10 ms·

Anecdotally, I have a few friends who work in the railroad industry and they are currently seeing something close to this. The company is almost entirely owned

by nthot 8y ago

Anecdotally, I have a few friends who work in the railroad industry and they are currently seeing something close to this. The company is almost entirely owned by large institutional funds. Union Pacific has a huge drive for constantly increasing efficiency. Their profits are up significantly year over year, but this fall they cut about 500 jobs from their headquarters in Omaha, around 6% of their Nebraska employees, and this isn't even the first time they've done it. To keep the big investors happy they are constantly searching for ways to cut costs. On the other hand, this might also be a product of the industry. The railroad is necessarily growth constrained. It's unlikely that significantly more products will move to being transported by rail and there is very little room for new lines to be constructed.

pmiller2 8y ago
You forgot: there's a hard ceiling to how high they can raise prices, because they have to compete with trucks. Together, that all implies that if they want higher earnings, cost cutting is the only way.
- hangonhn 8y ago
  Uh... not sure if that's actually the case. Trains are cheaper and actually faster over a long distance. The optimal way to ship is actually intermodal: ship for between countries/continents, trains for long trips over land, and then trucks for the last leg. They don't really compete with each other as much as they work together, especially since they have a standardized protocol for inter-process communication known as containers. Of course electric automated trucks could change all that.
  - ethbro 8y ago
    > Of course electric automated trucks could change all that. Unmanned trucks crossing long distances of rural America sounds like a recipe for hijacking loads.
    - pmiller2 8y ago
      Automated trucks don't necessarily have to be unmanned.
      - grogenaut 8y ago
        Just declare trucks corporations which makes them people and then they'll be able to carry guns in most rural areas.
      - jandrese 8y ago
        They do if you are automating them to avoid having to pay human drivers. It's kind of silly to go to all of the effort to automate a truck and then make someone sit on their thumbs behind the wheel for hours on end.
        frankydp 8y ago
        If you can reduce legal risk(accidents) by 50x or 100x and extend the road time by 2x or 3x, then paying a security person seems like a doable call. Especially if you can pass some of that premium risk mitigation on to the customer, if load value dictates. Raw hourly cost may not even be the primary point under the manpower line of reasoning. It is certainly important, but not necessarily the key issue.
        jandrese 8y ago
        You can't increase road time with a human driver at the wheel, that's a safety issue. While it's already dubious to hire a driver for an autonomous truck, it's even sillier to pretend that the driver is useful when you're having the truck do the work while the driver sleeps. Extending road time by 3x means running the truck 24 hours a day, and keeping a person awake that long will not improve safety.
    - elsonrodriguez 8y ago
      Hijacking trucks filled to the brim with sensors sounds like a recipe for jail time. The logistics of stopping and looting a truck involves too many parties, and ensuring that each party is following enough security protocols to not be identified via face, vehicle, or gait will ensure that only a few small sophisticated heists will ever be successful.
  - pmiller2 8y ago
    > Trains are cheaper [...] over a long distance. Right there's your hard cap. Make trains too expensive relative to trucks, and, suddenly, everything goes most of the way by truck.
  - azinman2 8y ago
    But why? I would think that trains, which aren’t constrained to gasoline and have dedicated tracks, should be able to obtain higher efficiencies compared to trucks going the same long distances?
    - dj-wonk 8y ago
      Think of shipping as an optimization problem where various modes are selected for different parts of the path. You have to run the optimization problem to see what mix makes the most sense -- and don't expect it to necessarily be simple or obvious. Logistics is complex; you'll also need to factor many things into the optimization: * both fixed and marginal costs of each mode (e.g. maintaining track, monitoring safety, wear and tear on vehicles, varying fuel costs) * constraints (due to technology, personnel, regulations, etc) * fluctuations in demand and shipping objectives * lots more If you want to focus on only one slice of the problem... Sure, for the exact same route (meaning that a particular track has already been built), one would expect that trains are more efficient. The data shows that; e.g. https://en.wikipedia.org/wiki/Energy_efficiency_in_transport#Trains https://en.wikipedia.org/wiki/Energy_efficiency_in_transport...
    - dwighttk 8y ago
      you are correct. That's why they don't really compete with each other. You put it on a train for a long distance and then trucks pick it up to spread it out from there.
      - dj-wonk 8y ago
