Railroads await specifics on Trump plans for taxes and trade

Executives set tone of cautious optimism
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Donald J. Trump
Associated Press
WASHINGTON — As President Donald Trump takes the oath of office today, railroads were still trying to sort out the uncertain opportunities and risks the administration’s policies may pose for the industry.

Railroad executives are cheering Trump’s proposal to reduce the corporate tax rate to 15 percent, down from 35 percent. Union Pacific, for example, paid $2.5 billion in income taxes in 2016. If Congress were to approve the Trump tax plan — which is far from certain — UP’s tax bill would be reduced to just more than $1 billion, a savings of about $1.5 billion.

CSX Transportation may accelerate its capital spending if all the pieces of a lower-tax puzzle fall into place, Frank Lonegro, the railroad’s chief financial officer, said on this week’s earnings call.

That would help CSX speed the capacity and technology improvements that are critical components of its CSX of Tomorrow strategy. CSX plans to make up for lost coal revenue by focusing capital investments on projects that will allow the railroad to gain service-sensitive merchandise and intermodal business.

Railroads were less enthusiastic about Trump’s critical assessment of free trade, including the North American Free Trade Agreement with Mexico and Canada.

“The irony of us reporting earnings on the inauguration day of the 45th president is not lost on us,” Kansas City Southern President and CEO Patrick J. Ottensmeyer said this morning.

But railroad executives say the global supply chain is so tightly linked to free trade that protectionist moves would ultimately harm U.S. interests.

“Our economies and societies are inextricably connected,” Ottensmeyer says.

And for that reason rail executives are cautiously optimistic that any trade moves will have a minimal impact on freight volumes. About 30 percent of U.S. carloads are tied to international trade, according to the Association of American Railroads.

“There are still many questions about the future of NAFTA and the trade relationship between the U.S. and Mexico. We still don’t have definitive answers." — Patrick Ottensmeyer, Kansas City Southern CEO
TRAINS: David Lassen
“There are still many questions about the future of NAFTA and the trade relationship between the U.S. and Mexico. We still don’t have definitive answers,” Ottensmeyer says, adding that he’s encouraged by comments from cabinet nominees.

Canadian officials have been told that the Trump administration’s primary North American trade target will be Mexico, the Globe and Mail newspaper of Toronto reported this week. The Trump administration aims to renegotiate NAFTA’s rules of origin and dispute tribunal system, the newspaper reported.

During his Senate confirmation hearing on Jan. 18, Wilbur Ross singled out NAFTA changes as “the first thing” he would address if confirmed as secretary of commerce.

“This is a complex issue and there’s a lot of risk for both the U.S. and Mexican economies if any future trade negotiations are not handled thoughtfully, which I’m sure they will be,” Ottensmeyer says.

Any modifications to NAFTA will be done in a rational way that will strengthen the economies and the future of KCS, he adds. Ottensmeyer has been named to lead a strategic trade group for the U.S.-Mexico Leadership Initiative’s CEO Dialogue, which will share industry’s trade views with government officials on both sides of the border.

The Bank of Canada expects the Canadian economy to take a hit from White House protectionist policies. The U.S. is far and away Canada’s largest trading partner, and a border tax on Canadian products would damage the Canadian economy.

Cross-border traffic is an important source of revenue for both Canadian National and Canadian Pacific. Cross-border shipments accounted for 34 percent of CN’s revenue through the first nine months of 2016 and 31 percent of CP’s revenue in 2015.

Despite Trump’s reservations about free trade, Canadian Pacific President and Chief Operating Officer Keith Creel says the railway is “cautiously optimistic” about the new administration. “We think it’s going to be positive for us,” Creel said on this week’s earnings call.

That’s partly because of proposals to reduce taxes in the U.S. and partly because CP tends to haul agricultural products and raw materials — rather than the finished goods that would be more likely to draw a border tax, says Nadeem Velani, CP’s chief financial officer.

Creel implied that CP is not as exposed to autos and lumber as rival Canadian National. Lumber has long been a sore point for U.S.-Canada trade, despite NAFTA.

With Mexican manufacturing under siege from the Trump administration, Kansas City Southern may face higher risk than its Canadian counterparts. About 29 percent of KCS’s revenue comes from cross-border traffic, a figure that rises to more than 40 percent when Laredo interchange traffic with UP is included, Ottensmeyer says.

But 60 percent of KCS’s cross-border traffic is southbound export moves, comprised of grain and food products, auto parts, intermodal, and industrial materials, Ottensmeyer says. Northbound movements are primarily intermodal and finished vehicles.

KCS has a favorable outlook for automotive traffic, executives said during the company’s earnings call this morning. The railway is not aware of any significant plant shutdowns in the works and noted that new Kia and Audi plants, which opened in 2016, will be ramping up to full production.

“We’re optimistic that those decisions ultimately will benefit U.S. trade and the U.S. economy." — Lance Fritz, Union Pacific CEO
Union Pacific
Brian Songer, KCS’s chief operating officer, met with two dozen customers last week, including automakers. They all were confident about production and growth in Mexico and encouraged KCS to continue making the capacity improvements necessary to handle increased shipments, he says.

UP is closely watching the Trump administration’s trade and tax proposals, CEO Lance Fritz said on Thursday during the railroad’s earnings call.

“We’re optimistic that those decisions ultimately will benefit U.S. trade and the U.S. economy,” Fritz says.

The economies of the U.S. and its trading partners are tightly woven together, Fritz says. Consumers benefit from free and open trade, he says, and many high-paying American jobs depend on export markets.

About 40 percent of UP’s revenue is tied to international business, says Beth Whited, the railroad’s chief marketing officer. This traffic includes grain, grain products, and industrial products. About 45 percent of UP’s intermodal business is international. And auto parts and finished vehicles make up a “big chunk” of UP’s cross-border Mexico traffic, Whited says.

The AAR has encouraged the Trump administration to make the regulatory environment more friendly to the industry. Specifically, the AAR seeks data-driven economic and safety regulations from the Surface Transportation Board and Federal Railroad Administration.

NEWSWIRETrains News Wire

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