Latest / Talk Track by Telegraph / Freight vs Fiction: Rethinking Rail Metrics, Train Speed, + Capital Allocation

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Freight vs Fiction: Rethinking Rail Metrics, Train Speed, + Capital Allocation · Talk Track by Telegraph

• 0:06
  SPEAKER_01: Hello and welcome back to another episode of Talk Track.
• 0:09
  SPEAKER_01: This is the Telegraph Podcast where we talk about and respond to the news of the day, and we try to do it from the perspective of anyone who's interested in railroading, carriers, shippers, rail car lusters, people with general business and economic interests.
• 0:23
  SPEAKER_01: As always, I'm joined by Telegraph co-founder and CEO, Mr.
• 0:26
  SPEAKER_01: Harris Liggan.
• 0:27
  SPEAKER_01: And today's topic is really a presentation that Harris gave at Mars, and he and I worked together.
• 0:33
  SPEAKER_01: It was a really cool opportunity to, I think, maybe change people's minds or offer a new perspective on what's going on in North American railroading.
• 0:42
  SPEAKER_01: So let me ask you first, Harris, to kind of kick off how did it go?
• 0:46
  SPEAKER_01: And to people who don't know, you know, what Mars is and what a session like this is, how was it and who did you speak to?
• 0:53
  SPEAKER_00: Yeah, Dave, great to be back with you.
• 0:55
  SPEAKER_00: I know uh Talk Track has had quite a few other more famous people than I recently.
• 1:02
  SPEAKER_00: Angie has been on, and I think that was a that was a really great conversation.
• 1:05
  SPEAKER_00: So it was super, super excited that you could just slot me in.
• 1:08
  SPEAKER_00: And um, and yeah, so uh happy to to bring you up to speed on on Mars.
• 1:12
  SPEAKER_00: Uh it was uh so for for folks who are who are listening and are wondering why we keep referencing a planet, uh Mars is short for the Midwest Association of Rail Shippers, and so uh it kind of fits and serves a lot of regional uh you know different needs.
• 1:26
  SPEAKER_00: So you've got uh the Northeast, the Southeast, the Southwest, the Pacific Northwest, and then obviously the Midwest that sits in there.
• 1:33
  SPEAKER_00: And so uh I consider Mars to be a really fun uh conference.
• 1:38
  SPEAKER_00: They have two sessions a year, one is in January to kind of kick off the year, and there's this obvious, really exciting one held at Lake Geneva in the middle of summer, and it's a really good opportunity for people to get together, share a lot of context as to what's going on in the year.
• 1:53
  SPEAKER_01: And maybe before we get into the specifics of that, as you think about kind of where you sit as a you know career railroader and tech entrepreneur, what is the opportunity to you of speaking to an audience like that?
• 2:06
  SPEAKER_01: You know, when you when you think, all right, great, I've got I think it was half an hour or something in front of these people.
• 2:11
  SPEAKER_01: What motivates you about speaking to that audience as opposed to maybe like, you know, you could speak at a college, you you could speak in many different places.
• 2:19
  SPEAKER_01: What is it about this audience that you thought was a great place to share your take on the the railroading economy?
• 2:25
  SPEAKER_00: Yeah, I I don't know that too many people would uh rote me into speaking much of anywhere, but it just so happens I've got I've got a very unique perspective uh on on you know some of the things that we're working on, obviously here at Telegraph, but but I you know things that that we've been thinking about for a while.
• 2:41
  SPEAKER_00: The the fun part about this was it was an interesting kind of cross-intersection or kind of a you know a crash of things that you and I had been working on and kind of talking about from more of a data and a maximum standpoint, really around why does this number say this?
• 2:59
  SPEAKER_00: It looks like these two things are not lining up, it doesn't look like this is a really good representation of the industry.
• 3:04
  SPEAKER_00: And candidly, the thing that I you know burns very brightly within me is making sure that folks who are working in the rail industry have really good access to information that allows them to make informed decisions about what they're gonna be doing.
• 3:16
  SPEAKER_00: There, there is nothing more frustrating, I think anywhere, but especially in the rail industry, is when I you see very clear misinformation that is unsupported by data and therefore leads people to maybe making you know just suboptimal decisions or kind of inferences about kind of what's going on in space.