        Sometimes people use "compete" in a casual way that overlooks key economic connections. Competition is a force that is always present, even if it is not currently the "most obvious" factor in play at a given time. I think any definition of competition must be relative to the sphere of economic activity. So, when it comes to transportation in general, rail and trucks do compete -- by this I mean they offer services with varying prices and characteristics. Just because rail and trucking have different sweet spots at a particular point in time does not mean that they don't compete. Both (a) think about how and why customers choose them over the other, (b) seek opportunities (for investment or growth) that lead to a competitive edge, and (c) therefore, influence each other.
- rplst8 8y ago
  > cost cutting is the only way Not always. If you provide a value proposition that a cheaper offering does not, say speed, you can increase volume. Highway transportation will not likely get much faster, but high speed freight via rail seems like it might have some room to grow.
hangonhn 8y ago
I'm not entirely sure your conclusion is correct. Almost 40% of all US freight is moved via rail. The reason passenger trains suck in the US is because our railroads are built for and prioritized for freight. When Berkshire Hathaway purchased BNSF, they noted that trains connect companies between the two coasts of the US. It is often the case that a company that produces something is on one coast but the port where its products go out is literally a continent away. Even domestically bound products have to be shipped between coasts because of how population centers in the US are situated. So assuming the US population and industries continue to grow, I think freight rail will continue to be in demand.
- xenadu02 8y ago
  Believe it or not, sometimes products are unloaded on one coast, transported by rail, then loaded on a ship on the other coast.
  - chimeracoder 8y ago
    > Believe it or not, sometimes products are unloaded on one coast, transported by rail, then loaded on a ship on the other coast. That is surprising, since shipping by water is dramatically cheaper than any other form of surface shipping, even factoring the extra distance to sail down to the Panama Canal. What's the point of adding the land leg?
    - saghm 8y ago
      Speed, maybe? I don't know offhand if it's faster or not, but if it is, I can imagine that spending more to get the products to their destination faster could be worth it in some scenarios.
    - ceejayoz 8y ago
      Shipping via Panama doubles the distance, and it's probably half the speed as well. Some products will likely benefit from shaving off two or three weeks from China to the EU.
dmurray 8y ago
The big index funds aren't exactly known as activist investors. Even if it's "Wall Street" collectively, it's not Vanguard or State Street that is pushing Union Pacific to cut costs.
- jandrese 8y ago
  It's a side effect of having real number feedback on how you're doing. Management can't just make up their own metrics anymore, there is a third party that tells you how well you are doing, and that third party wants to see constant growth or they'll start dropping your price and the financial press will pick up on that and start writing articles about how millennials are killing the rail industry. It takes real gumption for the upper management to say "screw what the greedy bastards on Wall Street think, we're doing just fine." Especially when their yearly bonuses are tied to what those guys on Wall Street think.
  - scott_s 8y ago
    Your comment still assumes active investors who are looking for value stocks. Index funds don't discriminate, they just buy stocks in the entire market.
    - jandrese 8y ago
      Right. In fact index funds should be better for management since they won't be rocking the boat so much.
    - whack 8y ago
      Index funds don't discriminate against stocks, but they can discriminate against directors and executives who don't deliver their desired profits and returns. Ie, by voting them out. This is already starting to happen. See: https://www.barrons.com/articles/passive-investors-are-the-new-shareholder-activists-1499491673 https://www.barrons.com/articles/passive-investors-are-the-n...
      - scott_s 8y ago
jonknee 8y ago
The pressure to increase profits exists regardless of ownership, if anything having large institutional funds own the majority lessens the pressure (vs an activist fund or something similar). If they're leaving money on the table someone is going to take it.
- xenadu02 8y ago
  Not really; you can look at BNSF (bought by Buffet) vs Union Pacific. Buffet takes the long view, as a result BNSF has been spending billions on capital projects and hiring. Wall St is known for encouraging short-term thinking.
  - whatok 8y ago
    BNSF is spending money on capex because it's the smart thing to do in that industry right now. That's not a consequence of a Buffet investment. Buffet also invested in Heinz and they immediately fired thousands and are cutting costs left and right.
    - atomical 8y ago
      Buffett lays out some reasons why it's tougher for brands like Heinz. https://www.cnbc.com/video/2018/05/07/buffett.html https://www.cnbc.com/video/2018/05/07/buffett.html
  - xkjkls 8y ago
    I'd say it's a lie that Wall Street is known for short term thinking. Hell, it is even a unofficial motto of Goldman Sachs to "be long-term greedy". Are there a large number of activist investors who want certain companies to trim fat? Yes. I wouldn't always say that trimming fat is always synonymous with short term thinking. For all the companies that are underinvesting in the future, there are 5 whose management has given them mission creep to invest in areas that incinerate capital. Especially in the current interest rate environment.

