually have a dedicated, essentially route running that you're not gonna have to interchange it in the first place.
• 28:37
  SPEAKER_01: And so that's where you know the you know, unit train intermodal, that's where you can see that there's gonna be that benefit.
• 28:46
  SPEAKER_01: For those couple bulk cars, it depends if there's gonna be enough volume that you're actually gonna get that unit, essentially that non-interchanged uh service, because otherwise, if it's still interchanging, the marginal, again, the marginal difference between UP doing an interchange with NS non-merged versus merged, how much, how much of a difference really is that?
• 29:12
  SPEAKER_01: That to me is the key question as we look at this merger is what is the marginal change that comes from vertical integration?
• 29:20
  SPEAKER_01: Um, and that's a question that academically uh we've tried to look at a lot, and it's a very, very, very challenging question to answer because it rests on a lot of assumptions.
• 29:31
  SPEAKER_02: Oh, that's an excellent point about sort of the scale of the operations, to whom do those benefits accrue?
• 29:37
  SPEAKER_02: The the second role-playing question I wanted to ask, and really I'm not imagining too far from my own character here.
• 29:43
  SPEAKER_02: Let's say I'm just like an anxious American and I'm worried about the economy, I'm worried about my country, and in your commentary, uh I noted that you called the proposed transcontinental railroad a unique entity and something that we've never seen before.
• 30:01
  SPEAKER_02: Depending on my level of anxiety, those can be fear-inducing words.
• 30:06
  SPEAKER_02: So I guess I ask, as just an anxious American, anxious about the economy, anxious about the state of things, is there something for me to worry about with the coming of this potential coming of this new unique entity?
• 30:19
  SPEAKER_01: No, that that's one certainly not.
• 30:22
  SPEAKER_01: Um, you know, it it is you this is one, if you are a carload shipper and you're about to go from two to one, you know, potential railroads, this keeps you up a little bit more at night, just thinking, okay, what does this do to my total cost situation?
• 30:38
  SPEAKER_01: Um if you're a transcontinental intermodal shipper, you may have some excitement for this.
• 30:45
  SPEAKER_01: Maybe there is some possibility.
• 30:47
  SPEAKER_01: Um, but again, the question is going to keep coming back on the margin.
• 30:53
  SPEAKER_01: Are you going to get something significantly different than again, let's say quantum right now, the JBH is running?
• 31:02
  SPEAKER_01: That to me is a question.
• 31:03
  SPEAKER_01: I hope that's what STB really looks at as they look at this is what is the marginal change with this over current existing operations?
• 31:13
  SPEAKER_01: And are there, well, we you know, say um, you know, in economics, are there those transaction costs that exist right now with UP and NS being separate entities that vertical integration is magically going to resolve that justifies what will is creating again a railroad with basically 40% market share, if not more, in almost all commodity categories that does take away um alternatives for um for shippers.
• 31:48
  SPEAKER_01: And so essentially the challenge is the benefits from this merger are kind of difficult.
• 31:54
  SPEAKER_01: They're opaque, they're a little bit hard to quantify.
• 31:57
  SPEAKER_01: The costs are more real, though.
• 32:00
  SPEAKER_01: We know what happens when competition is reduced.
• 32:03
  SPEAKER_01: And so that is, I think, the you know the big concern that the shipper community, especially the carload shipper community, has, is we know there will be a reduction in competition.
• 32:15
  SPEAKER_01: The question is, are the benefits of that reduction in competition going essentially offsetting it?
• 32:21
  SPEAKER_01: That is, I think, the case that UPN and NS have to make, and that is the case that STB has to analyze very closely as they look at this proposal.
• 32:32
  SPEAKER_02: Excellent.
• 32:32
  SPEAKER_02: And with that, I think you know what my last question has to be.
• 32:36
  SPEAKER_02: Which way is the STB gonna go?
• 32:39
  SPEAKER_01: I think they'll allow it.
• 32:41
  SPEAKER_02: Me too.
• 32:42
  SPEAKER_01: And I think that's the thing.
• 32:44
  SPEAKER_01: I think for Shepers, you you have to plan that this does move forward.
• 32:47
  SPEAKER_01: Um, and again, you know, and it's when you just figure out what you're gonna do.
• 32:52
  SPEAKER_01: I mean, I where I'm gonna be the thing I am most interested in is what does JBH do on the other side of this, because they're by far the largest intermodal provider, and they're exclusively BNSF in the West, but they do use CSX a little bit in the east.
• 33:11
  SPEAKER_01: I mean, it's mostly NS, but do you see a huge realignment that is potentially you know, basically JBH switching over to CSX?
• 33:22
  SPEAKER_01: Like that that is the one to me that I'm most interested in.
• 33:26
  SPEAKER_01: Um, you know, like hub groups perfectly positioned, they happen to be uh UP and UPNS users already.
• 33:34
  SPEAKER_01: Um and then we see that uh, you know, like Schneider is number three, they're on the opposite side there.
• 33:39
  SPEAKER_01: UP, but then CSX.
• 33:42
  SPEAKER_01: So that that to me is the most interesting one.
• 33:44
  SPEAKER_01: I'm trying to see is where do the mega intermodal marketing companies, um, you know, slash truckload providers, how do they end up moving themselves around?
• 33:55
  SPEAKER_02: Excellent.
• 33:56
  SPEAKER_02: Jason Gush, thank you so much for your time and for your insights.
• 33:59
  SPEAKER_02: And to anyone listening, if you don't already follow Jason on LinkedIn, I encourage you to do so.
• 34:03
  SPEAKER_02: It's a great way to get an independent take on what the numbers are telling us about what's happening in the economy and in freight markets.
• 34:09
  SPEAKER_02: Jason, thank you for sharing your insights with us today.
• 34:12
  SPEAKER_01: Hey, thanks for having me.