• 3:34
  SPEAKER_00: And so we were super fortunate to get asked a shipper discussion.
• 3:38
  SPEAKER_00: And it just so happened that some folks could make it, and so it became kind of a one-person show, and that's where I've raised the opportunity where you and I have been working for many weeks to say, hey, it feels like we talk a lot about as an industry this specific metric.
• 3:53
  SPEAKER_00: Does it really represent anything meaningful for us and how we make decisions?
• 3:57
  SPEAKER_00: And so when I originally pitched it, it was a um telegraph agnostic, mainly like informative session that was really trying to bring light onto a lot of publicly available data sets and to help people make make sense of them is really what it was about.
• 4:13
  SPEAKER_01: You know, and just to add some color to that, one of the things that excited me about working on this project with you is, and you might not remember this, but at one point when we were building out the market consist models and we were experimenting with analysis, and and I think I kind of came to to you and the group and said, you know, I'm being a little provocative here, maybe I'm being too bold, or should I go down the path?
• 4:34
  SPEAKER_01: No.
• 4:35
  SPEAKER_01: And the and the answer I got back was um basically come onto the scene like Rage Against the Machine.
• 4:41
  SPEAKER_01: Like go bold, question assumptions, you know, if if the data supports it, say it.
• 4:48
  SPEAKER_01: And and so what you know, I got excited about thinking about you know this Mars presentation, and it's like well, this is the opportunity to kind of come on the scene like Rage Against the Machine to say, like, you think this is true, but give me a couple of minutes to show you why I don't, you know, and and that I thought was a really cool opportunity in in this research.
• 5:06
  SPEAKER_00: Yeah, I don't know that uh as a two-person band, we were gonna hit the melody of Tom Morello and Zach De La Rocha.
• 5:14
  SPEAKER_00: Uh, but I do appreciate uh the way that they you know try to try to educate the folks and take take with with that what you will.
• 5:23
  SPEAKER_00: And so I I appreciate that we were able to bring that forward.
• 5:27
  SPEAKER_00: What it would what was so interesting is I obviously and you know kudos to you for you know for all the heavy lifting you've done to get the market consist to to where it is, and and I think readers really have appreciated that and are asking us candidly where where the next version is.
• 5:42
  SPEAKER_00: So we're all waiting to see that come out.
• 5:44
  SPEAKER_00: But I think in the midst of all this, we we kept finding these like counter-narratives that train speeds going up, service is not.
• 5:55
  SPEAKER_00: What what's really kind of going on here?
• 5:57
  SPEAKER_00: Hey, everybody says rail isn't growing relative to GDP.
• 6:02
  SPEAKER_00: We're kind of a services economy.
• 6:04
  SPEAKER_00: What's what's kind of like the underlying story?
• 6:06
  SPEAKER_00: And so candidly, it was really nice to have an audience of shippers and rail car leasing companies and three PLs and even a lot of railroads in the room that didn't want to raise their hand um to kind of just like talk through these things in a very like you know, candid and honest way.
• 6:22
  SPEAKER_00: Because I I think you and I have talked about before, and and hopefully I think people can earn to internalize this as an industry.
• 6:29
  SPEAKER_00: When you're on a plane and the captain comes on and says, Hey, we're at 28,000 feet and we are traveling at 500 miles per hour, that's awesome.
• 6:41
  SPEAKER_00: And I'm really happy for that information.
• 6:43
  SPEAKER_00: It gives me no context of like, am I gonna land it Oh here and spend an hour and a half on the on on the on the on the tarmac?
• 6:50
  SPEAKER_00: Because that's usually what happens these days, and so I I always want to help people contextualize the information that's in front of them.
• 6:56
  SPEAKER_01: Gosh, yeah, that's such an interesting way to think about it too, because there really is you know so much data available.
• 7:03
  SPEAKER_01: A lot of the data that we analyzed, some of it was our internal telegraph data, but a lot of it was just out there.
• 7:09
  SPEAKER_01: But you know, fresh eyes, data science skill set, you know, AI assists opened up a lot of new analyses, but got and so to talking about the analysis, maybe get right into it.
