Latest / Talk Track by Telegraph / Pride + Intermodal

Transcript

Pride + Intermodal · Talk Track by Telegraph

• 0:02
  SPEAKER_01: I'm Sydney Schreiber.
• 0:03
  SPEAKER_01: And I'm Harris Liggan.
• 0:04
  SPEAKER_01: 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_01: Let's get into it.
• 0:16
  SPEAKER_02: Dave, you you fortunately for us came to Telegraph most recently from the government, right?
• 0:25
  SPEAKER_02: You worked at the US DOT.
• 0:26
  SPEAKER_02: And I think you've got an interesting perspective on how influential politicians can be in all of this.
• 0:34
  SPEAKER_02: And I think Lutnick came out recently and talked pretty openly about his points of view for the for the merger.
• 0:39
  SPEAKER_02: Isn't that right?
• 0:40
  SPEAKER_00: Yeah, that's correct.
• 0:41
  SPEAKER_00: And that's why I really consider myself in the camp of if we're trying to read the tea leaves of what this BNSF CSX partnership might mean, it it means something towards a merger.
• 0:51
  SPEAKER_00: And I say that because you know Lutnik is a very influential figure in today's White House, maybe even more influential or powerful than previous secretaries of commerce.
• 0:59
  SPEAKER_00: So to have him sort of give these general statements publicly that he supports merger approval really changes the context of what we're observing in in the industry, I think.
• 1:09
  SPEAKER_02: So so it sounds like as as we've kind of been kicking around the idea, which I mean, I I don't think, again, any of us came into this year expecting to be talking rail mergers and consolidation.
• 1:20
  SPEAKER_02: Is your read of some of the BNSF and CSX activity?
• 1:24
  SPEAKER_02: Do you think that's it's innocent, or do you think there is some long-term intention there?
• 1:29
  SPEAKER_00: No, I think there's long-term intention not so innocent, if you will.
• 1:33
  SPEAKER_00: And part of it is if you put it in the context of Lutnik's comments suggesting that this is indeed an administration that is going to be pro-business, potentially pro-merger.
• 1:43
  SPEAKER_00: And the other part of it is we've seen a known player in this space, Ancora Holdings, say to CSX directly, you need to be looking for a dance partner, or you'll be looking at a fight with us.
• 1:54
  SPEAKER_00: And and you know, people who've followed the history of this industry know that Ancora Holdings does have a history here, and they have sort of a successful fight card for getting what they want.
• 2:03
  SPEAKER_00: So with those two developments happening at the same time, I have to see this partnership announcement as a stepping to stepping stone towards something bigger.
• 2:12
  SPEAKER_02: I am not surprised that it only took us two episodes to get to a point where you and I would diverge greatly.
• 2:19
  SPEAKER_02: So I actually view the CSX BNSF announcement completely differently.
• 2:26
  SPEAKER_02: My take was interesting.
• 2:29
  SPEAKER_02: So why is this very specific coast to coast announcement coming out very specifically on on Intermodal, right?
• 2:38
  SPEAKER_02: The backdrop of tariffs, interesting.
• 2:39
  SPEAKER_02: But I also wonder if this isn't a very powerful but subtle chess move of saying you can serve multiple constituencies coast to coast without going through a merger, right?
• 2:51
  SPEAKER_02: And so if you do not desire if either party does not desire a future tie-up and that outcome, then it makes sense to show the STB.
• 2:59
  SPEAKER_02: You don't have to offer single-line service to be fast and competitive and engaged and deep with your customers.
• 3:07
  SPEAKER_02: That you can do all of the things that you would purport to do as two separate entities, as we've seen in in prior years.
• 3:13
  SPEAKER_02: The challenge to that is, as you and I have talked about, is there has been stagnation from a volume service and a variety of the metrics show this, that there's just been stagnation for a while.
• 3:23
  SPEAKER_02: I I think it is fairly known that I am not uh heavily in favor of hedge fund investors, especially in the rail industry, mainly because there are a handful of industries left that have uh that have somehow escaped the potential tarnish that comes with a heavy-handed investor coming into that space.
• 3:43
  SPEAKER_02: And from a rail operations standpoint, it is a complicated dynamic network that I'm not sure a lot of spreadsheet churners really, really understand deeply.
