Posts Tagged ‘railroad financial condition’

Class 1 CEOs Optimistic About Traffic Growth

January 28, 2021

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.

Reports Show Challenges Facing Railroads

January 14, 2020

Investment banking firm Cowen and Company recently released three reports that reflect tough times for railroads yet contend that things are not catastrophic either.

The New York-based firm noted that in the fourth quarter of 2019 freight volumes fell by 7.5 percent when compared to the same period of 2018.

In comparing the last quarter of 2019 to the earlier quarters of the year, carloads fell by 1.4 percent, 4.8 percent and 4.4 percent by respective quarter for a full-year decline of 4.0 percent compared with 2018.

Cowen said railroads last year handled volumes that were similar to those expected during an economic recession.

It said, though, that the advent of precision scheduled railroading has enabled Class 1 railroads to reduce their expenses, which helped to stimulate earnings growth despite volume declines.

Among the long-term forces affecting railroads are intermodal growth, decline in export coal, and the state of the overall economy.

Cowen said these resulted in Class I railroads falling short of expectations.

It likewise has lowered its expectations for 2020 on earnings per share forecasts for most Class 1 railroads.

The exception is Kansas City Southern because Cowen analysts believe that carrier will benefit from the shifting of supply chains to South and Central Mexico.

In another study released by Cowen, a survey of rail shippers found they are expecting price increases of 3.0 percent below the survey’s long-term average.

Cowen described this as a positive for railroads but noted carriers continue to confront a challenging near-term demand environment and the worst volume declines since 2009.

The report said data show that railroads haven’t sought to increase their volume by lowering their freight rates.

The average positive rating given by shippers to rail service rose to 60 percent from 53 percent the third quarter of 2019 with satisfaction rising with all railroads other than Norfolk Southern.

In a third report, Cowen said railcar demand appears to be holding at or just below the levels of the past quarter despite rail traffic declines and the continued implementation of PSR.

Cowen said about 51 percent of all shippers surveyed said they will or may order railcars in the next 12 months.

That compares with 53 percent who said that during the third quarter survey.

About 49 percent of shippers said they do not plan to order railcars compared to 48 percent in the previous quarter survey.

Moody’s Downgrades Outlook for Railroads to Negative

November 7, 2019

The railroad industry has taken another blow, this time from Moody’s Investors Service which has changed its outlook for North American railroads as “negative.”

Moody’s had last April described the industry as “stable” but even that had been a downgrade from an outlook of “positive” rendered earlier.

In its latest report on railroads, Moody’s said the industry is being hindered by lower freight volume, weaker pricing gains causing revenue drops, and declining coal traffic.

Moody’s expects intermodal traffic to drop along with overall rail freight volume declining by 1.75 percent to 3 percent over the next year to 18 months. Overall railroad revenue is expected to remain flat.

The decline in railroad coal traffic is projected to accelerate unless there are changes in federal policy, technological innovations, or increased natural gas prices.

The demand for coal is seen as falling by 7 percent per year over the next decade.

But there is more than declining coal traffic that is hurting railroads.

The trucking industry has expanded capacity and that is putting pressure on the ability of railroads to price their product to lure or keep freight, particularly intermodal shipments, on the rails.

“Heightened competition from truck carriers for intermodal and certain other freight continues to weigh on the North American railroad sector,“ said Moody’s Rene Lipsch, a vice president and senior credit officer. “The excess of trucking capacity has been a primary driver of softening pricing gains in the industry.”

CSX Sets Operating Ratio Record in 2nd Quarter

July 19, 2018

CSX announced on Wednesday that during the second quarter of 2018 it set a record for its lowest quarterly operating ratio and said that along with gains in profits and revenues are evidence that its scheduled railroading operations model has begun to pay off.

Net earnings were $877 million, or $1.01 per share, compared with $510 million, or 55 cents per share for the second quarter of 2017.

The operating ratio fell to 58.6 percent, which was a drop of 4.9 points compared to the operating ratio of the same quarter of 2018.

In a news release, CSX said the operating ratio announced this week is adjusted for the impact of one-time restructuring costs.

In a statement, CSX CEO Jim Foote called the operating ratio “clearly the lowest ever for CSX and, I believe, the lowest ever by a U.S. railroad.”

Revenue increased 6 percent, to $3.1 billion for the quarter.

Earnings per share rose 84 percent, to $1.01, topping Wall Street estimates of 87 cents per share.

Analysts credited the improved showing to the effects of tax reform and share buybacks.

“Two words sum up everything: Great performance,” Foote said during an earnings call with investors and Wall Street analysts.

Freight traffic on CSX rose 2 percent for the quarter, led by a 7 percent rise in coal shipments. However, CSX said utility coal was down due to competition from natural gas.

CSX officials expect a strong export coal market to continue for metallurgical and thermal coal.

A boost in international intermodal traffic enabled CSX to post a 2 percent in total intermodal traffic which came despite losses in domestic intermodal volume.

CSX executives project that revenue will increase by mid single-digits compared with their previous forecast of being up slightly.

Foote said the change in outlook came because of expectations for continued strong export coal shipments, higher fuel prices, and a healthy U.S. economy.

Chief Financial Officer Frank Lonegro said that CSX handled more freight with 9 percent fewer crew starts and 13 percent fewer locomotives.

