Q&A – The Future of Rail & Intermodal

By | October 15, 2020

Following The Future of Rail & Intermodal, the fourth session of the FTR Engage virtual speaking series, the FTR Experts sat down with Ross Corthell (Packaging Corporation of America) to answer listener questions beyond what was covered during the Q&A within the presentation.

Listen to the full discussion on the State of Freight Podcast (also included at the bottom of this post) or read below for the fully transcribed Q&A.

Table of Contents:

  • Q1: The migration of freight towards rail & intermodal.
  • Q2: The indicators that you should be watching.
  • Q3: Rail growth & furloughs.
  • Q4: Shippers’ view of the job market.
  • Q5: Intermodal freight & Drayage cost efficiency.
  • Q6: Southern California’s impact on freight markets.
  • Q7: How can the industry work together to ensure extra capacity?
  • Q8: Headhaul and backhaul pricing in rail.
  • Q9: Intermodal volumes through restocking and a pre-stocking rush.
  • Q10: Trailer on flatcar expectations. 
  • Q11: 2021 Carload market expectations.
  • Q12: Fuel’s long-term impact on the rail business. 
  • Q13: How will zero-emission trucks impact rail?
  • Q14: What industries will make a quick comeback?
  • Q15: Class 1 railroad mergers.
  • Q16: Strength of recovery: growth or restocking?

DISCLAIMER: This text was automatically transcribed from an audio recording and may include typographic, grammatical, and contextual errors that differ from the speaker’s intention.

Question 1: The migration of freight towards rail & intermodal.

Eric Starks: Well, welcome, everybody, to this podcast, it is a delight to be here with you. We had a fantastic Engage session recently talking about rail and Intermodal. We had a bunch of questions that we just weren’t able to really get to or we weren’t able to dive in as deep as we’d like, so we’re just going to pick through those questions and have those addressed by the industry experts here. So let’s kick this off. One of the questions here is really talking about the relationship between trucking and the migration of freight towards rail and Intermodal. So, Todd, let me have you kind of address that, and then Ross, I’ll put you in here in a second and get your thoughts on this.

Todd Tranausky: Sure. Eric, thanks for the opportunity. You know, when you think about trucking and intermodal, you know, decades ago, intermodal was considered substitute service for truckload service. It’s generally quicker. It’s generally more reliable than rail intermodal services, even with the trans limit we’ve seen going on in the West Coast and so folks generally default to trucking. But as the trucking pipeline fills, as you start to see rates go up and you start to see trucking utilization ramp up, then you get to a point where folks look for capacity alternatives. And those capacity alternatives generally are intermodal, whether that be transloading international goods into a 53-foot box or whether that be a trailer or whether that be a straight intact international container. Folks look for other ways to move that capacity inland. And so as trucking fills up, which it has filled up, utilization has gone up quicker than we at FTR expected. You would expect intermodal to be more and more competitive relative to the domestic truckload market and we’ve certainly seen that. If you look at the intermodal competitive index that FTR publishes, intermodal has become a lot more competitive. You know, during the pandemic it was a negative 20 negative 30 levels, which are levels that are near historic lows. They generate significant long term modal shift of goods among shippers. And then as we go forward, what we’ve seen is that it’s intermodal become in a positive competitive position relative to the truckload markets and expect it to remain there, at least into the early part of 2021. So as people put more goods through the trucking industry, you create more migration freight to intermodal as folks look for capacity because they either can’t find capacity in the truckload market or they are looking for a cheaper rate by which to move their goods.

Eric Starks: You know, and I think that works for some for some freight. But there’s there is clearly other freight that’s based upon commodities. And it either likes to go rail, it likes to go truck, and it’s not easily converted. Now, there’s some stuff that can be and you always have stuff on the margin. But I do think that the premise of this kind of question is the expectation that if you see truck getting tight enough that it moves things back towards rail. So, Ross, I’d like to get your kind of your thoughts on this whole thing. And are you seeing some of the migration between the different modes right now? How are you feeling about all that?

Ross Corthell: Yeah, thank you, Eric. And thank you again to engage FTR. You guys are a professional organization. Really appreciate the opportunity to speak to your audience. So, you know, the migration from truckload to rail tends to be about economics or even sometimes no green play here and there, but what we’ve seen, of course, is inventories tightening up. And that puts a lot of pressure to stay in the truckload market and even migrate somewhat from rail back to truck. So there’s amici or folks are or at levels that factors into those decision matrixes and. Out of my group, actually, in the other way, from rail to truck, just because of the tight inventories of folks are running.

Question 2: The indicators that you should be watching.

Eric Starks: And that so kind of validated some of the things I was kind of curious about. Another thing that keeps coming up in the topics is that people are trying to understand, you know, what indicators should they be looking at? What are the things that either you’re relying on the most or should they be relying on? So Ross, how are you betting the market? What things are you looking at to make you feel better about getting to understand where things are going?