• 3:53
  SPEAKER_02: And so I don't see a ton of benefit.
• 3:56
  SPEAKER_02: And while Encora has been successful in winning some seats in other industries, they weren't necessarily as successful with Norfolk Southern at the initial point.
• 4:07
  SPEAKER_02: Ultimately, they ended up winning out.
• 4:09
  SPEAKER_02: And I think kind of the really interesting thing, uh, what is lost in all of this, the stock price is way up.
• 4:13
  SPEAKER_02: And so I think Encora actually, in a lot of ways, is has actually won a lot.
• 4:17
  SPEAKER_02: I think the interesting thing here is Warren Buffett came out earlier today and was very public in saying they're not buying another railroad.
• 4:24
  SPEAKER_02: And so if Bertr, Berkshire Hathaway has come out and said, and Greg Abel has has said publicly, we're not gonna buy, then I think pretty strong stance on the ground that I don't think these two parties are really deeply considering a merger.
• 4:37
  SPEAKER_02: I think that they're looking and very interested to show all the things they can do without having to go through that process.
• 4:42
  SPEAKER_00: You know, that that's a really interesting insight.
• 4:44
  SPEAKER_00: And in and before we get to another sort of point of diversion between our two takes on the topic, I want to explore that because another thing that you and I have talked about sort of offline is how could this go, you know, before the STB?
• 4:56
  SPEAKER_00: And I think you make an interesting point here that like maybe this is almost a created counterpoint to the necessity of a merger, just to say, like, look, you we can achieve the things you're looking for without that kind of tie-up.
• 5:06
  SPEAKER_00: I wonder if you could talk me through or talk listeners through something we've been discussing, like when they go to the STB, could one of the outcomes be, well, for compet competition's sake, we're going to break up these lanes, these segments, these sort of lines of business to preserve competition there.
• 5:23
  SPEAKER_00: Do you think that by starting these three new cross-country intermodal services, they're maybe trying to lay the land for that kind of carving out of specific competition preserving business?
• 5:32
  SPEAKER_02: You know, I I think one of one of the really interesting things is under the this is a it is again like it feels like we are splitting hairs, and and I'm sure some attorney is really excited to hear that we're getting this deep into this.
• 5:44
  SPEAKER_02: But the new merger rules no longer account for just preserving competition.
• 5:48
  SPEAKER_02: So if they were to consider a merger, there might there isn't just you've gotta you gotta preserve competition.
• 5:53
  SPEAKER_02: There has to be some demonstrable effect of enhancing competition.
• 5:58
  SPEAKER_02: And from my very independent view, preserve and enhance are two very different thresholds.
• 6:04
  SPEAKER_02: Now, who am I to say?
• 6:05
  SPEAKER_02: I'm I'm not a part of the board.
• 6:06
  SPEAKER_02: So when I think through that, one of the ways that you potentially can enhance is you can create some carve outs and offer up other people or other parties who might be particularly interested, have a unique service offering that could come in and actually accelerate something new within that, within that ecosystem.
• 6:25
  SPEAKER_02: I think one of the things that we we haven't talked openly about, everything revolves around routing through Chicago.
• 6:31
  SPEAKER_02: I mean, that that is that is where the majority of the routing happens, a lot of interchange opportunity in Kingley, there's a lot of line haul that goes through Chicago versus routing over at Kansas City, a St.
• 6:41
  SPEAKER_02: Louis, a Memphis, or maybe even in New Orleans.
• 6:44
  SPEAKER_02: We haven't spent a lot of time as an industry really going deep on is there an opportunity to actually bypass Chicago?
• 6:49
  SPEAKER_02: So could you, connecting with the short line, potentially route around, which is a very, very interesting proposition.
• 6:55
  SPEAKER_02: And so I think this is where shortlines, if they can carve out specific areas where they've got the entrepreneurial spirit, they've got the operational know-how, they're happy to take on that business and work very deeply on that first mile, last mile segment.
• 7:09
  SPEAKER_02: Yeah, there's a lot of opportunity for some potential carve-outs there.
• 7:12
  SPEAKER_02: I'm still a little fuzzy on how that quote unquote enhances competition.
