Latest / Talk Track by Telegraph / UP-NS Merger Concessions, Energy Prices + BNSF's Barstow Bet

Transcript

UP-NS Merger Concessions, Energy Prices + BNSF's Barstow Bet · Talk Track by Telegraph

• 0:06
  SPEAKER_01: All right, welcome back to TalkTrack, the podcast where we talk about and respond to the current events of the day and we think about them through the lens of the railroading community.
• 0:15
  SPEAKER_01: That's carriers, shippers, railcar lessors, really everyone interested in the industrial economy.
• 0:21
  SPEAKER_01: As always, I'm joined by Telegraph co-founder and co-host Harris Liggan.
• 0:25
  SPEAKER_00: Hey David, thanks for having me on yet again.
• 0:27
  SPEAKER_00: It's great seeing you.
• 0:29
  SPEAKER_01: Gosh, always a pleasure, and there's so much to talk about.
• 0:32
  SPEAKER_01: I want to jump right in.
• 0:33
  SPEAKER_01: You know, I think you and I have talked about how a lot of people talk about the UPNS merger and a lot of ink has been spilled.
• 0:42
  SPEAKER_01: But I think we'd be remiss if we didn't kind of mine for insight what happened recently, and maybe what what I'll do is give a brief synopsis looking for your reactions of which parts of this struck you, or what are you know some of the second order things that you think people might not be thinking about.
• 0:59
  SPEAKER_01: So for people who haven't followed the recent news on this, essentially BNSF, CSX, CPKC, and CN have all filed on deadline something called a description of responsive application.
• 1:14
  SPEAKER_01: And and I bring up that term of art because I think it matters.
• 1:18
  SPEAKER_01: It's basically saying this is not exactly the concessions, the final concessions we'll ask for should the merger be approved, because we're still very much opposed.
• 1:28
  SPEAKER_01: But this is our general sketch of what we want if that gets approved.
• 1:33
  SPEAKER_01: And we have some notes from BNSF, like I said, CSX, CBKC, CN.
• 1:38
  SPEAKER_01: I could go into any of them, but maybe I'll just start there.
• 1:41
  SPEAKER_01: You know, I'm sure you saw all the headlines and read a lot of the same coverage I did on it.
• 1:46
  SPEAKER_01: Did anything jump out to you about what the these parties are looking for?
• 1:50
  SPEAKER_01: Should the merger be approved?
• 1:52
  SPEAKER_00: Yeah, I I again I I think as we've traded some commentary here, and I think I've shared it with the broader public.
• 1:59
  SPEAKER_00: Um this is evolving in a way that I don't think the average person participating in the transportation ecosystem would anticipate.
• 2:09
  SPEAKER_00: So I I think my expectation was in the kind of the last round of filings, rebuttals, and and counter filings, that that was it for a specific time period, and that we were kind of going into a much longer period of waiting.
• 2:24
  SPEAKER_00: I expected that we would hear something mid-Q4, and then that would kind of set up the 2027 stage.
• 2:30
  SPEAKER_00: I was very surprised with the BNSF, um CSX, CPC, CPKC kind of like positioning for a couple of reasons, and then obviously CN because of how they have previously like said, we're good.
• 2:47
  SPEAKER_00: They're weighing in on that as well.
• 2:50
  SPEAKER_00: What most surprised me about the concession or the thought or idea of potential future concessions subject to the approval of the merger, really for me struck out was BNSF's identification of okay, we want to basically have rights from Chicago to Central PA.
• 3:11
  SPEAKER_00: Which, for those who who think about the broader intermodal network and think about the classic supply and demand patterns, that would indicate to me that BNSF feels very strongly about the long-distance transit between SoCal through Chicago and then Central PA.
• 3:33
  SPEAKER_00: And then for those who who may not think more broadly about that Northeast market, it's it's the extension into the New York, New Jersey area via Croxton as well.
• 3:42
  SPEAKER_00: I think that was a very interesting tell.
• 3:44
  SPEAKER_00: And if we think about the um the steamships and the domestic partners that BNSF has that drive a lot of their kind of channel partner acquisition strategy, that would lead me to believe that that is a that is something they are very concerned about.
• 3:59
  SPEAKER_00: So that was that was that was opportunity number one.
• 4:02
  SPEAKER_00: Um on CSX and CPKC, their concessions were very, again, directed at their own network.