Ross Corthell: Yeah. So for me personally, it’s about employment. And, we haven’t seen the employment numbers come back yet. There’s been an awful lot of economic stimulus. And I suspect even though there’s a lot of volleying back and forth in D.C. about this topic, I do suspect that there will be more economic stimulus. But that’s a very tenuous foundation to build on just because of our overall debt load. And I’m speaking of the national federal budget, of course. So, yeah, I’m very concerned, actually, that employment isn’t going to come back, that some of these jobs are going to be permanently lost or at least lost for another year or so and that concerns me.

Eric Starks: Yeah, and we totally are on the same page. I think we’ve been really vetting and looking at what’s happening on the payroll side, what’s going on with employment. Todd, aside from the employment things, what are the things that you kind of looking at? I mean, obviously, we’re looking at the employment. So can you add additional color?

Todd Tranausky: Yeah, absolutely. I mean, employment, certainly, because you’ve got business investment and you’ve got consumer spending as the two pillars of the economy, but also the inventory levels. I’m looking a lot of the inventory to sales ratio lately. You know, when you look at retail, it’s down at historically low levels and that is what’s driving some of the intermodal demand that we’re seeing in the system, that’s what’s driving folks try to push good through the system. The manufacturing inventory to sales, the wholesale inventory to sales are at higher levels. They’re basically on par with where we were going into the pandemic. So there isn’t that same need to restock. And I think that explains a lot of what you’re seeing on the rail carloads that intermodal has really ramped out of the pandemic very strongly. And the colloid markets have been a much more measured pace because there isn’t that same inventory pressure to restock. Now, if we get to a point here where spending stays strong, business investment re-enters the marketplace, and you draw those inventories down, there’s the potential as we get into 2021 to see, you know, the carload volumes display a much stronger spike. But to this point, the numbers haven’t shown any catalyst for it. And so I’m looking at inventory to sales ratios for when intermodal is going to stabilize at the levels that it’s at, and when might not we see another leg up and when the markets might inflect.

Question 3: Rail growth & furloughs.

Eric Starks: Yeah, and we obviously, you know, you and I talked talk a lot and we clearly are seeing the disconnect between, for example, manufacturing and what’s happening on the inventories there versus on the retail, the retail side and into the wholesale side. And there seems to be a fair amount and a fair amount is relative, a fair amount of inventory on manufacturing. And, you know, one of the things we clearly look at is industrial production, because that, you know, if that’s not coming back, that creates a problem because there’s so much industrial manufactured goods that get moved by the rail, the rail system. So I think having that broader discussion about employment takes us then to understanding a little bit more about what’s happening on the employment side, for the railroad. So one of the big questions out there here is, will the rail growth be hindered by the furloughs and the ability of the workforce to return? And  I guess ultimately, you know, broadly, did the railroads cut too deep with downsizing? And maybe the answer is maybe they didn’t cut too deep. And so what’s your kind of your thoughts Todd on that?

Todd Tranausky: The short answer is no. They didn’t cut too deep from the pandemic. You know, the pandemic the railroads responded to a significant decrease in volumes and responded to them with significant cuts in the workforce. Where the issue will come in is that railroads were already cutting their operating employee count before the pandemic. There was already an effort to right size the network and the right size employee counts before the pandemic. And volumes weren’t down nearly as much as an operating employee count was before the pandemic. So coming out of the pandemic, we’ve seen railroads successfully add back employees. As we talked about doing the webinar, you know, we’re up 3 percent from August to July. So the railroads are doing what they can to bring employees back home, not going to bring employees back commensurate with volumes. They feel like PSR has made them more efficient. They feel like they don’t need to bring employees back to the same level they had before. Now, there are some things in the overall economy that could make it harder for the railroads to bring employees back. You know, we talked about, Ross brought up stimulus a second ago. One of the key factors of the first stimulus package was a very generous unemployment package. And that, we have heard was an impediment to the carers being able to being able to bring employees back up until it expired at the end of July. So if we see another stimulus package with a generous unemployment benefit, it could be harder for the railroads to bring folks back. But I don’t think the carriers went too far. And I think because the railroads, unlike trucking, unlike day labor on construction, you know, the railroads are a fairly attractive industry. They’re one of the few industries, as I said during the webinar itself, where a kid with a high school diploma can work a career with good benefits and good retirement and support a family. So I think ultimately the railroads, we’ll find the people that they need, and they’ll be able to meet the demand out there to move goods.

Question 4: Shippers’ view of the job market.

Eric Starks: So Ross, as a shipper, I mean, obviously you really are focused in some cases on it when you need capacity. Is it available if you like? I need to get my stuff moved. So is the job market on the rail side? Is that even a concern for you or how are you framing that that up to make sure that you get the service level that you need?