The smaller locomotive and car fleet size meant that the railroad was able to cut its shop craft workforce by 18 percent compared with a year ago.

Overall, CSX’s costs fell during the second quarter by 8 percent with labor expenses dropping by 10 percent.

The improved operating ratio was helped by service improvements that saw train velocity up 7 percent, dwell time down 11 percent and train length up 13 percent on a year over year basis.

By commodity, CSX logged year-over-year second-quarter revenue increases in chemicals (up 7 percent), automotive (7 percent), agriculture and food products (up 2 percent), minerals (up 7 percent), forest products (up 11 percent), and metals and equipment (up 11 percent).

Fertilizer revenue declined 5 percent on an 18 percent drop in volume compared with the same quarter in 2017.

Year over year, coal revenue and volume each rose 7 percent, while intermodal revenue rose 9 percent on a 2 percent increase in volume.

STB Says CSX, NS Not Revenue Adquate

September 10, 2016

Neither CSX nor Norfolk Southern made the list of revenue adequate railroads for 2015.

STBThe U.S. Surface Transportation Board said this week that four of the seven Class I railroads in the United States had adequate revenue last year.

The STB said that based on its determination of a 9.61 percent cost of capital, it found that BNSF, Grand Trunk Corporation. (Canadian Nation), Soo Line Corp. (Canadian Pacific), and Union Pacific were revenue-adequate for 2015.

A railroad is considered to be revenue-adequate if it achieves a rate of return on net investment equal to at least the current cost of capital for the railroad industry, which for 2015 the Board said was 9.61 percent.

In an unrelated announcement, the STB also said that it now has a new website address.

The agency’s website address is now rather than

The STB said the change reflects its status as a wholly independent federal agency, as a result of the STB Reauthorization Act of 2015.

Previously, the STB had been administratively affiliated with the U.S. Department of Transportation.

Class 1 Railroads Facing a Challenging 2016

January 23, 2016

North American railroads had a tough 2015 with such adverse conditions as falling coal traffic and increased competition from trucks due to lower diesel fuel prices.

A strong U.S. dollar hurt the export market and other headwinds buffeting railroad traffic included low commodity prices and a slumping industrial sector.

Things don’t look to get much better in 2016 and some have suggested that the railroad industry is going into a recession.

An analysis written for Trains magazine identified several challenges for railroads including threats to the  market for intermodal shipments by rail.

Lower diesel fuel prices have resulted in lower freight rates from trucking companies which in turn have prompted shippers to re-think their intermodal shipping practices.

In recent years, higher diesel fuel prices had led some shippers to turn to rail for hauls in the 500-mile range.

Movement by rail has traditionally become competitive with trucks at distances greater than 700 miles.

That number fell to about 550 miles as the price of diesel fuel rose. But with diesel fuel prices declining, the railroads have seen their intermodal volumes fall with it.

In the fourth quarter of 2015, Union Pacific’s trailer intermodal volumes fall 19 percent while BNSF recorded a 6.77 percent decline.

Total intermodal volume — trailers and containers combined — showed a 5 percent drop at UP and a 0.81 percent decline at BNSF in the fourth quarter of 2015.

Midwest diesel fuel prices were $2.13 per gallon on Jan. 4, which was a 31-percent savings from $3.10 per gallon a year ago, according to the U.S Energy Information Agency.

CSX trailer intermodal volumes fell 11.3 percent in the fourth quarter while NS saw a decline of 24 percent

However, total intermodal volumes were up 4 percent at CSX at the end of the year on the strength of growing container traffic. At the same time, total intermodal volumes at Norfolk Southern fell 4.6 percent in the fourth quarter, driven by losses in container and trailer traffic.

So long as diesel fuel prices remain lower, railroads can expect to face increasing competition for business in such under 700-mile markets as Chicago-St. Louis, Chicago-Kansas City, Dallas-Kansas City and San Francisco-Los Angeles.

CSX and NS alike have benefited from modest growth in container traffic through Florida that stemmed from the widening of the Panama Canal.

At present, East Coast ports are not deep enough to handle the larger container ships that traverse the canal.
A slumping coal market has been widely discussed as power plants have begun switching from coal to natural gas.

Cheaper natural gas prices have played a role in that but so have federal regulations that make it expensive to upgrade coal-fired power plants to meet environmental standards.

U.S. rail traffic began falling last spring and has yet to recover.

In total rail volumes, BNSF’s traffic fell 0.13 percent in 2015 while UP posted a 6 percent decline, CSX had a 2.4  percent falloff and NS volume was down 2.79 percent.

It is possible that a recession in the U.S. industrial sector could drag the rest of the economy into a recession as well.

Analysts say that will depend on the behavior of U.S. consumers, who fuel two-thirds of the economy. If consumer spending falls, then the economy could fall with it.

As railroads look ahead, they also will be challenged to implement capital projects because the recent increase in interest rates by the Federal Reserve Bank will make capital spending more expensive. The Fed increased interest rates for overnight bank loans by 25 basis points.

The Trains analysis did see one bright spots for railroads in the form of faster speeds.

Union Pacific, for example, increased its average train velocity to 28.4 mph compared with 25 mph in 2014. At BNSF the average train velocity rose to 28.7 mph compared with 23.4 mph in 2014.