by nthot 8y ago

pmiller2 8y ago

You forgot: there's a hard ceiling to how high they can raise prices, because they have to compete with trucks. Together, that all implies that if they want higher earnings, cost cutting is the only way.

hangonhn 8y ago
Uh... not sure if that's actually the case. Trains are cheaper and actually faster over a long distance. The optimal way to ship is actually intermodal: ship for between countries/continents, trains for long trips over land, and then trucks for the last leg. They don't really compete with each other as much as they work together, especially since they have a standardized protocol for inter-process communication known as containers. Of course electric automated trucks could change all that.
- ethbro 8y ago
  > Of course electric automated trucks could change all that. Unmanned trucks crossing long distances of rural America sounds like a recipe for hijacking loads.
  - pmiller2 8y ago
    Automated trucks don't necessarily have to be unmanned.
    - grogenaut 8y ago
      Just declare trucks corporations which makes them people and then they'll be able to carry guns in most rural areas.
    - jandrese 8y ago
      They do if you are automating them to avoid having to pay human drivers. It's kind of silly to go to all of the effort to automate a truck and then make someone sit on their thumbs behind the wheel for hours on end.
      - frankydp 8y ago
        If you can reduce legal risk(accidents) by 50x or 100x and extend the road time by 2x or 3x, then paying a security person seems like a doable call. Especially if you can pass some of that premium risk mitigation on to the customer, if load value dictates. Raw hourly cost may not even be the primary point under the manpower line of reasoning. It is certainly important, but not necessarily the key issue.
        jandrese 8y ago
        You can't increase road time with a human driver at the wheel, that's a safety issue. While it's already dubious to hire a driver for an autonomous truck, it's even sillier to pretend that the driver is useful when you're having the truck do the work while the driver sleeps. Extending road time by 3x means running the truck 24 hours a day, and keeping a person awake that long will not improve safety.
  - elsonrodriguez 8y ago
    Hijacking trucks filled to the brim with sensors sounds like a recipe for jail time. The logistics of stopping and looting a truck involves too many parties, and ensuring that each party is following enough security protocols to not be identified via face, vehicle, or gait will ensure that only a few small sophisticated heists will ever be successful.
- pmiller2 8y ago
  > Trains are cheaper [...] over a long distance. Right there's your hard cap. Make trains too expensive relative to trucks, and, suddenly, everything goes most of the way by truck.
- azinman2 8y ago
  But why? I would think that trains, which aren’t constrained to gasoline and have dedicated tracks, should be able to obtain higher efficiencies compared to trucks going the same long distances?
  - dj-wonk 8y ago
    Think of shipping as an optimization problem where various modes are selected for different parts of the path. You have to run the optimization problem to see what mix makes the most sense -- and don't expect it to necessarily be simple or obvious. Logistics is complex; you'll also need to factor many things into the optimization: * both fixed and marginal costs of each mode (e.g. maintaining track, monitoring safety, wear and tear on vehicles, varying fuel costs) * constraints (due to technology, personnel, regulations, etc) * fluctuations in demand and shipping objectives * lots more If you want to focus on only one slice of the problem... Sure, for the exact same route (meaning that a particular track has already been built), one would expect that trains are more efficient. The data shows that; e.g. https://en.wikipedia.org/wiki/Energy_efficiency_in_transport#Trains https://en.wikipedia.org/wiki/Energy_efficiency_in_transport...
  - dwighttk 8y ago
    you are correct. That's why they don't really compete with each other. You put it on a train for a long distance and then trucks pick it up to spread it out from there.
    - dj-wonk 8y ago
      Sometimes people use "compete" in a casual way that overlooks key economic connections. Competition is a force that is always present, even if it is not currently the "most obvious" factor in play at a given time. I think any definition of competition must be relative to the sphere of economic activity. So, when it comes to transportation in general, rail and trucks do compete -- by this I mean they offer services with varying prices and characteristics. Just because rail and trucking have different sweet spots at a particular point in time does not mean that they don't compete. Both (a) think about how and why customers choose them over the other, (b) seek opportunities (for investment or growth) that lead to a competitive edge, and (c) therefore, influence each other.
rplst8 8y ago
> cost cutting is the only way Not always. If you provide a value proposition that a cheaper offering does not, say speed, you can increase volume. Highway transportation will not likely get much faster, but high speed freight via rail seems like it might have some room to grow.