Ross Corthell: Yeah. So, you know, I think I go back to your question about did they did they cut too deeply? I tend to agree with Todd pretty hard to criticize anybody that was trying to forecast, you know, in in February, March, April, what was going to happen and  when your volumes were dropping as fast as they were. So it’s pretty hard to be critical of any number of cuts that were made during that time. The one thing I would put an asterisk by that, though, is knowing what we know today about just the collective bargaining agreement and the length of time it takes for them to bring people back on in the event the volumes did and actually did come back up, then I’d have to say I probably would have been a little more conservative about furloughing, knowing, knowing that detail about how long it takes to bring people back, because when volumes did come back and they didn’t exactly v I think they kind of hockey stick a bit, but they did pick up momentum as the days went on. And it was very, very difficult for the railroads to keep up with that. And it was really all about, you know, the length of time it took them to get people back in the saddle. And that was a combination of their bargain, as well as the stimulus that Todd talked about as far as we were concerned. Then, of course, you know, everybody on the operating side, essential employees, were dealing with flare ups of COVID as well. And so that couldn’t be predicted either. So I’m not hypercritical, but I think I probably would have been a little more conservative knowing what I know now about how hard it is to bring people back.

Question 5: Intermodal freight & Drayage cost efficiency.

Eric Starks: Yeah, and you know what’s fascinating, too, is because I think that there’s this belief that truckers can be more nimble than the railroads in different ways because, you know, I’ll let somebody stand on the corner. I’ll put them in a truck being facetious here. But you know, what we found, though, is that the truckers didn’t bring back drivers as fast either. So it seems to be all the way through, not just rail, but trucking in other sectors. These have been slow to come back. And also, one thing that I’ve always thought about, too, is, you know, is there an ability for them to switch jobs? Right. If you furlough somebody, if you lay them off, whatever that looks like, are they going to go to another industry? And the reality right now is probably not because the jobs just don’t exist. So it is I think it’s a little different dynamic here on how the whole employment situation is playing out. So we talked a little bit about intermodal that came up earlier. So let’s just kind of move towards intermodal a bit. One of the things is there’s this belief that if you have more intermodal freight, then DRÉ becomes more cost effective because in fact, you got more stuff happening. I don’t I don’t have a good sense on is that truly reality. But to that premise, can the can the railroads kapper capture more market share for intermodal? And then how does that impact the dray market? And Todd, I can tell you’re ready to jump go for it.

Todd Tranausky: Yeah. I mean, I’m not sure that I really agree with the premise of the question in the sense of if you have more goods, if you grab market share, then you’re going to create a capacity issue in the drayage market and that’s going to drive prices up. I mean, we’ve heard anecdotally that Chicago is close to capacity in the drayage market right now. So if the railroads do increase their share, you have to find that DRÉ capacity somewhere and the market works. But that means prices go up. And so is DRÉ more cost effective in that scenario? I would argue no. I would argue that you’re going to pay more to get your goods moved. The question is, is the intermodal linehaul plus the DRÉ more cost effective for you than a long haul truck move from the West Coast? And the way we’ve seen, you know, truck rates move up, you know, coming out of the pandemic, it’s possible that could be the case. But I don’t think necessarily by the railroads getting more and more market, are you necessarily make DRÉ more effective, more cost of. I think, in fact, you could have it turn in the other direction and you could have such a problem getting capacity because capacity is tight in those markets as it is in the overall truck market, that you could see it’d be less cost-effective because you’re going to have to pay more for that DRÉ, particularly if you’re not just across town dry with the closure of intermodal ramps. We’ve seen the last couple of years, if you have to DRÉ from Chicago to Milwaukee, that’s not going to be a more cost-effective DRÉ in that scenario.

Eric Starks: Are you guys doing any dray moves?

Ross Corthell: Very few. We do a lot of local deliveries, but we’re not doing them in containers, so.

Question 6: Southern California’s impact on freight markets.

Eric Starks: Ok, yeah. And that makes that makes sense. So I didn’t think so, but I figure I’d better double check. So Southern California is a  hot spot right now. And so I think probably getting a little bit of your thoughts on how that’s impacting the freight markets in general, inbound and outbound. And is that having any impact on the structure that we’re seeing out there? So let me just toss that one up to you, Todd, about you go. And Ross, if you have some thoughts, just jump on in.

Todd Tranausky: I think in the short term, you know, folks are going to look to make Southern California work because it’s the quickest way to get volume into the country, even with the increase in transloading that we’ve seen, it’s still quicker than spending 10 to 15 days on the water to get to the East or Gulf Coast port. Do I think it changes anything long term, structurally? I don’t think so. I think this is a short term episodic phenomenon. As folks deal with those low retail inventories they have, they feel the need for speed. But the underlying issues that were still there and for why people went away from L.A., Long Beach in particular, you know, the labor issues in the environmental fees are still there. You know, they have not gone away. And so when the need for speed goes away, you know, those underlying issues that made folks diversify their ports in the first place, particularly with the build-out of increased transload capacity, at Prince Rupert. And I think you see people move back away to the port, diversification strategies to other ports, whether that be Rupert or whether that be the East Coast. I don’t think people for the long haul suddenly shift back to Southern California because the structural issues that drove them away from Southern California in the first place are still in place.

