Much like many other conglomerates during the middle of the 20th century, railroads wandered into alternative businesses: Natural resources like mines and timber, commercial real estate, and oil pipelines - anything to help drive returns and attract capital to survive just one more day.

Even when new, innovative ways of freight transport came knocking, such as the piggyback trailer or the intermodal container, railroads were either largely ambivalent to them or rejected these ideas outright. (Mark Cane’s excellent multi-volume series on introducing intermodal at BNSF is a great first-hand account on this subject).

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The K&O RR is one of Watco’s largest railroads that stretches across most of Kansas and interchanges with BNSF and UP at multiple points. It’s a descendant of branch lines from the former Atchison, Topeka, & Santa FE and Missouri Pacific railroads. In 1993, OmniTRAX created the Central Kansas Railway from the AT&SF branch lines. Another OmniTRAX property, the Kansas Southwestern Railway which leased former MoPac lines from UP, was later rolled into the CKR. Watco purchased the CKR in 2001 and renamed it the K&O.

The lease being disputed is for 166 miles of UP-owned track in Western Kansas that links up with the Colorado Pacific Railroad (CXR) just over the Colorado border in Towner, CO. Weskan Grain, a grain shipper throughout the region, petitioned the STB to look into the UP lease and revoke its exemption stemming from the CKR acquisition back in 2001.

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The right framework in all of this, I think, is asking how do human beings learn? Learning informs our views, clarifies our motivations, and moves us to act in ways that better align with our worldview. Knowledge is power, after all, and companies/individuals that can develop an asymmetric edge through greater information capture than their competitors can outperform them.

Going back in time, knowledge was passed down in small groups, families, tribes, clans, etc. Most of the time it was oral tradition. In many cultures, that still is the case. Once upon a time I lived among the Aboriginal people of Central Australia where traditions are predominantly passed down through music and stories. (Sitting in the dirt around the fire at night and telling stories is still a big part of their lives and something every Aboriginal person loves to do).

Greek epics like Homer’s The Illiad and The Odyssey, the Viking sagas, the Indian Mahabharata and Bhagavad Gita were all oral traditions before finally being captured in some type of written format.

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I’ll break this out into two parts. Part 1 will be focused on the cultural underpinnings that will inform how AI will proliferate. Part 2 will be more focused on specifics about the technology and its impact.

The Managerial Stagnation

I still remember a conversation I had with a friend of mine back in college. I hadn’t seen him in a while and we were catching up. He was a year or two older than me and was getting ready to graduate. I asked him what his plans were and he said he was looking at some entrepreneurship opportunities back home in Arizona. I don’t even remember the opportunity, but he said, “And then we can hire people to do the work and we just sit back and cash the checks!”

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RailPulse billed itself as the “Coalition of the Willing,” a collection of railcar owners with some 20% of the North American fleet who were going to start equipping their railcars with onboard sensors. The five founding members were NS, GATX, G&W, Watco, and Trinity. Other railroads and car builders soon joined.

But why do it? After all, most of the railroads, especially the ops folks, have been saying for years that they don’t need things like GPS on railcars or better bearing condition monitoring. Their current systems were just fine, thank you.

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Let’s start with the history lesson. In 1970, Penn Central filed for bankruptcy. The rail industry could no longer convince themselves that the kids were alright. This became a national crisis that resulted in several successive pieces of legislation to create a healthier rail network, culminating with the passage of the Staggers Act in October of 1980.

For the better part of a century, railroads had been fitted with an inflexible regulatory environment that allowed for modal share to be bled away freight to trucks and passengers to airplanes. What was left was a hollow carcass incapable of covering its significant fixed costs of track and equipment to maintain any semblance of service. Penn Central was the straw that broke the camel’s back.

The legislative reform that took a decade to come about breathed new life into a dying industry. Passenger obligations were shuttled over to the newly created Amtrak. Railroads could enter into private contracts without the stiff rate caps imposed by the ICC. Unprofitable lines were more easily shed, creating a massive wave of new shortlines. Private capital came in and took over the replacement of decrepit, railroad-owned equipment. And, railroads were able to more easily merge, consolidate, and reach scale economies.