• 7:19
  SPEAKER_01: I think you went in with something like 15 to 20 charts in the final package.
• 7:24
  SPEAKER_01: You know, you were in the room, you saw where people got out their phones, where their eyes lit up.
• 7:29
  SPEAKER_01: Out of the 15 to 20 slides, are there are there a few points that you think, yep, I think that one landed, or that one there was a response that you felt to any particular points?
• 7:39
  SPEAKER_00: You know, there were there were a couple, and I think one of the things that I really loved uh about this is there wasn't a ton of editorial time.
• 7:48
  SPEAKER_00: It was chart, chart, chart, chart.
• 7:51
  SPEAKER_00: But a couple that really stood out is we found, and I I don't know the exact number, but we found a pretty negative correlation towards train speed and volume.
• 8:04
  SPEAKER_00: And so I think when I when I would hear things like we had the best quarter ever for train speed and the lowest quarter ever for dwell and things like that.
• 8:14
  SPEAKER_00: I think as we were unpacking the data, we found that as volume goes up, train speed really goes down.
• 8:21
  SPEAKER_00: Um, or you know, the the inverse, right?
• 8:23
  SPEAKER_00: And so as the network would thin out, train speeds were flying off.
• 8:27
  SPEAKER_00: And so, you know, railroads are coming out quarter after quarter after quarter over the past three quarters and talking about how amazing service is.
• 8:34
  SPEAKER_00: Well, I would assume that it would be really well because there's there isn't there hasn't been historically as much volume on the network as there was you know in the prior couple of years.
• 8:42
  SPEAKER_00: So I I you know I thought that was a really important thing, and we we did a we did a good job visually of just like highlighting a lot of like the imbalances.
• 8:50
  SPEAKER_00: I think you took a step back and said, when we talk about an industry that wants to grow, let's think about what are the constraints because we we always talk about the levers.
• 9:00
  SPEAKER_00: What are the constraints to that actual growth?
• 9:02
  SPEAKER_00: Tell me a little bit more about how you kind of like represented that.
• 9:04
  SPEAKER_01: Yeah, oh gosh, I was so glad to get this angle in.
• 9:08
  SPEAKER_01: And and again, this is sort of like a very um mild punk rock thing to bring in more academic content to an industry presentation.
• 9:18
  SPEAKER_01: But uh what the what really dawned on me, and this was something that we started talking about over a year ago.
• 9:24
  SPEAKER_01: And it was just this idea that um so you know, I used to be uh a teacher of operations management.
• 9:31
  SPEAKER_01: That was one of my first academic positions after I finished uh school.
• 9:35
  SPEAKER_01: And and so like when you teach an operations management course, you're learning how to analyze systems and find Slack in systems and optimize systems and all that stuff.
• 9:42
  SPEAKER_01: And and I thought that point you made about train speed really kind of drove it home for me that like if we had infinite capacity, then demand on the system, or if we had too much capacity, it doesn't even have to be infinite.
• 9:54
  SPEAKER_01: If we had if we already had enough capacity to serve more demand, then incremental increases in demand wouldn't slow us down the way that we observed in the data.
• 10:04
  SPEAKER_00: And and I you know I've always thought about railroading as being a three-legged stool.
• 10:08
  SPEAKER_00: Effectively, it's like to run a really good operation.
• 10:10
  SPEAKER_00: And to be clear, this is not a Harrisling idea, this is a Matt Rose and Greg Fox from BNSF kind of like narrative.
• 10:18
  SPEAKER_00: It was to run a railroad really well, you need you really need on the on the train operation side, you need crews, you need locomotives, you need cars, right?
• 10:27
  SPEAKER_00: Like you need to have like the combination of those things.
• 10:30
  SPEAKER_00: Effectively, when you think about like a global, like you know, more like network operations, it's you need to have trains, you know, repair shops and like making sure things are in good, but you need to have like good functioning track.
• 10:41
  SPEAKER_00: And so um I you know, when when I tend to think about all of that, and you know, any of us can go look at a track on any given day.
• 10:50
  SPEAKER_00: That's one of the nice things.
• 10:51
  SPEAKER_00: It's kind of like this like very public rolling stock kind of like production inventory kind of system.