Ross Corthell: I completely agree with Tom’s assessment there. I don’t even have anything to add. I think that is spot on.

Question 7: How can the industry work together to ensure extra capacity?

Eric Starks: Well, easy-peasy I love it people agree. That’s great. So one of the other questions that has come in is and Ross, I’m going to toss this one over to you. And they say, how do we work together to ensure extra capacity is needed? And so in this case, I believe that they’re talking about the industry as a whole when you’re talking shippers and carriers and possibly even leasing companies because you’re trying to make sure that you’ve got not just capacity from an equipment standpoint, but you’ve got capacity on the rail going, being able to have liquidity, not fluidity in there. So how do you view that, Ross?

Ross Corthell: Yeah, this is a great question. So, you know, there’s empty trucks passing each other as loaded trucks passing each other in opposite directions. So I think this question is really centered around that.

Like, how do we as an industry get better visibility to the total amount of activity, whether it’s loaded or empty, and then. Make sure it’s loaded more frequently, so I do think there’s  a lot of collaboration opportunity to do that, but we’ve tried that a number of times, and it’s really difficult for those that are in this collaborative model to step away from their own prioritization. Oh, they all we all have customers that are demanding to get their deliveries when they want them. And they don’t accept as an excuse that you’re trying to utilize capacity better and therefore the truck will be there for another day or two, just not going to fly. So I think there is a technology, a technological solution to this. I do think it’s out there. I’m not giving up on it. I just haven’t seen a good one yet that really provides the kind of visibility globally that you need to drive up utilization, which is what I think this question’s really getting at.

Question 8: Headhaul and backhaul pricing in rail.

Eric Starks: Yeah. And so on the over the road to the truckers, at least tend to price accordingly when if it’s a head haul or a backhaul.  Not always, but I think the railroads traditionally have not done that. Is there a way that you could potentially see more productivity and extra capacity coming online if they would price it a little differently based upon if it is a head haul or a backhaul?

Ross Corthell:  Yeah and we’ve even had some modest success with that. We’re  a paper manufacturing company. We often take scrap paper in, for example, that our mills. And so we’ve had some modest success with several of the class ones in pricing inbound fiber, i.e. scrap paper into our paper mills and even utilizing the same equipment that will ship out of the mill. And so we’ve had some modest success with that. So I’d have to say I’m absolutely a fan of that. I wouldn’t say that it’s an easy sell. It wouldn’t say that it’s an easy conversation to have with the railroads, but where we’ve been able to influence them to think about backhaul and how that can influence their own share coming on. We’ve had some success with that.

Eric Starks: Yeah, in general, I just think it makes sense, especially if you want to reposition the equipment instead of bringing it back empty, why not put stuff in it? So and potentially you have a chance then to take some stuff off the over the road and put it on the rail system.

Ross Corthell: So yeah, one of the big challenges with that, of course, is, you know, if you have a truck that’s making a delivery and the truck needs to you know 20 miles down the road to get its next load, you know, that’s very natural for trucking. Railroads it is very unnatural for them to reposition a boxcar that just made empty 20 miles down to get another load that’s going in that. So it’s just a very unnatural event for them. And so in order for them to pull that off, they have to be committed to micromanaging the equipment much differently than they tend to be geared toward doing today. And that tends to be a breakdown for them. So if they’re having to manage equipment the way the truckers manage equipment, it’s a big challenge for them.

Question 9: Intermodal volumes through restocking and a pre-stocking rush.

Eric Starks: Understood. So, Ross, I’ll give you just a moment to take a breath, so, Todd, I’m going to have you change your brain function here for a moment about the economic recovery that seems to be losing a little bit of steam. We’ve seen the employment numbers not coming in is as high as many had hoped. You know, the GDP numbers were all over the place from a forecasting standpoint. So can you give some better visibility? The outlook for intermodal volumes as we after we kind of go through that restocking. And what they what they’re terming here is a pre-stocking rush. And how are you viewing that has been given the first part of the year?

Todd Tranausky: Sure. I mean, I think the 4th quarter is going to be very strong. I think you’re going to have the restocking demand. You’re also going to have folks shifting their spending from services to goods that we’ve already seen that in a lot of places. As the holidays come in, you’re going to see more of that as folks aren’t able to go to holiday parties or have big, you know, meals out. They’re going to focus on spending on goods, and that’s going to support increased intermodal movements through the fourth quarter. When you get into next year, it becomes a lot more cloudy. You know, you have a definite slowing. We’ve definitely seen the slowing that you alluded to and now we have no deal out of Washington on a stimulus, you know, and we probably won’t through the election. It seems like it’s on again. Off again. You know, my crystal ball says they’re not going to get a deal done. And so, you know what time? How long?

Eric Starks: I was going to say, you know what? By the time we are done recording this podcast, for all we know, they may have a deal. So who knows? OK, I’ll just say.

