CSX this week posted some glittering first quarter financial numbers and service metrics, but were they based on fool’s gold?
An analysis by Railway Age noted that the record earnings and operating ratio was based almost entirely on cost-cutting measures, rate increases and stock buybacks rather than on traffic volume growth.
In short, CSX is trying to live up to the adage that less is more. In this case, that means operating fewer and longer trains with fewer employees.
In looking at CSX freight traffic numbers, the trade publication found that traffic volume was flat or declined in every category except export coal and international intermodal.
Railway Age quoted its Wall Street Contributing Editor Jason Seidl as saying that from a financial standpoint CSX exceeded expectations among financial analysts in terms of revenue and profits.
The managing director of financial firm Cowen and Company sees that as a positive.
“Early on in [CEO Jim Foote’s] tenure, the company is showing the ability to operate efficiently as a smaller railroad with fewer employees and assets.”
Seidl said investors are likely to have increased confidence in CSX’s goal of achieving a 60 percent operating ratio by 2020.
“We continue to expect that CSX will become a more nimble, dynamic railroad in the coming years, as many layers of management have been reduced,” he said. “The company has consolidated its structure into four operating regions from nine. The number of hump yards where railcars go to die has been cut by two-thirds to four, from 12. There could be more to go on that front. Decentralization of operational decision-making will likely prove to be a key component to customer service improvement and employee retention over time.”
CSX is expected to continue reducing its employment rolls, sell $300 million in real estate through 2020 and reduce the total mileage of track that it operates.
Seidl noted that in the first quarter of this year CSX reaped $32 million from real estate sales.
“We think CSX’s strategy could provide an opportunity for Genesee & Wyoming . . . to acquire complementary infrastructure,” Seidl said, adding that G&W is already a major interchange partner with CSX and has a history of looking for asset sales from Class 1 railroads.
Railroad economist Jim Blaze told Railway Age that most of the net earnings that CSX posted in the first quarter of $695 million was based buying back shares of its stock.
He attributed the 19.8 percent improvement in the operating ratio largely to cost cutting.
“Revenue was relatively flat, year over year. The biggest revenue growth appeared to be from price leveraging and fuel surcharge increases,” Blaze said.
“On the traffic side, my analysis is a bit more negative for those expecting a shift toward a larger rail vs. truck mode change. That’s not occurring for CSX.”
Blaze said CSX traffic unit growth has stalled despite traffic growth opportunities provided by truck driver shortages and electronic logging.
“Intermodal volume remained unchanged percentage-wise at just 1,000 intermodal units over the 90 days. That’s about 11 system-wide units per day as truckers struggle,” he said. “Who saw that competitive outcome? Domestic intermodal growth was negative. That outcome isn’t in any stated railroad plans, is it?”