• 4:09
  SPEAKER_00: And what I what I thought was really really interesting, it felt like from a network standpoint, chess on the on the chess pieces on the chessboard, they were showing what moves they might make if the situation was was reversed.
• 4:23
  SPEAKER_00: If they were to do a tie-up or a merger, where are the areas that they feel are really important to their competitive position?
• 4:30
  SPEAKER_00: I thought that was interesting.
• 4:33
  SPEAKER_01: You know, that's a a great way to see it is like where do the class ones see action on a map of the US?
• 4:40
  SPEAKER_01: And and since you said it, it really struck me too, you know, that BNSF looking for essentially trackage rights for Norfolk Southern's tracks Chicago to Bethlehem PA or the Lehigh Valley.
• 4:51
  SPEAKER_01: I also want to point out that CSX was interested in that same thing.
• 4:54
  SPEAKER_01: And just as someone who, you know, as a runner we'll get into as we usually do, I you know have an interest in politics as you know you do, and many of you were doable like Battleground Pennsylvania strikes in the railroad merger too.
• 5:06
  SPEAKER_01: Like that is two of the class one saying, if you want this to approve, give us Pennsylvania.
• 5:12
  SPEAKER_01: And then the other one that really struck me as sort of a an energy enthusiast was the NSF also said you're also we want access to the Gulf Coast and all of that lucrative petrochemical business.
• 5:24
  SPEAKER_01: So it's I think it your way of framing it that says this is where the class one operators see the industrial economy moving really was a tell.
• 5:34
  SPEAKER_00: So so if we if we kind of go back and think through how all of these things have have come together, networks evolve over time and railroading hundreds of centuries, uh especially post-staggers.
• 5:47
  SPEAKER_00: What I thought was interesting is we all tend to sleep on Pennsylvania for a variety of reasons.
• 5:54
  SPEAKER_00: You you brought up you know a very comparable point.
• 5:57
  SPEAKER_00: Pennsylvania is a great state.
• 5:58
  SPEAKER_00: Having lived there for a while, I think it's it's a great place.
• 6:00
  SPEAKER_00: For those of you listening, Philadelphia is a great city.
• 6:03
  SPEAKER_00: But what I thought is is interesting is that area tends to be some some sort of uh food and consumer breadbasket for the broader kind of like what I what I refer to as like the Northeast Corridor population, right?
• 6:18
  SPEAKER_00: It's like you know, you in Boston, New York, New Jersey, Philly, you know, kind of down into the Baltimore, DC area.
• 6:24
  SPEAKER_00: That is a great place for a lot of distribution centers.
• 6:27
  SPEAKER_00: So around, you know, Eastern PA, the Valley, Bethlehem, that area, that is a from a consumer products, stuff it in an intermodal container, send it and get it close to be basically trucked or drade to the final mile.
• 6:40
  SPEAKER_00: It's a great place.
• 6:41
  SPEAKER_00: So I that's actually understandable.
• 6:43
  SPEAKER_00: CSX's point around, hey, we want you to divest East St.
• 6:48
  SPEAKER_00: Louis altogether, shows me that that it continues to be Chicago, is where all the trackage tends to flow, where there is a lot of pricing power because there is a lot of throughput.
• 6:59
  SPEAKER_00: But I think many of these railroads, for a variety of reasons, maybe it's crew availability, locomotive, like cycling of the network, they continue to evaluate middle of the country, Mississippi kind of interchange points, which I think is funny.
• 7:11
  SPEAKER_00: The last piece that I that struck me, and you called it out, for the longest time, Union Pacific has been thought of as having one of the probably premier physical locations on a map.
• 7:26
  SPEAKER_00: So if you were to design a railroad and think about all the mixtures of commodities and OD points and you know splicts that you need to serve in order to kind of get that good balance, UP's ownership of the Gulf region and especially the energy and chemical segment has led them to really, really kind of dominate that market.
• 7:45
  SPEAKER_00: And that's that's an arena that Venus F, I think, has always wanted to participate more into, has had some thoughts about maybe some creative strategies to do that.
• 7:54
  SPEAKER_00: This is a very clear way that they could take share and maybe take some aggressive, you know, commercial actions to be able to do that.
• 8:02
  SPEAKER_00: So I thought I thought it was, it's just it's really interesting.
• 8:05
  SPEAKER_00: I continue to find myself um a little tired of the drama, but it is, you know, for our industry the most intellectually stimulating thing that we've got going on.