• 10:58
  SPEAKER_00: Uh the biggest constraint you would you would think visually is actually like the steel in the ground.
• 11:03
  SPEAKER_00: Like, like how much how much throughput can you can you actually get through it?
• 11:06
  SPEAKER_00: And so what was really interesting in many of the analyses that you were continuing to turn is that there's there's actually there's more probably available track that we have out there, but it seems like we're not maxim we're not maximizing from an optimization optimization standpoint.
• 11:22
  SPEAKER_00: It feels like we're stuck.
• 11:23
  SPEAKER_00: And what I thought was interesting is the piece that keeps us constrained as an industry, uh it it isn't train speed, it's all the things that are inputs into train speed that we actually we actually don't have a good data set around.
• 11:37
  SPEAKER_01: Gosh, that that's a great point.
• 11:38
  SPEAKER_01: I think such an important one, because I I I really like kind of the positioning that the you know the company's taking and we took in this presentation is like pro-rail, like like everyone wants more volume.
• 11:50
  SPEAKER_01: So you know, I I don't mean to say like we don't need more demand, we will push every button we can to contribute to greater volumes on the railroads and more business for everybody.
• 12:01
  SPEAKER_01: But we have to identify where the real bottlenecks are in order to serve that demand effectively, and I feel like that's what we were trying to contribute to.
• 12:09
  SPEAKER_00: Yeah, and look, it's easy to get on your own podcast to talk about your own presentation and to pat yourself on the back the the entire time.
• 12:15
  SPEAKER_00: That's absolutely what we were not doing here because I think we did, you know, as we kind of like pulled back the curtain and said, Hey, all of the data that that you've been looking at may not be the best representation.
• 12:27
  SPEAKER_00: And here's some other things you you should absolutely consider.
• 12:30
  SPEAKER_00: I think the second tack we we took was something that you know, Candle and I have I've said ad nauseum for a while, you can't cut your way to growth.
• 12:39
  SPEAKER_00: There's like there is no historical great business model or even great HBR case study that would say, man, this company really grew by cutting its way to the bone.
• 12:50
  SPEAKER_00: And that was the unfortunate byproduct of the chase of the OR, PSR, whatever we want to kind of like.
• 12:58
  SPEAKER_00: One of the things is like, I found a really good quote from uh from Michael Porter, good distinguished academic who I know you really appreciate.
• 13:06
  SPEAKER_00: Um, but he effectively said, like, operational effectiveness is is not it's not strategy.
• 13:11
  SPEAKER_00: And so I we we we took that to heart.
• 13:14
  SPEAKER_00: And one of the things that that we found in when we look from 2004 to no, it was 2014 to 2024, is that many companies were out there publicly talking about how they were cutting their operating ratio.
• 13:28
  SPEAKER_00: And what do we also see?
• 13:30
  SPEAKER_00: Their train speeds were falling.
• 13:31
  SPEAKER_00: And so, what did we hear at that time?
• 13:33
  SPEAKER_00: And if you go back and look at the historical records on the STB, record number of service complaints, record number of petitioning the board to please come help me get service to help my tiny little you know, steel or paper mill in the middle of nowhere, right?
• 13:48
  SPEAKER_00: What I also thought was that you know, like that was kind of like a general industry trend, and we were very candid about it.
• 13:57
  SPEAKER_00: There were some railroads that publicly report that that didn't do well, right?
• 14:00
  SPEAKER_00: OR went down, train speeds also went down, so you can infer from that.
• 14:03
  SPEAKER_00: So, as they were extracting cost out of the system, maybe they were laying off people, shuddering locomotives, you know, parking things, taking tracks out of service to extract the cost of the network.
• 14:14
  SPEAKER_00: As a result of that, service goes down.
• 14:16
  SPEAKER_00: The interesting thing was kudos to CSX, they were pedaled down on we're gonna keep our maintenance away projects going.
• 14:22
  SPEAKER_00: They we're gonna finish these big you know projects, Howard Street Bridge Tunnel, a ton of other things.
• 14:27
  SPEAKER_00: And guess what?
• 14:28
  SPEAKER_00: Their ORR went down in that time period and the train speeds went up.