Todd Tranausky: And so as we look out, you know, you assume a no stimulus baseline and the question becomes, how long can the U.S. consumer continue to spend? You know, both Ross and you highlighted earlier about the unemployment rate. You know, so long as the unemployment rate remains high, how long can the consumer continue to spend without stimulus? And so I have real concerns about, you know, the veracity, the durability of the recovery and of Intermodal demand in the first quarter. And I don’t have a real firm answer for folks. But I think, you know, you have to watch it and you have to think that it could be a very weak number in the first quarter, in the second quarter, just by virtue of the fact you have a very easy comparison, because most of the economy was shut down in the second quarter of 2020, you’re going to get a good number in the second quarter. But that does not necessarily mean things are great. You know, and I think the first quarter is going to be a true indication of where we are. And I think there’s real potential for the first quarter to be really weak.

Question 10: Trailer on flatcar expectations. 

Eric Starks: The so one of the other things that kind of come up as part of this is the trailer on flatcar. How do you, I guess, the railroads, how did the railroads view the future trial on flatcar and how do you view the future? And they may not jive and maybe they do. So what is your thought?

Todd Tranausky: I was just going to say there are really two parts to the question of how the railroads view it. And then there’s if you’re trying to forecast where we’re going to be for trailering flatcar in 2021, those are two different equations and different answers in the near term. You know, the railroads have already invested in the equipment to do trailer on a flatcar. You know, most of that equipment are not going to age gap between now and 2021. And so they’re content to handle it, you know, through next year, probably through the time when they have to reequip some of those jobs that today handle trailers and containers where the railroads have to maintain and invest in two sets of equipment as we get to the reinvestment cycle for that equipment, you know, sort of 2025 and beyond. You get real questions about how the railroads would view the return on that business. But for the short run, I think the railroads are perfectly content to move trailers at the moment. They have the equipment. It’s pretty well depreciating at this point. I think they’re content to handle the business. If you’re asking me where I see trailers going in 2021, they’re at very healthy levels this year and they’ve showed signs in recent weeks of plateauing because of folks looking for capacity, because of the increase in e-commerce. The man from the parcel carriers looking for sort of surge capacity outside of their standard truckload networks. You know, I don’t think we maintain those levels through 2021. I think you see a very difficult year over year comparisons next year. And I think you see the absolute level of volumes come down significantly in 2021 from where we are today. I just don’t see things continuing at that gangbusters pace we’ve been on in 2020 for trailer on flatcar.

Question 11: 2021 Carload market expectations.

Eric Starks: Ok, so, we kind of just talked through basic intermodal. We talked about our flatcar. So Ross, you can jump on in here, but I’ll throw this at Todd first because I don’t need you to get in hot water at all. So, Todd, how do you anticipate kind of the first two quarters of 2021 looking like as it relates to the carload, the carload market?

Todd Tranausky: Sure. In the car loan markets, we’re going to continue sort of the path that we’re on through the first quarter of 2021. So we wouldn’t be down significantly year over year. We’re going to whittle away those year over year declines. We’re not going to turn positive between now and the end of the first quarter of 2021. But we are going to make progress whittling down that year over year percentages of declines. And on an absolute basis, we’re going to slowly but surely sort of increase our levels from where we are. We’re going to continue the slope of the line that we’re on. If you’ve seen the carload line, if you’ve seen the FTR carload index line, you know, they’re very slow and steady increases. We’re going to stay on that flight plan in the second quarter, just like we talked about in Intermodal. You’re going to have a huge increase because of the comparison period. You know, as we get beyond the second quarter, we’re going to settle into a more traditional carload run rate of GDP plus growth. At least that’s our current expectation for the back half of 2021 in the first half, first quarter, slow and steady trend. We’re in the second quarter, you know, explosive growth rates because of the comparison period almost entirely. And then in the back half a more normal car loan market if you’re thinking about carload in 2021.

Question 12: Fuel’s long-term impact on the rail business. 

Eric Starks: So, Ross, I won’t make you jump and talk about the future, but I at least in that respect, but I do want to get you to pontificate for me on fuel prices so that this particular question of terror is asking about fuel rates for intermodal 10 years. I’m not going to focus on that or say I do want to focus on fuel. How are you kind of view fuel over the long term and the impact that it has on the rail business?

Ross Corthell: Yeah, you know, it’s funny, you don’t want me to jump into the future, but your question is about what’s going to happen in the next 10 years.

Eric Starks: I gave you a softball 10 year thing. I didn’t say the first two quarters of 2021. I didn’t want to get in hot water. So this way you have complete deniability.

Ross Corthell:  Well, I can tell you I’ve been using deniability when anybody ever asked me a question about fuel. But I don’t see fuel being as volatile as it has in the past for a long time to come. I think, you know, obviously, the election could sway things, but I don’t see a wholesale change in energy policy that would crimp supply in any way, domestic supply. And so I think we see stability, relative stability in fuel, you know, for my foreseeable future. I don’t want to forecast out 10 years, but I don’t see fuel being a big issue, you know, for the next year, at least. Maybe even beyond that.