• 8:16
  SPEAKER_01: And you know, one more note on that is is that I think it's it's interesting to think about how you say, you know, that's kind of the that petrochemical business is a prize to be sought after.
• 8:26
  SPEAKER_01: You know, one of the things that we've experienced, and we'll probably start talking about energy prices here pretty soon, is that like America's transition to, you know, world energy shop, world gas station, to put it bluntly, net energy exporter has implications like this, right?
• 8:40
  SPEAKER_01: Like if if we are moving a lot of volume out through golf course golf coast terminals, which we are, I can see it carriers wanting to be a part of that change in the American economy the way that that is being requested here.
• 8:52
  SPEAKER_01: And that was such an interesting one, is that it wasn't exactly BNSF saying only like give us access.
• 8:58
  SPEAKER_01: They really put out there, we'd like to see this open access where there's a terminal where anyone can get there.
• 9:04
  SPEAKER_01: The reality of that is a different thing, but the I think the the class ones putting their fingers on Pennsylvania and the Gulf Coast do tell us something about where they think the economy's going.
• 9:15
  SPEAKER_00: Yeah, I I think the the greatest the greatest thing about about whether it's trucking or rail, or I mean any any mode of transportation, just pull up a map.
• 9:24
  SPEAKER_00: And you you can you can understand the the strategy behind that.
• 9:28
  SPEAKER_00: There's obviously a ton of strategy around logistics and cotton you know global conflict, but I think when it when you just think about how do you make money in the in the North American transportation ecosystem, pull up a map, and and that will help you understand where you should probably be spending the majority of your time.
• 9:43
  SPEAKER_00: And candidly, the other thing that I I really got excited about from the rebuttal and some of the counterfilings was the attempt of the other class ones to effectively say, Hey, there have been a lot of changes to the application.
• 9:59
  SPEAKER_00: It feels like you know, the dial always turns a little bit, and um, it almost feels like any, you know, you being a former professor probably felt this you know in some ways.
• 10:08
  SPEAKER_00: When you have students that want to turn in their work perpetually late, or you know, they're constantly like asking you for feedback, they take the feedback, then they submit, and they want to kind of I I I like I appreciated that they were they were calling that out.
• 10:21
  SPEAKER_00: My assumption would be that they would equally want those rules applied to them if the situation were to change at some point in the future.
• 10:29
  SPEAKER_01: That's a good point.
• 10:30
  SPEAKER_01: I think a bookmark you've kind of put in the conversation before is that like we don't know what happens next in terms of consolidation, but what people say now could be brought up uh you know in their applications, just because I think we have to get to the brass tack question of it.
• 10:43
  SPEAKER_01: So, you know, we have these descriptions of potential concessions, and just calendar-wise, my understanding is they have to put forward their full concession list or what they want to be evaluated by November, and then the applicants can respond to that by February.
• 10:59
  SPEAKER_00: Yes.
• 10:59
  SPEAKER_01: And you know, if if I have that wrong, I apologize.
• 11:03
  SPEAKER_01: But the what I want to drive it towards is do you think this moves the needle on if this thing gets approved in 2027?
• 11:10
  SPEAKER_00: So right now, we when you think about this November to February timeline, uh I think there's always gonna be more to come up.
• 11:19
  SPEAKER_00: And so I would I would see that that that February date of kind of like the comment period being closed is likely more probably March, April, potentially May, right?
• 11:28
  SPEAKER_00: I mean it could extend all the way into May.
• 11:29
  SPEAKER_00: And at that point, you're effectively in the second half of the year.
• 11:34
  SPEAKER_00: So my thesis is that I think we will hear about a decision in late 2027.
• 11:42
  SPEAKER_00: But man, there are a lot of things that could come up between now and then, and even post-2027, this isn't gonna be an overnight thing.
• 11:50
  SPEAKER_00: I mean, when we think back to the to the southern Pacific, when we think back to Conrail, those were things that were decided on a date, and then it wasn't 18 until 24 months later that there actually was a change.
• 12:02
  SPEAKER_00: I mean, even with the the the CPKC S, that was probably the fastest that any of those two large organizations have ever moved historically, and that was candidly because they were two very willing participants in that opportunity.
• 12:15
  SPEAKER_01: That's a great point.