• 14:31
  SPEAKER_00: So we were we were we were very candid to to talk about both sides, which which I appreciated.
• 14:37
  SPEAKER_00: But what I saw a lot of head nods in the audience was that people probably realized five years ago, ten years ago, I probably gave more volume to the rail industry.
• 14:48
  SPEAKER_00: As service has deteriorated, I'm probably less likely to do that now.
• 14:51
  SPEAKER_00: It's not a function of that I'm producing less, it's a function of how I'm allocating my freight across the different modes.
• 14:57
  SPEAKER_00: That um, yes, sure, it may be cost optimized, but it's definitely service optimized.
• 15:04
  SPEAKER_01: That's a great point in and to kind of uh continue to abuse the notion of the the punk rock nature of the presentation.
• 15:12
  SPEAKER_01: I just uh thought that that component where you you know got in front of an industry that does have, and and you were not the first to say it, sort of a history of the cult of the operating ratio, or you know, other people said it to say like you cannot cut your way to growth is is kind of heretical to the classic management heroes you know of that industry.
• 15:35
  SPEAKER_01: In fact, I was just listening to um uh a class one leadership presentation recently where one of the speakers said, you know, and I worked with Hunter Harrison.
• 15:46
  SPEAKER_01: I think the point that we were saying is there's a time and place for that, and now we're in a time and place where you can't cut your way to growth.
• 15:51
  SPEAKER_01: And and that is that's a punk rock moment in itself, I feel like.
• 15:56
  SPEAKER_00: Look, and and so we we we opened up the presentation with kind of you know, really three questions that that we had.
• 16:02
  SPEAKER_00: Hey, like freight rail is supposedly fading away, it's not, right?
• 16:06
  SPEAKER_00: Efficiency um should have produced growth, it didn't.
• 16:10
  SPEAKER_00: And then um a service uh an economy that is increasingly reliant on services still needs rail.
• 16:16
  SPEAKER_00: And so, you know, we're really kind of like the three things that we landed on towards the the back app of the presentation was hey, GDP continues to climb.
• 16:25
  SPEAKER_00: We're all super appreciative of that.
• 16:27
  SPEAKER_00: Thank you, everybody who contributes to that, and we're really excited about it.
• 16:31
  SPEAKER_00: But you can't index rail to GDP anymore.
• 16:34
  SPEAKER_00: You've got to index rail to industrial production, right?
• 16:36
  SPEAKER_00: You've got to have the right measure to evaluate how it's performing overall.
• 16:40
  SPEAKER_00: The second thing was efficiency is not equal to growth.
• 16:44
  SPEAKER_00: And I think we've we we've kind of turned that over at ad nauseum, but uh the interesting thing was the efficiency run was increasing as volume from a macroeconomic standpoint was actually falling.
• 16:55
  SPEAKER_00: And so it it was like it was like almost like duplicative from the impact that it drove so as volume is declining, there's less available, it was driving more volume away.
• 17:06
  SPEAKER_00: So it was a really interesting thing, and I and I I believe that people in the room realize that it's especially the railroads, it's on them to actually come back and say, we've done our rationalizations, we're ready to serve, we actually can't execute.
• 17:19
  SPEAKER_00: When you indexed the amount of dollars that were going in from a capital expenditure standpoint relative to the amount of dollars that are being paid out in share buybacks and dividends, there was actually a pretty interesting break-even point right around 2017 where the amount of dollars coming out of the industry in share buybacks and dividends actually outpaced capital expenditures, which this was one I was blown away by because railroads love to bang a drum.
• 17:48
  SPEAKER_00: And one of the biggest drums they bang every spring is we've announced our capital expenditure budget.
• 17:54
  SPEAKER_00: We're gonna be investing two billion dollars into our network for you, the customer.
• 17:59
  SPEAKER_00: They never come out and say it's gonna increase train speeds or it's gonna, you know, shorten transit times, or it's gonna improve the switching operations, we're hiring more employees.
• 18:08
  SPEAKER_00: It never say any of those things.
• 18:09
  SPEAKER_00: They just assume that you're gonna infer that they're spending billions of dollars and that's good for you.
