CSX: The Goodness of Their Heart?

By incorporating Pan Am Systems, CSX is giving its PSR champions a juicy, low-hanging target to drive down O/R and still spare the rest of its already-there network.

Identifying the Real Competition

CSX’s prospective acquisition of PAR presents an improvement in practically every aspect of New England’s rail industry. Simply by virtue of being a Class I railroad, they will certainly improve the track, rolling stock, operation, and reliability along every mile of the PAR/PAS network. They will connect New England shippers/receivers to a vast market beyond our region. They will endeavor to create commodity lanes that will compete with and retake tonnage from trucks. They will strengthen New England’s rail spine (PAS) so that it can support the local efforts of connecting shortlines. They will bring a larger share of intermodal traffic through the region. They will work with states to leverage public and private funding for industrial development. And they’ll do it all as sustainably as can be done in our time, and perhaps even more so as time and technology move ahead. So it’s definitely a “win” for New England. But what about for CSX?

Everybody gets something (right?)

Like Santa Claus doling gifts from his bag, The Amended and Supplemented Application has goodies for everyone in the region:

Regional transportation patterns
With direct, more efficient service along a much broader rail network, there will be much higher incentive and greater prospects for shippers to convert traffic from truck to rail and remove haul traffic from congested regional highways. Added rail capacity will draw substantial container traffic from the burgeoning Port of Saint John NB to flow easily into or through the region.

The New England rail infrastructure
The PAR System network in New England will become integrated into CSXT’s 19,500 rte-mi network covering the eastern half of the United States, bringing traffic to/from markets where two-thirds of the U.S. population reside, and to the heart of the U.S. industrial complex. New England shippers will have robust single-line access to these markets, and connecting railroads will have a reliable, consistent Class I partner.

Logistics
“Expansion of CSXT’s integrated operations into New England will allow customers to schedule their supply chains more precisely, better manage inventory and reduce costs. CSXT [has] developed a sophisticated but user-friendly, secure, web-based tool, ShipCSX, that allows customers to monitor their freight movements across the network and better control inventory and manage their supply chain. This and other tools we have created provide our customers with valuable ways to better manage their logistics.” {Pelkey}

Shippers
“CSXT’s trip-plan system, which focuses on individual cars rather than trains, has allowed us to improve transit times and reliability. We have implemented changes … [that] have reduced variability in our rail operations and increased reliability for our customers. All of these changes have been focused on improving customer service, and they have succeeded in making CSXT a more resilient and reliable provider of rail services. The Proposed Transaction will allow us to bring these service benefits to New England rail users.” {Pelkey}

Pan Am Southern
Elimination on movement caps (Island Line) through Ayer, Ayer infrastructure and facilities improvements, diversion of NS container traffic, and contracting PAS operations to GWI subsidiary Berkshire & Eastern Railroad will improve capacity, fluidity, and consistency on PAS, to the benefit of shippers and connecting carriers. As explained by Wm. Huneke in his Amended and Supplemented Verified Statement, B&E brings many valuable advantages to the job, compared to ST {P}

Norfolk Southern
“NSR will be able to bring double-stack intermodal trains to and from the Boston area, which it is unable to do today due to the height restrictions in the Hoosac Tunnel on PAS.”{P} NS will also get a new “peer” PAS partner, who shares the Class I big-picture goal of connecting New England to the rest of the country, and can develop PAS for that purpose.

Boston-area regional passenger service
“[Passenger services] will benefit from the more consistent and reliable network … . For example, the improvements to the Ayer Yard described in detail in the Operating Plan will result in reduced congestion at the Ayer MBTA Fitchburg Line commuter rail station. All rail users will also benefit from having a dedicated team of CSXT professionals overseeing the operation of passenger trains on the combined PAR System/CSXT network. My team will work to ensure that passenger trains remain on schedule and they are provided with the required preference, and to ensure that the passenger trains capacity needs are fully considered” {VS of Andy Daly, Senior Director of Passenger Operations for CSX}.

The Environment
“[CSXT] has identified concrete steps … to upgrade [the Wachusett] line segment. As an initial step, CSXT plans to upgrade approximately 7.6 miles of track adjacent to the Wachusett Reservoir to FRA Class 3 track standards” {Exhibit 4: Environmental Matters}.

“CSXT plans to revitalize its yard fleet with the first order for Wabtec’s Tier 4 switcher modernization program, which provides an additional 20% improvement in fuel efficiency and 90 percent reduction in emissions.

“Moreover, the higher-horsepower CSXT locomotives will allow CSXT to operate the PAR System with fewer locomotives … For example, ST may use three locomotives to power certain trains today, and CSXT may be able to move such trains with only two locomotives.” {Exhibit 13: Operating Plan}

State of Maine
“State of Maine Department of Transportation (“MaineDOT”) has entered into a settlement agreement with CSXT whereby CSXT and MaineDOT have agreed to work cooperatively to complete two of the federal infrastructure grants identified in the table below to upgrade PAR System line segments in Maine, and to work together on future projects to increase capacity, enhance safety, and promote efficient railroad operations” {Pelkey}.

“CSXT has also reached a settlement agreement with the State of Maine Department of Transportation (“MaineDOT”) in which CSXT and MaineDOT have agreed to work cooperatively to complete two federal infrastructure grants to upgrade PAR System line segments in Maine, and to work together on future projects to increase capacity, enhance safety, and promote efficient railroad operations” {State of Maine Settlement Agreement}.

VRS
The Amended and Supplemented Application has further added subtle yet significant tweaks and clarifications to the prior considerations given in the Amended Application. These matters are governed by the NS-CSX Settlement Agreement, which focuses primarily on NS access to the CSX Mainline, but secondarily on the disposition of PAS, including the rights of connecting carriers. Relative to VRS, the Amended and Supplemented Application specifies these CSX/NS commitments (see VRS: The Great Opportunity)

But, who gives Santa presents?

Throughout the 1300-page Application, CSX doesn’t seem to be expecting much in return, at least in the short term: A 1.5% annual rate of traffic growth; Some creeping diversion of road traffic to rail; Concentration of volatile or unproven commodities (wood products, energy, waste, bottled water). Nothing really, on the face of it, that would make Wall Street happy.

Again, and again, and still: Why is CSX doing this?

The modern currency of railroading is not the dollar, not the route-mile, nor the GTM. Wall Street values railroads on the Operating Ratio. And despite the trumpets announcing the post-PSR era. O/R is going to be the coin of the railway realm for a long time, yet.

And, it’s going to be harder and harder to get, because most Class Is – CSX prominent among them – have started scraping their bones, and are actually starting to nick the marrow. And for that sight, Wall Street leans harder into the blade. Caught in mid-decapitalization (exemplified by stock buy-backs), railroads need to keep finding ways to reduce O/R, and whomever can maintain the trend will reap a big share-price reward.

In acquiring Pan Am, CSX is getting some valuable mileage that will probably start paying itself off in five or more years by adding growth to the entire network. That’s a worthy plan. But what CSX is getting in the short-term is just as valuable: an inefficient, scruffy, undercapitalized, but profit-ekeing property with an astronomical O/R — that will begin to improve almost immediately by pursuing the strategy that CSX has effectively perfected: impose operating discipline, implement technology, and build a robust railroad.

By incorporating Pan Am Systems, CSX is giving its PSR champions a juicy, low-hanging target to drive down O/R and still spare the rest of its already-there network. It’s a brilliant, genuinely strategic play that, if pulled off, will produce short- and long-term benefits for CSX, as well as put New England into the forefront of rail freight’s revival as a foundation of sustainable reindustrialization.