These reforms were an absolute necessity to save the industry from complete abandonment or nationalization. The Class 1’s were akin to diabetic chain smokers on hospice care. By allowing railroads to undergo lifesaving treatment, the industry was resurrected to not just financial stability, but incredible profitability.

After the merger moratorium of the early aughts, the Class 1’s were profitable, healthy, and ready to consolidate their gains. They did so with gusto.

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Bridging The Rail-Shipper Gap - The 5-year Oliver Wyman shipper survey has been published again and, shocker, nothing’s changed! Shippers are still shifting from rail to truck despite the hi…

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Ports urge strict review of intermodal impacts from UP-NS merger

Trump to Unveil $12 Billion Bailout for Farmers

DHS launches sweeping I-9 audits on California truck fleets

October coal train de…

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Why Congress’ refusal to act on freight since 1993 is costing taxpayers over $40 billion a year - Important points raised on taxpayer subsidies for the trucking industry, but it stops where a lot in the rail industry stop: “Make trucks pay their share but I’m not going to think about anything beyond that.” This is a lazy argument that relies on an appeal to schoolyard “fairness” and deflects from the Class 1’s inability to actually compete with trucking.

The truth is that this is never going to happen because it would drive a large amount of truck capacity out of the market. Since trucks move ~70% of US freight, that means higher prices across the board and reduced service quality, further impacting prices, inventories, etc. This is obviously political suicide and the reason why the fuel tax hasn’t changed since 1993. Let’s just be honest here and stop floating stupid pipe dreams.

As I’ve written in the past, US freight transportation policy should be focused on one thing: Reducing the total cost of transportation. This includes a number of dynamics:

• Restraining monopolistic pricing power where value creation disproportionately accrues to the supplier at the expense of the consumer.

• Investing in, and, yes, even subsidizing certain modes/lanes, to lower rates to the benefit of the industry.

• Combating irrational or unnecessary regulations and red tape that prevent private capital investments in infrastructure.

• Incentivizing public-private partnerships in infrastructure investment.

• Incentivizing research in and later adoption of the latest technologies that support the goal of reducing the total cost of transportation. With the AAR, this would include federal statue that prevents the AAR committee cabal from becoming overly prescriptive in its regulations.

Focusing on these much more practical and necessary policy objectives would still bring great benefits to the rail industry.

Norfolk Southern’s Florida freight partnership with FEC Railway expands amid textile and automotive growth

Automakers, suppliers push deeper collaboration to build resilient supply chains - This is a trend which the Autos are really pushing, but one that I think is at least being explored across most of the industry. The problem the railroads have with addressing this opportunity (because it is a growth opportunity for a logistics company like a railroad) is that their data quality is so poor. Merging to reduce the number of partners in the network helps paper over the cracks, but, ultimately, if you have low quality data you’re going to be handicapped in giving shippers the greater transparency that they’re seeking.

Railroad ops leaders also need to loosen up their ice cold grip on transparency. That’s a culture change and one that is still being ignored at best or actively repulsed at worst in pretty much every Class 1. There’s still far too much of a “We know best” mentality that brought out rather accurate shipper criticisms during the PSR adoption last decade - “PSR is done to you, not with you.” In a fragmented network business, collaboration is key.

STB Approves Fortress Investment Group Acquisition of Two Shortline Rail Carriers

American Customers Are Madder Than Ever

Stadler challenges $US 2bn SBB contract award

Union Pacific says rail merger could unclog Chicago. Critics worry about costs and traffic tie-ups. - Tremendous article that does a good job at looking at several aspects of the merger in a relatively unbiased way. Good primer for those who aren’t in it every day.

China export controls push European firms to move supply chains

Steel sector praises new federal measures, wants to see tariff remission program end

Exclusive: Russia weighs how to prop up Russian Railways which is $51 billion in debt, sources say

Just in time for your comatose, post-meal malaise, here’s a roundup of recent merger news. It’s been a bit sleepy for the past month or so, up until a number of actions became public more recently. Here are 3 key points to help find the signal from the noise.