• 12:17
  SPEAKER_01: The the kind of flip side of it that came to my mind as I was reading this, and you know, I think really people could read those documents, they're each around 10 to 13 pages long, what the class ones filed, and they're you know generally digestible.
• 12:30
  SPEAKER_01: Otherwise, I think uh Steve Blyn and Dan Bostix have written some great pieces on it.
• 12:35
  SPEAKER_01: But but one thing that was ringing in the back of my mind as I was reading it is you know, don't forget that uh Venna, the CEO of UP, has said publicly, like if the concessions extract all the value from this, I'm willing to pay the walk away price, which is big.
• 12:51
  SPEAKER_01: But this does open the door, you know, healthy concessions, I think, open up the conversation of well, if this is what we have to do, is it still worth it?
• 12:59
  SPEAKER_01: I think that's you know a conversation that we'll see play out in the press between now and the end of the year.
• 13:04
  SPEAKER_00: Yeah, look, I I the the way so so two rebuttals to that is I I always I always think it's good that that folks are are weighing in.
• 13:14
  SPEAKER_00: My encouragement and uh what I you know always hope to read is is the perspective that's being offered to me true you true and unique and novel and differentiated?
• 13:24
  SPEAKER_00: So are we are we providing commentary and perspective back to the industry that we think actually like raises the level of discussion?
• 13:30
  SPEAKER_00: And and I think that that's where we should always be kind of like striving for.
• 13:33
  SPEAKER_00: I think you and I have had a lot of conversations about that recently.
• 13:37
  SPEAKER_00: The second thing about you know paying the walkaway price, there's something of a waterfall to be considered with that.
• 13:45
  SPEAKER_00: Yes, I I hear exactly what you're saying.
• 13:47
  SPEAKER_00: The concessions at some point maybe may become too high a price to allow for in this kind of joint, and it probably, you know, if if the UPNS merger or acquisition has been structured in a way that they're gonna remove a lot of trucks off the highway, if you're effectively giving up a good portion of that ownership of that you know, high priority premium route between Chicago and Northeastern PA, yeah, that that may actually distill some of your your offering or the value that you you believe that you would create.
• 14:21
  SPEAKER_00: Being willing to pay the walkaway price is not necessarily an awful outcome for any party.
• 14:30
  SPEAKER_00: However, following that, it raises some really interesting questions.
• 14:35
  SPEAKER_00: The UP strategy pretty clear.
• 14:38
  SPEAKER_00: I don't think anybody around the table has had many discussions or questions around like long-term, what could that franchise be?
• 14:46
  SPEAKER_00: Man, if you've been in Atlanta for a while and for the past two, three, four years you've been talking about a merger.
• 14:56
  SPEAKER_00: Yeah, I mean, I think it it really it really challenges that organization to think about their role in the broader spider web of 140,000 miles of track.
• 15:05
  SPEAKER_00: What is their unique strategy?
• 15:07
  SPEAKER_00: Absent a merger.
• 15:10
  SPEAKER_01: Is the next shoe to drop, that is really interesting to think about.
• 15:13
  SPEAKER_01: What one other sort of wrinkle I'll put on it, and and it's maybe sort of an unpopular opinion, but it's it's uh held with conviction that uh I think the midterm elections matter here.
• 15:24
  SPEAKER_01: Personally, I think that we are going to see a change in uh party in Congress, and that change in party I think will impact how much the city administration can do without oversight.
• 15:37
  SPEAKER_01: And if they invoke more oversight, they're sort of tied down a little bit more by a Congress that is not as compliant, then I think that changes at least the calculus that I apply to the likelihood of the merger.
• 15:49
  SPEAKER_00: Interesting.
• 15:49
  SPEAKER_00: Okay, yeah, I mean you you I feel like you kind of have this running tabular review.
• 15:54
  SPEAKER_00: Maybe it's an abacus on the desk that we can't see that you're kind of moving some stuff around on.
• 15:59
  SPEAKER_00: I think I as a as a natural transition uh to other topics that we had tied up for today, of all the things that you might be considering as a governing body, boy, is a rail merger even in the top 10 at this point.
• 16:15
  SPEAKER_00: I I don't know.
• 16:17
  SPEAKER_00: I I think you know, candidly, I was I was at a conference yesterday and uh slide pops up on the screen, and we are basically looking at a nearly exponential move in diesel prices.
• 16:31
  SPEAKER_00: And the counter chart that we saw on there, you know, for for for those listening, we we we were a part of the the Uber Freight Chemical Summit conference yesterday.