• 18:14
  SPEAKER_00: What actually is happening behind the curtain for the publicly traded companies, they're paying out, you know, the the the best way to think about how this operates is that over the past um, you know, 20 years, for every one dollar of CapEx, there's a dollar and fifty going back to the shareholders.
• 18:33
  SPEAKER_00: Again, I'm not arguing that that's necessarily a bad thing, but when we talk about an industry that is struggling to grow and frustrated about its growth trajectory, I don't know.
• 18:43
  SPEAKER_00: I just have an interesting question about how the capital is being allocated.
• 18:47
  SPEAKER_01: I gotta say, for me, that was, you know, as as sort of you and I, as the research team worked on it, that was one of your discoveries, and that was a get your phone out moment for me.
• 18:55
  SPEAKER_01: Like once those numbers came back, and we thought, wow, I would not have expected the proportions of investment in the network and buybacks to work the way that work out the way that they did.
• 19:05
  SPEAKER_00: Because I operating a rail network, it is not cheap by any stretch of the imagination.
• 19:10
  SPEAKER_00: And so I I I was I was yeah, I I followed along for many years and thought these are really big numbers, like kudos.
• 19:17
  SPEAKER_00: I'm glad we're investing more into the network.
• 19:19
  SPEAKER_00: But I think this was a a great way to kind of to kind of frame it up to help people kind of understand where the dollar is actually being allocated.
• 19:27
  SPEAKER_00: And I think in a in a in a great economy, this this makes sense, but in an industry that is begging to grow, just so just something for for folks to think about.
• 19:38
  SPEAKER_01: Um let me let me ask you this.
• 19:40
  SPEAKER_00: Yeah, yeah, yeah.
• 19:43
  SPEAKER_01: Um, so let's assume that it went as well as we are telling this audience that it did.
• 19:48
  SPEAKER_01: And I think it did, but you know, everyone should have their own opinion.
• 19:51
  SPEAKER_01: Do you think next year we'll be addressing these same questions, or it will be a whole different set of questions at you know, Mars 2027?
• 20:01
  SPEAKER_00: Yeah, well, at Mars 2027, I I hope that we get the opportunity to um to even bring more new uh opportunities and events to that.
• 20:12
  SPEAKER_00: I think it'll be really fun.
• 20:13
  SPEAKER_00: We we we had a great time this year.
• 20:15
  SPEAKER_00: Will we be addressing some of the same questions?
• 20:18
  SPEAKER_00: No, probably not, because I think candidly, like we we've we've asked and answered those pretty well.
• 20:23
  SPEAKER_00: I think what this did was spark new opportunities for us to dig in, you know, different data sets that are publicly out there.
• 20:30
  SPEAKER_00: Obviously, there's some other data sets that I think we're we're beginning to pull from.
• 20:33
  SPEAKER_00: And I think our objective has always been, again, not to pat ourselves on the back and and say that we are the only people that have ever come to these conclusions.
• 20:42
  SPEAKER_00: It's wanting to equip people in the industry with better information that may conflict with the the narrative that is fairly standard.
• 20:50
  SPEAKER_00: And I think that's where good conversations come from.
• 20:52
  SPEAKER_00: And if then if the net of those good conversations between a railroad and a shipper, or a leasing company and a shipper, or a shipper and a 3PL, right?
• 21:00
  SPEAKER_00: If the net of that is both parties are more informed and they're making better decisions, that yields to more volume coming to the railroad, that's exactly where we want to be.
• 21:09
  SPEAKER_00: That's a business that we want to be in.
• 21:11
  SPEAKER_00: So, yes, we'll continue to be pro-rail.
• 21:13
  SPEAKER_00: That doesn't mean we're not gonna ask tough questions.
• 21:16
  SPEAKER_01: Excellent.
• 21:17
  SPEAKER_01: Gosh, and I'd just like to let listeners know that I believe we'll be making these slides in carousel form or maybe in direct slide format available to anyone at our website where people can find us at telegraph.io or through our LinkedIn channel.
• 21:31
  SPEAKER_01: Thank you very much for watching another episode of TalkTrack.
• 21:34
  SPEAKER_01: If you like more of this content, please follow us on LinkedIn and check us out at telegraph.io.