1. UP is doing all the right things

I published “Lose the PR Battle, Lose the War” back in September, aptly written right before Mr. Vena goes to Washington. In that article, along with a photo of anti-merger advocate Keith Creel standing with US Commerce Secretary Howard Lutnick, I highlighted how UP and NS were losing the PR battle:

“So given the importance of having the Trump administration on their side, why hasn’t Jim Vena and Mark George jumped on a plane to Mar-a-Lago to kiss the ring? Why weren’t they in Lutnick’s office within a week of the merger announcement? Take a leaf out of Nippon’s playbook in their very public acquisition of US Steel. Japanese executives recognized the political hot potato during an election year and made all sorts of concessions and trips to the US to get the deal done.”

Since that time, UP has made several important moves:

1. CEO Jim Vena did kiss the ring and got President Trump’s “ringing” endorsement, “Sounds good to me.”

2. UP followed up that visit by donating to the President’s pet project of remodeling the White House.

3. UP secured key union support by getting SMART-TD to do a 180 and support the merger, making it all the more easy for a populist president to support the merger.

4. Industry and mainstream media were treated to a ride through Chicago, the epicenter of any improvements that would deliver streamlined service for shippers.

5. In an effort to allay fears raised by the Anti-Merger crowd on a potential disruption from IT system integration, UP CIO Rahul Jalali is making the rounds saying that won’t happen this time. (I don’t know that this really means anything, but at least they recognize the issue).

These are all good moves and should be positives for UP in positioning themselves well for the STB review. What more can they do? Flip chemical shippers.

2. The Anti-Merger crowd is only positioning for handouts now

It feels like the main opposition to merger is giving up. Or at least they should if this is all the defense they’re going to muster.

Trade associations will still make noise and individual shippers will negotiate for deals like rate freezes in exchange for supporting the merger. BNSF and CPKC have continued to make some noise with BNSF publicly urging shippers to speak up. But if no one is willing to engage the White House directly then what’s the point? That’s the real litmus test and the White House has made it clear that they don’t want to hear from the trade associations.

And it’s not just the White House. I’ve heard from more than one person in DC about their surprise at the lack of engagement from certain prominent Class 1 constituents in this Anti-Merger camp. Do they care? It certainly isn’t the urgent, pull-out-all-the-stops effort one would expect if you truly believed this was the endgame.

But maybe they don’t believe it’s the endgame, or at least they don’t believe the merger will get approved. That’s fine, but why aren’t you hedging your bets?

I’ve already written about the lack of a key figure from the Anti-Merger crowd who is willing to stick their neck out and sit down with the President in the White House. Engaging directly with this Administration and not doing so through a trade association is exactly what’s missing. The “strongly worded letter” is a waste of time with this Administration, especially when your opposing side is shaking hands and kissing babies. Which tactic is harder to ignore?

But maybe the shippers are okay with that? Part of this whole dog and pony show is really just posturing and positioning to extract the most value from this transaction, other Class 1 railroads included.

3. There’s still a lot of misunderstanding about rail mergers

I write off most of the for/against articles that I see from time to time because they’re largely recycled slop. Just like the old Wikipedia game, 5 clicks to Kevin Bacon, it doesn’t take that long to figure out the author is writing more out of a commitment to their favored ideology rather than to any real substantive understanding of the rail industry.

Take for example, this beauty published in Railway Age last week.

I don’t know this guy from Adam so I don’t want to dump all over his article, but what?? There are so many issues with it. Here’s two:

“As the new, combined company finds ways to make its network more efficient, shippers and consumers will ultimately benefit from those savings. This will help tamp down the inflationary pressures of the past few years and deliver price relief.” - What?