• 16:40
  SPEAKER_00: Chemicals obviously in huge demand currently, I think that looks to continue.
• 16:46
  SPEAKER_00: But one of the big factors that I think a lot of folks are considering is stockpiles or availability of um of oil inventories is at its potentially lowest point in the past 20 years.
• 17:01
  SPEAKER_00: And so that raises some big concerns of going back to like of all the things that the United States and even probably North America is probably considering today.
• 17:12
  SPEAKER_00: I don't know if the UPNS merger is breaking the top 10 right now.
• 17:16
  SPEAKER_00: Because we we think about that, we think about interest rates, which is uh I mean a wet blanket on an already fairly challenged consumer-driven market.
• 17:28
  SPEAKER_00: Yeah, I don't, I don't, I don't know, Dave.
• 17:29
  SPEAKER_00: I I don't I don't know that there's enough time on the docket for for to talk about you know the monopoly board today.
• 17:36
  SPEAKER_01: You know, I I think my only disagreement is that I I don't think the people who make the decision are spending as much time thinking about what's good for the country as they are thinking about other objectives.
• 17:47
  SPEAKER_01: So I think there's maybe, maybe, maybe.
• 17:49
  SPEAKER_00: But I I think the the thing that we're not we're not talking enough about is yes, absolutely concerned about the direction and trajectory and looks like to be sustained trajectory of where um fuel prices are likely going to be and the waterfall cascading impact on transportation prices, a lot of other things.
• 18:10
  SPEAKER_00: I'm actually more worried about the fact that the inventory levels are at such such a low place, and that the time that it takes for a fuel basically full reset on the on the supply, and that pipelines are now out of service, natural through points are now effectively out of service, that has really raised an interesting position for us to be in.
• 18:32
  SPEAKER_00: And if I'm thinking about the through line of why we're talking, if you're in a situation where fuel prices are really high, availability of fuel is really low, you're likely going to naturally turn, or you should, to the most economically efficient modes of transportation across the surface.
• 18:51
  SPEAKER_00: That would lead us to railroad and intermodal or car load and intermodal, which I think is a potentially uh uh a net benefit in a really unfortunate way.
• 19:00
  SPEAKER_00: Like I hate positioning it like that.
• 19:02
  SPEAKER_01: No, but I think that's the right one for this audience.
• 19:05
  SPEAKER_01: And and so just two things for people who don't follow this stuff probably as carefully as we do.
• 19:09
  SPEAKER_01: Diesel hit six dollars, that's a record price.
• 19:12
  SPEAKER_00: And it is staying above six dollars.
• 19:14
  SPEAKER_01: Yeah, and as we talk today, uh WTI crude oil is over a hundred, which is you know, such a big deal that um when it's happened previously, there were traders who bought contracts just so they could show that this uh high water mark was achieved on their watch.
• 19:29
  SPEAKER_01: This is a it's a memorable moment.
• 19:31
  SPEAKER_01: It's a it's a ceiling that has psychological impact and we're past it.
• 19:35
  SPEAKER_01: So you know, just for people who don't who don't follow, because all the other news is overwhelming them, those are really high prices for the inventory reasons and other reasons I think that you brought up, you know, and then just one other thing, will it calm down?
• 19:49
  SPEAKER_01: I don't think so, but a lot of that depends on what a person's uh belief is about the potential for world peace between now and Christmas.
• 19:58
  SPEAKER_01: And if you share my belief that there's not a lot of potential for that, then I think this is a this is a price environment we're sustaining.
• 20:04
  SPEAKER_01: But to your point, just as far as a volume on the rails perspective, what we learned this year is that higher energy prices bring volume on the rails.
• 20:14
  SPEAKER_01: Intermodal conversion, energy exports, there's there's things moving as a result of this.
• 20:20
  SPEAKER_00: Yeah, and the way that the way that I've I I've started to to think about this is we're seeing a lot of potential for structural changes in the broader transportation landscape.
• 20:34
  SPEAKER_00: Let's talk trucking, right?
• 20:35
  SPEAKER_00: You and I have talked about multiple times on this podcast that trucking capacity artificially, structurally, had been propped up by the availability of driver.
• 20:46
  SPEAKER_00: There has now been a regulation on top of regulation on top of action that has now pulled capacity out of the market.
