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Focus: Transportation Management

Feature Article from Our Transportation Management Subject Area - See All
 

From SCDigest's On-Target E-Magazine

- Nov. 11, 2014 -

 

Logistics News: Rail Carriers Enjoy Mostly Blow Out Q3 on Strong Volume Growth

 

Record Low Operating Rations being Set Left and Right, On Strong Volumes Even in Face of Continuing Service Issues


SCDigest Editorial Staff

 

US rail carriers enjoyed something of a blow out quarter in Q3 for the second quarter in a row, with largely double digit profit growth based on strong carload volumes, even as rail pricing power continues to wane.

SCDigest Says:

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Union Pacific's operating ratio of 62.3% was an all-time quarterly record, 2.5 points better than the third quarter 2013 and 1.2 points better than the previous all-time quarterly record.
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We're back as usual every quarter with our review of the results and comments from leading public rail carriers, as the last of them finished up their Q2 2014 earnings reports in the last few weeks.

Last week, we covered the US truckload sector (see Q3 2014 Truckload Carrier Review and Comment).

Here we look at the four major Class I public carriers that make up the US rail sector (Burlington Northern is of course part of public company Berkshire Hathaway, but its results are not broken out in any detail and thus are not included)

 

Next week, we will wrap up our Q3 coverage with similar analysis for the less-than-truckload (LTL) sector.

 

Overall, carload volumes in the US rose about 4% in Q3, according to the Association of American Railroads, though Union Pacific and CSX both reported carload gains of 7% in the quarter. Overall, the US rail carriers seem to have stopped the bleeding on coal volumes, now seemingly up or down a little each quarter, versus the double digit declines seen in the past couple of years prior to 2014.

 

Profits were again strong as they were in Q2, up 16.7% versus Q3 in 2013, and net income as a percent of revenue rose to a very strong 19.7% across all the carrier combined, versus 18.4% in 2013. It wasn't that long time ago that railroads were a very challenged industry in terms of profits. 

 

Union Pacific was able to achieve operating income as a percent of revenue of 22.2%, a number that would stand up very well in almost every sector. Procter & Gamble's net income as a percent of revenue in Q3 was 9.5%, for example. Net income as a percent of revenue in Q3 in the truckload sector was only about 6.3, and that will be better than the LTL numbers when we calculate them next week.

 

There was general improvement in the carriers' operating ratios, or operating expense divided by operating revenue, a key metric in the transport sector. Here again Union Pacific led the way, driving its OR down to a record 62.3%. But all four carriers sported operating ratios of under 70%, with an unweighted average of just 66.3%, down from 68.6% in 2013.

 

All that even as pricing power by the rail carriers seems to have waned a bit in recent quarters. A few years ago, pricing gains in the 5% range were commonly cited. In 2013, that dropped to more like 4%. In Q3, while Union Pacific said it was able to achieve core pricing gains of 2.5%, the other carriers implied rates were even flatter than that - but that didn't stop the rail profit machine in Q3.

 

Q3 2014 US Rail Carrier Results

 

For Quarter Ending Oct. 31, 2014
Data in $1000s
  Union Pacific CSX Norfolk Southern Kansas City Southern Total Carriers
Total Operating Rev Including Fuel $6,182,000 $3,221,000 $3,023,000 $677,500 $13,103,500
Change 2013 to 2014 10.9% 7.9% 7.7% 9.0% 9.2%
Total Volume Growth (Revenue Carloads) 7.0% 7.0% -1.1% 4.0%  
Volume Growth General Merchandise, Auto, Ag, etc. 8.1% 9.0% 9.8% 6.0%  
Volume Growth Coal 0.0% 7.0% -2.3% -5.0%  
Volume Growth Intermodal 10.0% 5.0% 10.0% 5.0%  
Net Income $1,370,000 $509,000 $559,000 $138,400 $2,576,400
Change 2013 to 2014 19.0% 11.9% 16.0% 16.3% 16.7%
Net Income as % of Revenue  22.2% 15.8% 18.5% 20.4% 19.7%
Net Income as % of Revenue 2013 20.7% 15.2% 17.1% 19.1% 18.4%
Operating Ratio 62.3% 69.7% 67.0% 66.1% 66.3%
Operating Ratio 2013 64.8% 71.9% 69.9% 67.8% 68.6%

 

Service issues continued to be a problem, as they have been all year, with train speeds slowing again and train dwells times increasing for most of the carriers. At Norfolk Southern, for example, composite service performance fell to 68.6% in Q3 and is at 72.% year to date, down from 83.3% for all of 2013.