Eric Starks:  Yeah. And yeah. Go ahead, Todd.

Todd Tranausky: Here’s the thing. You know, trying to forecast that fuel rates 10 years from now, you know, that’s a fool’s errand. But I think if you look at the next couple of years, you know, there are puts and takes on that. And the intermodal industry, you know, if diesel prices go up, that makes intermodal that much more competitive. And you’ve got some things, you know, right now, you’ve got a massive oversupply of refined products and crude in the marketplace. And so it’s going to take a while to burn that off. But as we get in 2021, if we get an economic recovery, if things start to heat up in the economy in the second half of 2021, you are going to have, you know, some price pressure. You are going to have some supply and demand pressure in the back half of the year. Now there are some issues there, you know, when you think of, you know, IMO 2020, the effect of IMO 2020 sort of got, you know, overshadowed by COVID-19 effect on overall economic demand. And when you talk about the intermodal markets, you could totally see IMO 2020 want to have an impact on your overall transportation fuel costs because your ocean liners are going to have to pay that. And it’s going to be passed through. And depending on what happens in the US political election, you know, overall petroleum prices, you know, I’m sort of with Ross. I don’t see a huge wholesale change because depending on who wins the White House, you could see a shift in policy toward Iran that could bring an extra 2 million barrels of day of crude online to the marketplace. That’s not there today because of the sanctions regime that’s in place. And so you could see, in fact, downward pressure on the overall crude price and overall refined product supply, depending on who wins the election. So I think, you know, domestically, the markets want petroleum prices to go up to be able to move crude by rail. They have to look at some drilling sand, but I don’t see it happening in 2021. I think we’re going to see relative stability. I think you’re going to see fuel surcharges become less of an issue because they’re going to be stable. They’re not going to be moving around month to month the way we’ve seen in the recent past.

Question 13: How will zero-emission trucks impact rail?

Eric Starks: So off the whole fuel thing, one of the things that we keep hearing about is going to a zero-emission truck, for example, Europe, that we’ve already seen targets for California, all of these different things. Does that have any impact on the rail, the rail business?

Todd Tranausky: It does if they’re able to do it priced competitively, if the alternative fuel that they use, whether it’s LNG, whether it’s, electric if it’s price competitive and you start to erode, diesel is a trucker’s biggest cost. And so if you bring that cost basis down, you know, that makes them more competitive with intermodal, that allows them to price more aggressively relative to Intermodal, and that allows them to eventually take more volume off of rail intermodal and pull them on the highway. And it doesn’t the railroads have somewhat of a cost of intermodal[, but it’s not as much as a lot of folks think. And so if the truckers can whittle their cost bases down by four or five, six, seven percent, you know, suddenly there’s a lot more jump ball intermodal freight that could go either way.

Eric Starks: Yeah, the one thing I always kind of think about is if you’re going to potentially move trucks to electric. Right. Let’s just go with that. Right. Let’s say that they have to plug into the grid. I assume that the cost of electricity starts to go up because you have a significant amount of demand there for the number of trucks. You then have extra diesel sitting out there that wasn’t going to use the railroads, have access to a cheaper fuel source. All of these things, it seems like, you know, the dynamics all the way through there has to balance out. And so, Ross, being a shipper, how the heck are you guys paying attention to all of this? And are you even starting to make some contingencies of what that looks like in the future? No, not really. I don’t think it’s scalable for a while yet.

No, so I don’t know. I don’t even have a planning window for when zero-emissions tractor-trailers are scalable.

Eric Starks: But when do you retire?

Eric Starks: It is amazing. As we hit that 50 and older time frame, you’re just kind of like, yeah, it’s not I have to worry about that. But it was a really, really do appreciate that answer, because  I think a lot of people are in the same boat. It’s just not on the radar. And I find that it’s on people’s radar. It’s to be able to say, you look I look at the green technology. I’m looking at these kinds of things. But is it a truly viable solution longer-term? And I think that’s the struggle. But with going talking about a zero-emission standard, I think if that really does all come to fruition, I think that that pushes some things. But it is you know, you’re talking about 15, 20, 20 years or longer right now.

Ross Corthell: I don’t know. How many miles do you get today out of one of those tractors? So it’s very few. A Tesla. Gets what about three hundred miles. Right.

Question 14: What industries will make a quick comeback?