• 20:52
  SPEAKER_00: That changes the calculus for the availability of capacity today, changes the calculation for new tractor builds.
• 21:01
  SPEAKER_00: So those are structural changes that will be in place in the next 18 to 24 months that that will actually be with us for five to ten years.
• 21:10
  SPEAKER_00: It's the same thing that when we think about the volume story on the railroad, if the volume story continues to be consistent where it hasn't been in the past five to six years, it's been at a consistently low point.
• 21:21
  SPEAKER_00: If that rises and remains stable, we're gonna have to have a conversation about locomotive manufacturing, right?
• 21:28
  SPEAKER_00: Do we have enough rail cars?
• 21:30
  SPEAKER_00: You you brought up a really good point a couple of weeks ago.
• 21:33
  SPEAKER_00: The replacement rate on the retirement flow of rail cars is actually negative at this point.
• 21:38
  SPEAKER_00: So we're not we're actually retiring more rail cars than we are actually building new rail cars.
• 21:42
  SPEAKER_00: And depending on what vintage and type of rail car, that actually can be a pinch point for you long term.
• 21:47
  SPEAKER_00: And so those items on top of an already changing energy market that looks to remain high for a longer period of time will drive structural changes in procurement.
• 22:00
  SPEAKER_00: And execution.
• 22:01
  SPEAKER_00: If you're a company that knows how to procure rail and can execute effectively on rail, you're probably the best position you can be to rail.
• 22:11
  SPEAKER_01: I think that's a great point.
• 22:12
  SPEAKER_01: And just one more structural change to add on before maybe a quick topic shift is that you know, as is I've written previously in some blog posts, and I and I'd like to shift us to one that that you wrote recently before that or after this, but I just want to bring up my friends, the farmers at Corn School.
• 22:27
  SPEAKER_01: Energy prices is very much are very much related to farmers' decision making.
• 22:32
  SPEAKER_01: Right now, in sort of the heartland, uh farmers are getting ready to harvest.
• 22:37
  SPEAKER_01: Those are huge machines that take a lot of diesel, and then the grain has to be dried, which also has a diesel input.
• 22:43
  SPEAKER_01: These prices are gonna hurt those folks too, and I think we'll see that longer term, uh, you know, with similar dynamics as to what you discussed.
• 22:50
  SPEAKER_00: Yeah, and the the the the challenging part about that, because I you you you and I share the sentiment around the Heartland, is that it's not just about the individual farmer and the individual machines, it's about the folks that are during harvest that are gonna be running their their combines 18 hours a day, and then setting up their the other farmer and friends and folks who are working to run their CDLs and their hopper trucks to and from the elevators, right?
• 23:17
  SPEAKER_00: There's an entire ecosystem that really, I mean, it's it's beautiful to see this time of year when it does come alive.
• 23:23
  SPEAKER_00: But yeah, that those are those are major input points.
• 23:25
  SPEAKER_00: And um, yeah, we I don't I don't think we as a society do enough time thinking about it.
• 23:30
  SPEAKER_00: Like think about it for ourselves, maybe we think about it for local communities.
• 23:33
  SPEAKER_00: We don't necessarily think about it from the things that show up actually in our in our in our pantries.
• 23:38
  SPEAKER_00: And so we should do more of that.
• 23:40
  SPEAKER_00: So yeah, that's that's a good structural point.
• 23:42
  SPEAKER_00: Well noted.
• 23:44
  SPEAKER_01: Speaking of things we don't think about enough, I'd like to pivot to something that you wrote recently.
• 23:49
  SPEAKER_01: And if you'll indulge me, as you know, I like to make literary references uh as we go into things.
• 23:56
  SPEAKER_01: So I'd like to start with this one from uh the 1971 classic Fear and Loathing in Las Vegas by Hunter S.
• 24:02
  SPEAKER_01: Thompson.
• 24:03
  SPEAKER_01: We were somewhere around Barstow on the edge of the desert when the drugs began to take hold.
• 24:09
  SPEAKER_01: So tell us about when the drugs began to take hold for you, Harrison, why you chose to write about Barstow.
• 24:13
  SPEAKER_00: I I had no idea we were gonna we were gonna reach in that in that pot today.
• 24:17
  SPEAKER_00: Happy to take us there though.
• 24:18
  SPEAKER_00: Um so so it's funny.
• 24:20
  SPEAKER_00: Let let's let's zoom, let's zoom way out.