 


(Transportation Management Article Continued Below)

 
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Below we post similar results for the first nine months of 2014. As can be seen, those numbers are solid but not quite as strong as those for just Q3, meaning Q3 results were stronger than those in the first quarter, though again showing solid profitability.

 

YTD 2014 US Rail Carrier Results

 

For 9 Months Ending Oct. 31, 2014
Data in $1000s
Carrier Union Pacific CSX Norfolk Southern Kansas City Southern Total Carriers
Total Operating Rev Including Fuel $17,835,000 $9,477,000 $8,754,000 $1,934,600 $38,000,600
Change 2013 to 2014 9.2% 5.4% 4.7% 10.3% 7.2%
Total Volume Growth (Revenue Carloads) 7.0% 6.0% 4.8% 5.0%  
Volume Growth General Merchandise, Auto, Ag, etc. 7.2% 6.0% 5.2% 7.3%  
Volume Growth Coal 2.0% 4.0% -4.2% -2.0%  
Volume Growth Intermodal 9.0% 6.0% 8.1% 5.0%  
Net Income $3,749,000 $1,436,000 $1,489,000 $362,600 $7,036,600
Change 2013 to 2014 16.6% -0.1% 6.6% 51.8% 11.9%
Net Income as % of Revenue 21.0% 15.2% 17.0% 18.7% 18.5%
Net Income as % of Revenue 2013 19.7% 16.0% 16.7% 13.6% 17.7%
Operating Ratio  64.2% 71.4% 69.3% 69.2% 68.5%
Operating Ratio 2013 66.5% 70.4% 71.5% 69.0% 69.4%

 

 

In this section, we usually post comments from each carrier's earnings call that shed some insight on a carrier's strategy or market trends, but the carriers were unusually terse in Q2, so we will mostly let some charts do the talking.

 

Union Pacific

Quarterly freight revenue increased 11% compared to the third quarter 2013, driven by volume growth and core pricing gains. Core price up about 2.5%.

Union Pacific's operating ratio of 62.3% was an all-time quarterly record, 2.5 points better than the third quarter 2013 and 1.2 points better than the previous all-time quarterly record set in the second quarter 2014.

However, there were 84 network interruptions, up from 70 in Q2 and 39 in Q3 2013. Train speeds fell and dwell times rose.

Capital investments will rise in 2014 to $4.1 billion from $3.6 billion in 2013, or about 17% of revenues.

CSX

Revenue of $3.2 billion, an 8% increase over the same period last year, "is evidence of CSX's ability to leverage the continued economic momentum that is driving strength across nearly all markets CSX serves, coupled with secular growth trends in the intermodal and energy markets," the company said. With the high level of demand and operations that remained stable, the company produced operating income of $976 million and an operating ratio of 69.7%.

On the strength of this performance, CSX expects to sustain double-digit earnings growth and margin expansion in 2015, and continues to target a mid-60s operating ratio longer term.

CSX said it saw Just .2% core pricing gains, but a 2.5% pricing gain in consumer goods intermodal.

Norfolk Southern

Norfolk Southern reported third-quarter net income of $559 million, 16% higher than $482 million for the same period of 2013. Diluted earnings per share were $1.79, up 17% compared with $1.53 per diluted share in the same period last year.

Pricing was flat.

Cited "continued highway conversions" as driing revenue growth.

Composite service performance fell to 68.6% in Q3 and 72.% year to date, down from 83.3% in all of 2013.

Carrier said it is responding to service issue by adding more staff, improving various network infrastructure, and adding 150 locomotives in Q4.

Kansas City Southern

KCS achieved a third quarter 2014 operating ratio of 66.1%, a 1.7 point improvement from third quarter 2013.

Company said it is investing to stay "a step ahead" of growth. KSC Will spend 28% of 2014 revenues in capital expenditures, a very high ratio.

Cross-border revenue into and out of Mexico rose a strong 14% in Q3.


We will be Back with Q3 LTL results next week.

 

Any reaction to our Q3 2014 rail segment review? Let us know your thoughts at the Feedback button (for email) or section (for web form) below.

 


   
 

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