• 7:16
  SPEAKER_02: And so moving from what we're talking about today to actually talking about that in actuality, still a little fuzzy.
• 7:22
  SPEAKER_02: Um, but I think there are two different two different kinds of thresholds we we've got to talk around here.
• 7:27
  SPEAKER_00: Yeah, that that's an interesting take.
• 7:28
  SPEAKER_00: And thinking about the ability of the short lines to improve the service experience of shippers takes us to which they inevitably do.
• 7:36
  SPEAKER_02: I I think time and again, David, like they I know very few shippers that have nothing but glowing things to say about their short lines, the responsiveness, that they're they're yes, they'll come in and switch them extra on the weekends, they're loading all these things.
• 7:50
  SPEAKER_02: Compared to their class one partners, that is that is not a uniform distribution of love.
• 7:55
  SPEAKER_00: I wonder then how how would you see a revisiting of, I was thinking about our last conversation, and we said, all right, you know, if if there is this sort of consolidation and there's two major parties, and we took an analogy of Coke and Pepsi and we thought about innovation, and we thought, well, you know, innovation comes from the smaller players.
• 8:13
  SPEAKER_00: As I've you know sat with that analogy, some, I've thought, well, the other thing that comes to mind is if it is a two-mega railroad world, you know, I don't think there's any restaurant I've been to that offers you Coke or Pepsi.
• 8:25
  SPEAKER_00: It all gets locked up.
• 8:26
  SPEAKER_00: Do I hear you saying that that won't happen because the STB will see it the same way?
• 8:31
  SPEAKER_02: Railroads are classically the this is one of the this thing that makes actually the entry one of the most interesting places to work is that it is a classic network effects business.
• 8:41
  SPEAKER_02: Like literally, they're physical tracks in the ground.
• 8:44
  SPEAKER_02: It is a network and it and a closed closed loop, right?
• 8:48
  SPEAKER_02: And so it actually would make for a really good system dynamics uh exploration if we ever wanted to do that.
• 8:53
  SPEAKER_02: I think it becomes very challenging without reciprocal switching for you to become a dual-serve proper property if you're on one of these single line offerings.
• 9:01
  SPEAKER_02: And so if you're on um, I I I referenced the Montana High Line last time I talked, right?
• 9:07
  SPEAKER_02: It's very hard to say that you're gonna get competitive switching options from Union Pacific up there.
• 9:12
  SPEAKER_02: Like I just it's like it classically is not something that I think we we would really want to entertain.
• 9:16
  SPEAKER_02: I think if you go to the two mega railroad, it's hard to say that there are crossover benefits.
• 9:21
  SPEAKER_02: And I don't know, to use your example.
• 9:23
  SPEAKER_02: I don't I don't know.
• 9:23
  SPEAKER_02: Maybe maybe if you if you do have only coke or have only Pepsi, maybe it becomes a watered-down product.
• 9:30
  SPEAKER_00: The other thing that I think has come out of our conversations about well, what can the audience of a conversation like this expect to come out of these developments?
• 9:39
  SPEAKER_00: We've talked a little bit about you know what where the railroads stand on what they might want.
• 9:43
  SPEAKER_00: And I and I think that that point about creating the counterpoint for the necessity of a merger is a very clever one.
• 9:49
  SPEAKER_00: Uh, you know, what to expect in terms of service level and sort of mind the Coke Pepsi analogy there.
• 9:53
  SPEAKER_00: I wonder what well, I'll lay out what I'm thinking, and then I would love to hear the argument for or against that.
• 9:58
  SPEAKER_00: Let's hear it.
• 9:59
  SPEAKER_00: I just think that that as we look at how this administration chooses to engage business, it's different in a meaningful way, and we get sort of continuous evidence that this government wants to be an owner, a director of major American companies.
• 10:16
  SPEAKER_00: We saw that with the approval of the U.S.
• 10:18
  SPEAKER_00: Steel merger.
• 10:19
  SPEAKER_00: We saw it with the you know requirement that when Nvidia and AMD sell to China, the government's gonna take a 15% stake.
• 10:25
  SPEAKER_00: We now saw it with the government's 10% stake in Intel owing to the CHIPS Act.
• 10:29
  SPEAKER_00: It seems to me that a condition of this merger could include government involvement in railroading in a way that we've never seen before.