hangonhn 8y ago

I'm not entirely sure your conclusion is correct. Almost 40% of all US freight is moved via rail. The reason passenger trains suck in the US is because our railroads are built for and prioritized for freight. When Berkshire Hathaway purchased BNSF, they noted that trains connect companies between the two coasts of the US. It is often the case that a company that produces something is on one coast but the port where its products go out is literally a continent away. Even domestically bound products have to be shipped between coasts because of how population centers in the US are situated. So assuming the US population and industries continue to grow, I think freight rail will continue to be in demand.

xenadu02 8y ago
Believe it or not, sometimes products are unloaded on one coast, transported by rail, then loaded on a ship on the other coast.
- chimeracoder 8y ago
  > Believe it or not, sometimes products are unloaded on one coast, transported by rail, then loaded on a ship on the other coast. That is surprising, since shipping by water is dramatically cheaper than any other form of surface shipping, even factoring the extra distance to sail down to the Panama Canal. What's the point of adding the land leg?
  - saghm 8y ago
    Speed, maybe? I don't know offhand if it's faster or not, but if it is, I can imagine that spending more to get the products to their destination faster could be worth it in some scenarios.
  - ceejayoz 8y ago
    Shipping via Panama doubles the distance, and it's probably half the speed as well. Some products will likely benefit from shaving off two or three weeks from China to the EU.

dmurray 8y ago

The big index funds aren't exactly known as activist investors. Even if it's "Wall Street" collectively, it's not Vanguard or State Street that is pushing Union Pacific to cut costs.

jandrese 8y ago
It's a side effect of having real number feedback on how you're doing. Management can't just make up their own metrics anymore, there is a third party that tells you how well you are doing, and that third party wants to see constant growth or they'll start dropping your price and the financial press will pick up on that and start writing articles about how millennials are killing the rail industry. It takes real gumption for the upper management to say "screw what the greedy bastards on Wall Street think, we're doing just fine." Especially when their yearly bonuses are tied to what those guys on Wall Street think.
- scott_s 8y ago
  Your comment still assumes active investors who are looking for value stocks. Index funds don't discriminate, they just buy stocks in the entire market.
  - jandrese 8y ago
    Right. In fact index funds should be better for management since they won't be rocking the boat so much.
  - whack 8y ago
    Index funds don't discriminate against stocks, but they can discriminate against directors and executives who don't deliver their desired profits and returns. Ie, by voting them out. This is already starting to happen. See: https://www.barrons.com/articles/passive-investors-are-the-new-shareholder-activists-1499491673 https://www.barrons.com/articles/passive-investors-are-the-n...
    - scott_s 8y ago

jonknee 8y ago

The pressure to increase profits exists regardless of ownership, if anything having large institutional funds own the majority lessens the pressure (vs an activist fund or something similar). If they're leaving money on the table someone is going to take it.

xenadu02 8y ago
Not really; you can look at BNSF (bought by Buffet) vs Union Pacific. Buffet takes the long view, as a result BNSF has been spending billions on capital projects and hiring. Wall St is known for encouraging short-term thinking.
- whatok 8y ago
  BNSF is spending money on capex because it's the smart thing to do in that industry right now. That's not a consequence of a Buffet investment. Buffet also invested in Heinz and they immediately fired thousands and are cutting costs left and right.
  - atomical 8y ago
    Buffett lays out some reasons why it's tougher for brands like Heinz. https://www.cnbc.com/video/2018/05/07/buffett.html https://www.cnbc.com/video/2018/05/07/buffett.html
- xkjkls 8y ago
  I'd say it's a lie that Wall Street is known for short term thinking. Hell, it is even a unofficial motto of Goldman Sachs to "be long-term greedy". Are there a large number of activist investors who want certain companies to trim fat? Yes. I wouldn't always say that trimming fat is always synonymous with short term thinking. For all the companies that are underinvesting in the future, there are 5 whose management has given them mission creep to invest in areas that incinerate capital. Especially in the current interest rate environment.