Eric Starks: So, yeah, I think that the hope is that if you could start getting something close consistently to eight hundred miles. Right. If that could happen, I think then that becomes a really competitive environment, but I mean, you’re really talking about it being more of a short-haul to a medium-haul type of situation. And then ultimately, what’s the not just what is the cost, but what’s the weight and the size of that? You know, because we know today that as you really start looking electrification, you know, you’re changing the whole makeup of the truck and the size and weight. So it’s an interesting thing to think about, but it’s there’s still always ways to go. But I know on the equipment side, this is a big deal. And there they are looking at this as a real alternative going forward and putting a lot of time of research and development into this. So I think it’s sooner rather than later that we see truly viable solutions. It’s more about can they scale it up to a level that really hits the masses. OK, so we’ve hit fuel. It’s got a few more questions left. So as the kind of industries in general start to recover from the effects of COVID, which ones do you think are going to make a quicker comeback than others? Todd, let’s start with you

Todd Tranausky: The two that I would say would make a very quick comeback. I would look at lumber as one. You know, there are underlying demand pressures there that say there should be volume in the system. There hasn’t been yet. So if I’m looking for a sector that’s going to have one of those, you know, those peak events where all the volume sort of goes at one time, you see a huge spike in volume. You know, they are very high on that list. If I look at the industry’s grain, I think everybody focus on COVID that’s taking the spotlight off of the trade situation. And so I think you’re going to see normalized export purchases this year of grain. And so I think that and an easy comparison positions them very, very well. In the third quarter, you had export inspections of 20 percent year over year. I expect that to continue in the fourth quarter and beyond. And so I think grain and lumber are the two that I’m really keyed in on for really quick growth.

Eric Starks: Yeah, and Ross, it’s very fascinating because I think there’s this general expectation that just everything stopped. Right, and it did in a lot of cases. But for example, we know that there’s been pressure on moving goods differently than they were before. We’ve seen consumer goods moving. We’ve seen a lot of online and retail type of things. I mean, it intuitively feels like things like corrugated boxes would be in higher demand than other types of commodities. So are you guys kind of viewing that as we come out of this and what do you kind of see in from a recovery standpoint?

Ross Corthell: Yeah, so, you know, intuitively, when people started working from home and thousands and thousands of people did, they also started shopping from home and dining from home. And, you know, Todd mentioned the lumber business, for example, you know, a lot of folks that maybe would have taken a long weekend vacation, instead were working on a project at home. So what they call the shoulder business, the big box retailers of building materials. I mean, the shoulder business has gone crazy. The people that are literally carrying wood out on their shoulder to work on a whole project, that business has been. It has gone crazy during COVID, so, yeah, there’s a lot of stuff that is associated with being at home and how you consume and or, you know, do activities that have actually, I think, done very well during COVID know, if your if your question is what recovers it COVID if COVID went away tomorrow, what would recover the most? I mean, just on a percentage of change, I think if it went away tomorrow, people would flock back to restaurants. No, they’re dying to do that. So the services businesses would go off the charts in terms of rate of change. I don’t know if that would drive a lot more real volume necessarily. But I do think, though, that you’d see some disruptions in supply chain support type disruptions and supply chains when that ultimately within a week or greatly diminished. You put it that way.

Eric Starks: Yeah, I’m kind of chuckling over here as you’re talking about people buying stuff and trying to do projects. I swear it’s all I’ve done over the last six months is order stuff online. And then I typically order stuff online from a big box store and then I get lumber and all these other things. So I’ve got tons of projects that I’ve been working on or have started. And I’m realizing now I probably should finish them. You know, I get into I’m actually into a project right now where I am putting insulation under his shed and I’ve gotten halfway done. And I’m like, yeah, this probably was not the best idea. It sounds like a good idea at the time, but I digress. So some things have changed.

Ross Corthell: Some things just won’t change. Right? Like the half-finished project probably will never change.

Eric Starks: Yeah, that’s true. I actually have finished some projects that I’ve never would have finished before. So please call that a victory,

Ross Corthell: The virtual thumbs up for you.

Question 15: Class 1 railroad mergers.

Eric Starks:  You know, I appreciate that. Two more questions here and then we’ll  wrap this this up. So what’s the likelihood that we see another class-one merger in the future?

Todd Tranausky: Is that even talk go for it? Well, here’s the thing. I mean, the genesis of the question probably has to do with a lot of the recent reports around Kansas City Southern. And Kansas City Southern, the reports that have been in the media, you know, there have been offers made by a private equity firm. The private equity firm, as I understand it, does not at today own a railroad. So it would not be a merger in the way that we typically think of a railroad merger. OK, it’s not one railroad buying another so that creates an ability for it to go through easier than if it was railroad to railroad. You know there were new merger regulations put in about 20 years ago that made it very, very difficult for class-one railroads to merge. But there is, you know, a KCS exemption in there. There is a KSC tax waiver in there that makes it easier for KCS to be taken out by another carrier than if it was to be a UPNS type merger. And I don’t I think KCS franchise is unique enough that even if you had somebody like a CP come in a traditional railroad acquirer, you know, come in and try to take out the KCS, I don’t think it would set off a chain reaction because those chain reaction mergers would still be subject to the more stringent and I would posit impossible to satisfy standards at the Surface Transportation Board.

Ross Corthell: I completely agree with Todd, I think in the short run, that’s a pretty low risk. No. The question was pretty open-ended. Do we see real mergers in the future? I could definitely see some point in the future where you see mergers. I don’t think it happens in the short run. And the really interesting thing about KCS, yes, of course, you are both US and Mexican regulators that you’d have to contend with. So I don’t think that’s a two foot putt either. So I do think, like I said, pretty low risk in the short run.