• 24:22
  SPEAKER_00: Like we we always need to.
• 24:25
  SPEAKER_00: Um amidst the the flurry of merger discussion, AI generated articles, I mean just this flood of just uh a ton of information out there.
• 24:36
  SPEAKER_00: Most of it maybe explanatory, a lot of it feels uh duop.
• 24:41
  SPEAKER_00: It just feels like we're just saying the same things over and over again, and we're not we're not actually like helping refine the the point of view, which is something that I you know I think is important.
• 24:51
  SPEAKER_00: So I've been kind of looking around for some different things to to talk about.
• 24:56
  SPEAKER_00: And one of the things that that I think has been overlooked is um you know BNSF is putting quite a bit of money in the middle of the desert, right?
• 25:04
  SPEAKER_00: And so when when when I when I kind of thought through that over the past couple years, I've been scratching my head and wondering why, and I wonder why, mainly because I'd been there.
• 25:14
  SPEAKER_00: I've I've ridden a train through, hung out in a crew lodge overnight, came back the next day, and got on another Z train, like headed out of town on my way to Chicago.
• 25:23
  SPEAKER_00: And I just remember being in awe of like after coming through the Mojave Desert on a you know, um, on a slow order because it was so hot we could actually we couldn't make track speed, we were just kind of puttering along.
• 25:36
  SPEAKER_00: Um, that there's this like massive facility, I think a massive diesel shop, huge hump yard.
• 25:43
  SPEAKER_00: I mean, now we're thinking about building an intermodal facility.
• 25:45
  SPEAKER_00: Why in the world would you do that in a place that even if you again going back to what we said earlier, if you pull up a map, looks like it's in the middle of nowhere.
• 25:52
  SPEAKER_00: So, like, what is kind of the the broader objective there?
• 25:56
  SPEAKER_00: And so I wanted to take the time and challenge myself and obviously offer something back to the community that felt a little more grounded in some analysis, felt grounded in some perspective, felt grounded in, hey, this is a different way to think about what the future of the rail industry could be, which is you know, I don't know how much you think about, you know, port hinterland activity.
• 26:19
  SPEAKER_00: I've been thinking about it a lot more.
• 26:21
  SPEAKER_00: And I think from your time at Freight Lab and DOT, you probably have had some concern about the configuration of our current port structure.
• 26:28
  SPEAKER_00: Is it would it be fair to say that 100%, yeah.
• 26:32
  SPEAKER_00: So if we if we assume that there is some frustration or that we are constrained or there's there's friction or there's conflict, or we're just not making the most out of what we have for a variety of reasons.
• 26:43
  SPEAKER_00: Maybe it's a steamship alliance, a variety of things, right?
• 26:47
  SPEAKER_00: What are the what are the chips on the table that we could actually pull?
• 26:50
  SPEAKER_00: Oh, okay.
• 26:50
  SPEAKER_00: Well, we could relocate as we've done kind of on the East Coast, where we're pushing basically inland distribution uh centers, or we're expanding the port and saying, hey, Port of Richmond, you now have a location in Richmond, Virginia.
• 27:02
  SPEAKER_00: Hey, Charleston, South Carolina, you now have a position in Greer.
• 27:07
  SPEAKER_00: Same thing in Georgia, right?
• 27:08
  SPEAKER_00: We sort of we're seeing that.
• 27:09
  SPEAKER_00: The West Coast has not had that, mainly because the population centers kind of stop once you get off the coast, unless we're talking about Utah, great state, by the way.
• 27:19
  SPEAKER_00: And um the what the, you know, the way that I think about that, so Barstow kind of makes sense, but Barstow isn't further enough along to serve Phoenix.
• 27:27
  SPEAKER_00: What does it actually serve?
• 27:28
  SPEAKER_00: It serves the opposite end of the inland empire.
• 27:30
  SPEAKER_00: So, shout out to my friends at MIT Freight Lab who over the year who have opened my eyes to system dynamics.
• 27:37
  SPEAKER_00: I went and pulled super deep in the in the files, pulled up some old Forrester stuff, looked at some causal diagrams, tried to make some sense of it from a layman's perspective, built a model, slap some Barstow stuff into there, and effectively kind of got to the point where BNSF is investments and Barstow really come down to container throughput.
• 27:58
  SPEAKER_00: You're maxed out at the port of LA, you're maxed out at the port of Long Beach because of a couple cascading factors.
