Class 1 CEOs Optimistic About Traffic Growth

Optimism was the underlying theme this week in investor calls hosted by top executives of Norfolk Southern and Canadian National.

CEOs of both Class 1 railroad systems expect intermodal traffic to drive growth this year as the economy recovers from the COVID-19 pandemic induced economic downturn of 2020 that at times threw the nation into a recession.

Both railroads expect to see growth in carload traffic although it is likely to lag behind intermodal volume in terms of percentage growth.

“As we take stock of what we achieved in 2020 while managing both the pandemic and energy market challenges, including the successful idling of four additional hump operations while driving productivity to record levels, we see much more opportunity ahead,” CEO James Squires said.

CN CEO J.J. Ruest made similar comments, noting that the economic recovery remains uneven but traffic continues to grow.

“We are increasingly optimistic about 2021 and we are reinstating our full-year financial outlook,” he said.

NS expects revenue growth this year of intermodal and merchandise volume in the high single-digit range.

But energy-related traffic is another story. NS management expects coal volume to continue to decline due to low natural gas prices, increased use of renewable energy, and unusually high utility stockpiles.

NS Chief Marketing Officer Alan Shaw said demand for intermodal traffic is expected to remain strong due to consumer spending and retailers restocking depleted inventories.

The decline in merchandise traffic was due to falloffs in crude oil, natural gas liquids, and frac sand shipments.

All of those declined due to the effects of the pandemic, lower refinery production, additional pipeline capacity, and reduced oil and gas drilling.

However, Shaw said there are signs that steel, automotive, plastics, forest products and agricultural shipments are picking up.

Further boosting carload traffic will be a rebounding manufacturing and housing market.

NS said 2020 operating income and revenue fell 13 percent as traffic skidded by 12 percent.

NS managers said 70 percent of the revenue decline came from energy-related traffic. Earnings per share fell 10 percent, to $9.25. 

The 2020 operating ratio set a record by falling 0.3 points to 64.4 percent, the fifth straight year of improvement.

“We see ample opportunity to affect more positive change and remain focused on closing the operating ratio gap with the industry,” Squires said. 

NS is aiming to shave 3 points off its operating ratio this year, hoping it will fall to 60 percent by the fourth quarter. 

The operating ratio reflects the percentage of revenues that are devoted to expenses.

At CN, management expects traffic growth of 5 percent this year.

Driving that is a record Canadian grain tonnage, demand for lumber and propane, and international and domestic intermodal gains driven by e-commerce and refrigerated grocery shipments.

CN expects earnings to rise in the high single-digit range this year, with an operating ratio below 60 percent.

The capital budget of $3 billion remains unchanged from last year.

Ruest said CN will continue to focus on managing capacity, increasing profit margins, and deploying technology that makes the railroad safer and more efficient, as well as easier for customers to do business with.

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