Question 16: Strength of recovery: growth or restocking?

Ross Corthell: I completely agree with Todd, I think in the short run, that’s a pretty low risk. No. The question was pretty open-ended. Do we see real mergers in the future? I could definitely see some point in the future where you see mergers. I don’t think it happens in the short run. And the really interesting thing about KCS, yes, of course, you are both US and Mexican regulators that you’d have to contend with. So I don’t think that’s a two foot putt either. So I do think, like I said, pretty low risk in the short run.

Eric Starks: Ok, I like it. Let’s wrap this up with some final thoughts, Todd, you talked about restocking an inventory or at least inventory restocking. I guess one of the things that kind of comes up with this part of this particular question  what is the possibility that the strength we’re seeing, for example, in truck and then the slow but steady increases that we’re seeing in Israel and then the jump that we’ve seen recently in intermodal is not just restocking that its fundamental growth and that that growth can continue. Is that even a possibility and I think maybe just get your thoughts in general about the strength of the recovery?

Todd Tranausky: Sure. I mean, restocking is certainly a part of the volume strength that we’ve seen. And I think that there’s a non-zero risk that once inventories normalize, you will see demand for Intermodal. That’s for Intermodal will also drive truckload as well, start to level off and start to decline. I think there’s a real risk of that as we go forward. And we’ve already seen a little bit in the drive and truck market where we see sort of a plateau. If you look at the MDI and other metrics, there’s a plateau forming and the latest weeks intermodal volume, you know, it showed signs of a definite slowing. Now, some of that could be the particular comparison week. We could get next week’s data and feel like we’re not there, that we’re continuing to move stronger. But there’s a real risk that it could be driving the bus here and that you could see a plateau in intermodal volumes as we go forward. And I think people have to be cognizant of it, that it may not go on forever. It sort of these increased intermodal items came on sort of almost like a light switch back right around August 1st. Well, whenever you see a phenomenon like that, you know, that light switch can go off just as quick as it came on. And so I think you have to be in the back of your mind a little bit worried about the restocking phenomenon versus underlying demand as we go forward in the weeks ahead.

Eric Starks: Yeah, because, I mean, honestly, if it’s restocking, for example, you bring stuff in or you manufacture it, you get it to a distribution center and then you have to send stuff out a lot of times and throw it into a box. Ross, kind of how are you guys viewing this particular time in the in the recovery?

Ross Corthell: And, you know, it’s interesting to read the question back to you guys, because, you know, a pretty healthy chunk of this tightening of truck capacity is on the supply side. No, and I don’t have a great window in terms of how to forecast what may change on the supply. It’s on the supply side of trucking that really eases this pressure that we’re feeling. So there’s the restocking of goods and services, but where are we going to start restocking trucks and drivers? And I think that restocking effort, you know, is the wildcard. And so I’d love to have some good data on that.

Todd Tranausky: Well, there have been a lot of things on the trucks out there that have been headwinds in terms of seeding trucks with drivers. The first is, you know, drivers for the most part that demographically they’re in an older age bracket and so they’re more at risk of COVID-19. And so we’ve seen that older demographic be less willing to come back even as rates have gone up. And so you’ve got that. You’ve got the older drivers not coming back and on the other side of the age gradient, it’s been very difficult to get new drivers into trucks because the driving schools closed during COVID-19 and with state DMV being closed with their various COVID-19 measures, it’s been very difficult and taking a lot longer for new drivers who want to come into the market to be able to get CDL’s skill test and in some cases even having to schedule another appointment and wait just to get the actual license itself, to get the picture taken. And so you’re sort of from the driver’s supply situation. You’re getting squeezed on both ends. You have older drivers who, you know, are at the point where maybe I just retire. I don’t want to go back and deal with this. But you can’t replace them with younger drivers who are looking for jobs where normally when you can’t find jobs in other sectors of the economy, you see a boom in truck driving. In this case with the drivers being closed in the DMV issues, you haven’t been able to fill the pipeline on the other side.

Eric Starks: Yeah, and it’s fascinating because, Ross, you talk about supply and ultimately, I agree 100 percent with Todd that the supply constraint right now is driver. It’s not the equipment. There seems to be plenty of equipment still out there. It’s just getting somebody seeded into that truck. Now, having said that, we clearly are seeing some run-up in order activity for new equipment for both trucks and trailers. And that’s been a welcome sign if for no other reason. It suggests that people are willing and that fleets and carriers are willing to spend some money if that’s the case. And that means that they’re typically feeling a little bit better about where things are. And that makes me makes me feel a lot better. So with that, I think we’ll leave it there. And I want to thank you both for joining us. It is always a delight to hang out with you guys, and maybe we’ll just have to do this again sometime soon.

Ross Corthell: Thank you very much, Eric, thanks, Todd. I enjoyed the conversation greatly.

Todd Tranausky: Well, no thanks to you. You guys are fantastic. So with that, I bid you adieu.

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