• 28:05
  SPEAKER_00: You've only got enough waterside capacity, you've only got enough available tractors and you know chassis in that market, and because of the traffic, you only have so much throughput that you can get on any given weekday.
• 28:17
  SPEAKER_00: So, why not kind of go long shot, extend the capacity there, do some sorting in the middle of the desert, reverse stray it back to the inland empire, and then you can actually get faster turn times.
• 28:27
  SPEAKER_00: So instead of rail containers dwelling at the port of LA or Long Beach, for on average, I think I read it's like six days, you could just send them directly out there and probably in a day and a half have them back in the distribution center, which I think is a really, really interesting thing.
• 28:44
  SPEAKER_00: That's the point that I really wanted to make is that hey, if you're gonna make this massive investment in the middle of the desert, there needs to be some some tangible payoff.
• 28:51
  SPEAKER_00: And I think that was kind of like the the underlying piece of it.
• 28:54
  SPEAKER_01: Gosh, well, as someone whose job it used to be to introduce incoming MIT students to Jay Forrester and Systems Dynamics, I am so thrilled.
• 29:02
  SPEAKER_01: Well guy, that it found application there.
• 29:04
  SPEAKER_01: And and I guess let me ask you if this changes the thesis that you and I have shared in this forum and in others, uh, that the railroads maybe aren't investing enough in the network.
• 29:14
  SPEAKER_01: They're extracting value but not putting enough back in.
• 29:17
  SPEAKER_01: Is this a counter-argument that changes your case there?
• 29:20
  SPEAKER_00: So the through line that David is pulling on, which listeners of this podcast probably remember, is David believes that there is basically a supply constraint ceiling on the rail network for its physical, like existing infrastructure, crews, locomotives, cranes, people who operate cranes, right?
• 29:38
  SPEAKER_00: David believes that there is like a fixed point at which the network begins to degrade once volume hits a certain point.
• 29:46
  SPEAKER_00: I agree.
• 29:47
  SPEAKER_00: And I also agree, David, to your point that um there has been some question about how we are reinvesting in the network.
• 29:54
  SPEAKER_00: This is a very clear example of somebody saying, we have excess cash flow to deploy.
• 30:00
  SPEAKER_00: We think our CapEx budget is appropriately sized for where we want to go.
• 30:04
  SPEAKER_00: We recognize that in competition with the Panama Canal, we probably need to figure this out, or we will lose throughput share to direct all water to the East Coast.
• 30:13
  SPEAKER_00: Here's a really interesting way that we can not only serve our existing local Southern California market and also set ourselves up to do block swapping, container swapping.
• 30:23
  SPEAKER_00: You can do a lot of transshipment right there on land, like you don't need to go to another port to do that.
• 30:28
  SPEAKER_00: And so there's a really interesting value there.
• 30:31
  SPEAKER_00: The challenge that BNSF and its partners that are working in that area is going to be it is in the middle of the desert.
• 30:38
  SPEAKER_00: You're going to need human resources to be able to power up a lot of that.
• 30:42
  SPEAKER_00: And a part of the blog that I wrote was maybe this is an interesting test bed for some autonomous roles of maybe it's the transit of the container to and from the port, which I think is a really cool automated return cycle that we could think about.
• 30:55
  SPEAKER_00: And there's also some terminal automation uh opportunities that will be present there in a um not port-side regulated unionized environment that we we might come to see.
• 31:09
  SPEAKER_00: And so I think it's a you know, Van Gogh always loved painting with a new canvas.
• 31:14
  SPEAKER_00: Gosh, it feels cool to see the industry take advantage of this one.
• 31:19
  SPEAKER_01: Vincent Van Gogh, TI.
• 31:22
  SPEAKER_01: There's a lot of references that I hope people will uh engage on their own.
• 31:26
  SPEAKER_01: I encourage everyone to go read Harris's post on this.
• 31:29
  SPEAKER_01: There's really interesting charting and analysis there.
• 31:31
  SPEAKER_01: And for anyone who's interested in more of these kinds of conversations or more of these kinds of insights, we encourage you to follow us on LinkedIn or to check us out at telegraph.io.
• 31:40
  SPEAKER_01: Harris, thank you so much for joining us for another talk track.
• 31:42
  SPEAKER_00: David, thanks for having me.
• 31:44
  SPEAKER_00: Good seeing you.