Cross-border traffic, West Coast port activity benefit Eastern railroads

Canadian Pacific Kansas City’s plans to drum up additional cross-border business will benefit shippers wanting to use the eastern U.S. Class I railroads to access markets in the Southeast, according to executives speaking at an investor conference this week.

“I haven’t seen a new interchange pop up [in my years at CSX] … that is going to be as significant as this one,” CSX CFO Sean Pelkey said at Deutsche Bank’s transportation conference for investors Tuesday.

Pelkey was referring to plans that CPKC and CSX will create a new direct interchange connection in Alabama via acquiring or operating portions of the Meridian & Bigbee Railroad, which operates in Mississippi and Alabama and is owned by short line operator Genesee & Wyoming (G&W). G&W, CSX (NASDAQ: CSX) and CPKC (NYSE: CP) announced their plans in late June, saying then that the change would establish a new freight corridor connecting Mexico, Texas and the U.S. Southeast. The Surface Transportation Board will need to approve the plans.

Although Norfolk Southern isn’t a party to this partnership, NS President and CEO Alan Shaw said it also has a relationship with CPKC in which shippers can utilize the Meridian Speedway to go between Texas and Mexico and the Southeast. NS (NYSE: NSC) also has its own service products, including those that involve partners J.B. Hunt and the Hub Group.

Rather, the larger issue in the Southeast lanes to and from Texas and Mexico is less about direct rail competitors and more about “taking freight off the highway,” according to NS CFO Mark George.

Shaw said, “The one reason rail has lost share to truck is service. If we think of ourselves as a service organization … we know we can grow, particularly with our franchise.”

He said that is why NS has chosen to retain employees instead of furloughing them in market downturns, which had until recently been considered as industry practice and a means to cut costs. When market demand returns, NS will have the staffing to meet service needs and market demand.

Meanwhile, the question about how volume shares shift between the West Coast and East Coast ports is not much of a concern for CSX and NS because both railways also work with their western U.S. Class I railroad counterparts to bring volumes inland.

A “healthy” West Coast port system is “also good” for CSX, Pelkey said, adding that there’s also inland port business and business that moves to the Midwest from the East Coast ports.

When asked about how the departure of Jamie Boychuk, who served as CSX’s chief operations officer, will affect the company, Pelkey said there is institutional knowledge and experience in place to both ensure smooth operations and drum up more business. Concerted efforts to better coordinate CSX’s sales and marketing teams and its operations teams should also benefit the railroad and its customers.

CSX’s leadership teams have been talking with each other “about all the opportunity that’s out there. How do we break down some of the barriers that exist across our organizations? Anytime you’ve got 20,000 people across an organization of our size, you’re going to have silos. How do we work through that?” Pelkey said.

“We’re six years into the scheduled railroading journey. It’s in our DNA. You’ve got a team of leaders across the operations group who understands what that plan looks like, how to run that plan, and the repeatability of that plan is what makes it so successful,” Pelkey said, noting that Ricky Johnson, senior vice president of transportation, and Casey Albright, SVP of network operations and service design, would be available in Boychuk’s absence.

“Ultimately, whenever there’s a significant change like that in an organization, you look for how the organization is going to respond. I would say that there’s a lot of optimism about what we can do going forward and so we’re not going to look backwards — we’re going to come together.”

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