• 10:36
  SPEAKER_00: As a career railroader, do you see that happening?
• 10:40
  SPEAKER_00: And and do you see a positive and negative clearly coming into your scope?
• 10:44
  SPEAKER_02: The irony in all of that would be that the railroad network that we enjoy, speak of, um, entertain ourselves with today was predominantly constructed entirely of land grants.
• 10:57
  SPEAKER_02: So that that is that is an interesting 180 that we might have hundreds of years later.
• 11:04
  SPEAKER_02: I uh I don't think the taste, no matter how sweet of that poison would be, would be, I think, something that I think any of these major railroads would want to have long term, mainly because when you think about some of the examples that you offered, Intel, NVIDIA, they have not historically faced the looming regulatory friction that railroads have have had to deal with for years.
• 11:27
  SPEAKER_02: I mean, candidly, right?
• 11:28
  SPEAKER_02: They're regulated pretty heavily on the operating side by the FRA, regulated semi-loosely by on the commercial side by the SDB.
• 11:36
  SPEAKER_02: And I'm not sure that if you're a railroad today, that that is something you want to get closer towards, to be totally honest with you.
• 11:42
  SPEAKER_02: So I um I don't think that is the direction that they would want to go.
• 11:47
  SPEAKER_02: However, as you pointed out, the current administration has a pretty impeccable track record of extracting value from any major and corporate activity these days.
• 11:57
  SPEAKER_00: And that's what's so interesting to me.
• 11:59
  SPEAKER_00: And that might be sort of the question going forward is you know, last time I thought you framed up the initial deal really well when you said it was sort of a way to purchase growth in a market where it's hard to get growth.
• 12:09
  SPEAKER_00: What will the true cost of purchasing growth be?
• 12:13
  SPEAKER_00: Potentially, it involves concessions that I think you're right, the the railroads wouldn't want to walk towards, but that may be a price they're compelled to pay to get that STB approval.
• 12:22
  SPEAKER_02: Yeah, it's it's interesting.
• 12:24
  SPEAKER_02: Let's just let's let's assume some some very broad numbers here.
• 12:26
  SPEAKER_02: Well, let's say you you've got an interline move going from Omaha to Atlanta.
• 12:32
  SPEAKER_02: And if you're Union Pacific today, you you maybe take what 60 to 70 percent of that line haul, and the and the balance is left over to to Norfolk Southern.
• 12:40
  SPEAKER_02: Effectively, the strategy here is that your growth is going to be through this acquisition, you're basically gaining that incremental line haul um that you are already working with and in pricing out.
• 12:51
  SPEAKER_02: So I think that's interesting.
• 12:53
  SPEAKER_02: I'm not sure how much more mingling you would want to do with the government to for for that.
• 12:59
  SPEAKER_02: And and candidly, I think the way that the stock market performs, right?
• 13:02
  SPEAKER_02: Short term, it's a voting machine, long term it's a weighing machine.
• 13:05
  SPEAKER_02: I don't think we historically in the United States have dealt with heavily regulated companies very well in a capitalistic society.
• 13:14
  SPEAKER_02: That has tended that does not have a strong tendency to go up and to the right, has a strong tendency to stay kind of flat for a very long time.
• 13:21
  SPEAKER_02: And so I think if we're if we're honest with ourselves, that's actually what we're attempting to break out of.
• 13:25
  SPEAKER_02: And uh that would be a concern, I think, going into uh into that kind of relationship.
• 13:30
  SPEAKER_00: 100% agree with the concern.
• 13:32
  SPEAKER_00: And you know, even just thinking about some of the challenges that Amtrak has being closer to that position, you know, you end up compelled to service certain parts of the country because the government stakeholder wants you to, not because that's your best bottom line decision.
• 13:44
  SPEAKER_00: Do we see that in a a mega railroad approval?
• 13:48
  SPEAKER_00: We'll have to wait and see.
• 13:49
  SPEAKER_02: Yeah, I I think that may be left uh for for maybe our conversation next time.
• 13:55
  SPEAKER_00: Look forward to it.
• 13:56
  SPEAKER_02: Well, thanks for the time, David.
• 13:57
  SPEAKER_02: As always, good seeing you.