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From SCDigest's On-Target E-Magazine

March 7 , 2012

Logistics News: Rail Carriers Enjoy Another Strong Quarter and Year, as LTLs Make Progress

Rail Carriers Once Again Show Strong Profit Growth with Modest Volume Gains; a Little More Black Showing Up in LTL Segment, Our Exclusive Analysis Shows

SCDigest Editorial Staff

We continue to say Warren Buffet made a very smart move when his Berkshire Hathaway aquired Burlington Northern Santa Fe a couple of years ago, as rail carrier profits and pricing power continue to be strong even amidst tepid volume growth.

SCDigest Says:

Norfolk Southern said that it will continue to make "substantial investments along our Crescent Corridor, a public-private partnership to create a high-capacity, truck-competitive intermodal freight rail route between the Gulf Coast and Northeast."

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Once again, SCDigest has analyzed the financial results and market comments released near the end of January into early February from a number of leading publicly traded rail and LTL carriers announcing results for Q4 2011 and the full year.

Last week, we looked at the results from eight leading truckload carriers, which can be found here: Truckload Carriers Again Enjoy a Solid Q4 and Full 2011, Our Exclusive Analysis Shows.

As shown in the charts below, the four major public US rail carriers kept their profit engines running again in Q4 and for the full year of 2011, with revenue among the group up 14.5% on average, even though car load volumes were up only in the low to mid-single digit percentages for each of them.

Some of this can certainly be attributable to fuel surchage increases, but clearly pricing power and rates also played a key role.

For example, CSX noted in its earnings call that of the $306 million increase it had in fourth quarter revenue, just $51 million was attributable to higher volumes. while $117 million came from higher fuel surcharge revenue, as diesel prices soared. But about 45% of the reveenue increase, or $138 million, came from higher rates and improved "mix," a euphanism of sorts being able to select more profitable freight to haul.

The result was strong profit growth for most in the quarter as well, though CSX and Norfolk Southern saw some deceleraion in profitability versus recent quarters. Union Pacific profits were up 23.9% in the quarter, and Kansas City Southern's rose 72.7% over a poor Q4 in 2010.

Rail Carriers Q4 1011

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The story was much the same for the full year, with the carriers showing a 13.6% average gain in revenue on volume growth that averaged about 5%. The lowest growth in net income for the year was from CSX, which still managed to grow the bottom line more than 16%.

Operating ratios, or the percent of operating expense versus operating revenue, continue to fall for the carriers, which of course has a direct link to overall profitability. All four of carriers have OR down to near 70%, with Union Pacific noting that its "operating ratio of 68.3% was a fourth quarter best, 1.9 points better than the previous fourth quarter record set in 2010. Pricing gains, volume growth and improved operating efficiency contributed to this record performance, more than offsetting the negative impact of higher diesel fuel prices compared to 2010."

CSX said that it "remains committed to achieving a 65 percent operating ratio by no later than 2015."

Meanwhile Norfolk Southern said that it will continue to make "substantial investments along our Crescent Corridor, a public-private partnership to create a high-capacity, truck-competitive intermodal freight rail route between the Gulf Coast and Northeast,” saying that it will open intermodal terminals in Alabama, Pennsylvania, and Tennessee later in the year.

Rail Carriers Full 1011

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(Transportation Management Article Continued Below)

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On the LTL side, the carriers in general continue to slowly dig their way out of the deep financial holes most of them were in, including the near death experience of YRC Worldwide on several occasions. But as usual, Old Dominion continues to defy the industry gloom and post outstanding results.

In Q4, Arkansas Best/ABF pulled itself back into profitability, though just barely, after a small loss in Q4 2010.

Conway Freight saw operating income rise dramatically to $19.6 million in the quarter, versus just under $2 million a year ago, even though tonnage for the quarter was barely up. (Note Conways profits are operating profits only, not full net income as with the others, as we only looked at the LTL segment revenue for parent company Conway.)

YRC Worldwide had another tough quarter, with an $84 million loss, but said it nevertheles had positive operating cash flow for the quarter of $27 million.

YRC's financial performance continues to be mired in a variety of legal and other restructuring costs, as it noted, for example, that results included "included a $13 million loss on asset disposals, $4 million of restructuring professional fees and $9 million of letter of credit fees."

Then there is Old Dominion, which saw tonnage growth of a strong 9.7% in the quarter, $39.8 million in net income, and an operating ratio of 86.9% in Q4, while its rivals struggle to get much below 100%.

LTL Carriers Q4 2011

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For the full year, total revenue for the group was up some 12.9%, which included a strong fuel surcharge component but also - for the first time in a long while - some modest pricing power, with rates generally thought to be up 4-5% for the year. Most of the same patterns seen in Q4 were also on display for the full year.

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What makes Old Domininion, which saw a profit of $139.4 million for the full year, operate so much more profitably than most of the rest of its competitors?

David Ross, a LTL industry analyst at investment company Stifel Nicolaus, noted a few months ago, "As the rest of the LTL industry is trying to heal from the 2009-2010 price war and great freight recession, Old Dominion is taking market share, raising employee pay, providing record levels of service to its customers, refreshing its fleet, and also benefiting from the industry pricing momentum."

How and why? Ross cited the following factors:

• Density is the key. It is pretty simple. If one hauls more freight with the same network (in 3Q11, Old Dominion hauled 3,000 more shipments per day than 3Q11 through the same basic fixed cost network), there is positive operating leverage.

• With greater density and better systems comes improved service, which translates into a virtuous cycle that benefits the company and shareholders.

• Price discipline is important. Management's reluctance to drastically cut price in a broad manner in 2009 and 2010 like much of its competition allowed the company to be the only asset-based public LTL carrier to post an operating profit in every quarter through the recent great freight recession.

• Cost control is also important. The company's significant and steady investment in technology and intelligent applications of technology to better understand its network costs have allowed for Old Dominion to operate more efficiently.”

The rest of the industry looks on jealously.

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