This is the biggest one, the assumption that value from increased economies of scale captured through consolidation will accrue to the shipper. Sure, if the service gets better, shippers could see cost savings in terms of reduced fleets and less inventory carrying costs. That’s something. (Not that there’s any guarantee shippers would play with reduced inventories, but theoretically it’s there). HOWEVER, at what point in time in the past 20 years have the railroads passed on their savings to their customers?

They’ve done the opposite. As PSR proliferated through the industry, the resulting cost savings from reduced CAPEX and fewer crews accrued to the shareholders in the form of greater and greater stock buybacks. Shippers were treated to ever larger and more frequent rate increases. Some can and have argued that the Class 1’s are only hitting the merger button now because they no longer are able to push price increases to fuel EPS growth.

“Greater leverage in negotiations with trucking companies” - ??? Pray tell, why would a shipper struggle with leverage in a market with about a million options to choose from, any of which the shipper could simply pick up the phone and get access to today? That’s leverage. A market with fewer options than I have fingers on my right hand does not grant the shipper any leverage whatsoever.

If this merger truly were to deliver greater leverage to shippers, then why would 64 shipper trade associations come out against it? Especially those steeped in the rail industry like the American Chemistry Council (ACC), the American Fuel & Petrochemcial Manufacturers (AFPM), and the National Industrial Transportation League (NITL).

This isn’t to say the whole article is wrong - there are very valid points - but my goodness, let’s get on the same page here. Rail has been bleeding volumes for decades and it’s not because there isn’t a US transcon. It’s because the Class 1’s have largely ignored their customers and pursued an anti-growth, profitability-maximizing strategy that extracted as much value out of these customers as they can get away with.

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Despite all these recent events and posturing from both sides, not much has really changed. There’s a path with a good chance of success that UP will be able to get their merger approved. The STB will ask for a large stack of concessions. UP will have to decide if it can live with what the STB is going to demand they give up. Maybe UP will walk away, but given the investment and careers staked on this merger going forward, is there really any world where UP doesn’t take the deal from the STB? I don’t think so.

Part 1: My Life Is a Lie - Insanely good article arguing that the poverty line in 2024 should be ~$140,000. Must read.

“The [U.S. Poverty Line Formula] was developed by Mollie Orshansky, an e…

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Republican state AGs raise concerns about Union Pacific deal for Norfolk Southern - “The attorneys general of the states - which also include Ohio, Florida, North Dakota, South Dakota, Missis…

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Such fables, while romantic, insufficiently explain how innovation occurs - real, progressive, needle-moving innovation that pushes civilization forward to a better/cheaper/faster future.

It involves great sacrifice, late nights, an irrational willingness to get up after being smacked down over and over and over again. It occurs in the few, not the many. It rarely (if ever) happens in large organizations. It’s met with resistance, derision, rejection by the status quo. It often looks absurd until it reaches a critical mass.

Real innovation occurs when a mixture of technological advancement, timing, access to capital, and a small team of committed individuals who are willing to endure setback after setback finally get progress to stick. It requires the right nurturing environment, unencumbered by and safely protected from the choking forces of overregulation and corporate inertia.

Without that protection, natural market forces would kill it off. Internal politics, let alone $ thresholds, carefully crafted budgets, or layers of approvals for action, choke it like a weed kills the tender shoots of a young plant.

A Century of Innovation Hits a Brick Wall

The railroad was birthed during the Industrial Revolution. In 1774, John Wilkinson developed a more precise cylinder boring machine for manufacturing cannons used in naval warfare. James Watt, who was struggling at the time with sloppy tolerances from out-of-round cylinder bores, found Wilkinson’s technique allowed him to significantly reduce heat losses in his steam engine. Once implemented, this innovation allowed Watt to commercialize the steam engine that would be a major driving force of the Industrial Revolution.

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Senate advances plan to end historic shutdown in bipartisan breakthrough

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Flight cuts from government shutdown strain a supply chain tha…

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In letter to President Trump, chemical industry leaders warn UP-NS rail merger threatens U.S. manufacturing competitiveness - They chickened out. Should have made the trek to the Oval office…

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China’s Soy Imports Hit September Record, Despite Avoiding US

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