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Supply Chain News: US Rail Carriers See Strong Volume, Profit Growth in Q1

 

Profits Up 10.1%, as Coal Volumes Recover, Net Margins Remain Very High

 

May 17, 2017
SCDigest Editorial Staff

After several soft volume quarters in which profits nevertheless remained fairly strong, Q1 saw a rebound in volumesr rail carriers– perhaps surprisingly based in part on increases in coal shipments.

We're back as usual every quarter with our review of the results and trends across freight modes, starting last week with US truckload carriers (see Yet Another Soft Quarter for US Truckload Carriers in Q1, as Volumes, Rates Remain Weak).

Supply Chain Digest Says...

Net income as a percent of sales was 18.0%, up from 17.5%, in numbers that compared favorably with almost any industry.

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This week, we look at the rail transport sector, and then next week we'll review results and trends in the less-than-truckload group.

As part of that review 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).

Overall, carload volumes in our group were up from just 0.3% at Union Pacific to 6% at Kansas City Southern, with many of the carriers reversing many quarters of double digit declines in coal shipments  seeing a rebound in the quarter, up 21% at Norfolk Southern, for example,

According to the Association of American Railroads, total U.S. carload traffic for the first three months of 2017 was 3,324,102 carloads, up 5.7%, or 180,665 carloads, from the same period last year; and 3,387,680 intermodal units, up 1.4%, or 47,977 containers and trailers, from last year.

The big news in the quarter was Hunter Harrison taking over as CEO of CSX, after having previously turned around Canadian Pacific in a big way.

Harrison is making moves already, and CSX's stock price is soaring. For example, CSX has aready closed four so-called "hump yards," with several more potentially on the chopping block, as the former CEO of both major Canadian railroads is bringing his legendary focus on efficiency to his newest gig.

What is a hump yard? It is an approach to reshuffling inbound cars to a terminal to match them up with outbound trains scheduled to take them away. Using this process, long trains are broken down into individual cars by pushing them over a hill, then letting gravity send them down different tracks. From there, they are reassembled and connected to a train headed to their next destination.

Harrison has said such facilities are inefficient because of the time-consuming way they work and the high costs of manning and maintaining them. Instead, he favors an approach called "flat switching," in which locomotives are used to break down and assemble trains. In this approach, considered part of "precision railroading," train cars are sorted into blocks as they are picked up from shippers. The blocks are more organized than the jumble of cars that typically arrive at hump yards, which makes for faster swapping and assembly, cutting days off transit times, railroad experts say.

Some of the 9 other CSX hump yards may stay, according to reports, based on their traffic profiles.

Profits for our group in Q1 were up a strong 10.1% in the quarter. Net income as a percent of sales was 18.0%, up from 17.5%, in numbers that compared favorably with almost any industry. Kansas City Southern led the way, with net margins of a very strong 24.1%, with Union Pacific was not far behind at 20.9%.

That of course meant average operating ratios (OR), or operating expense divided by operating revenue, a key metric in the transport sector, were strong, at 68.8% (unweighted average) up fractionally from the 68.7% in Q1 2016. That level of OR is of course far superior to that seen in the truckload or LTL sectors, which generally see ORs in the high 80 percent levels and low 90 levels, respectively.

Q1 2017 US Rail Carrier Results

 

 

Source: SCDigest Analysis from Company Earnings Releases



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As usual, highlights of the comments from each carrier in their earnings releases are provided below, most of which even more brief than usual this quarer.

 

Union Pacific

 

Quarterly freight revenue improved 6% compared to the first quarter 2016, as volume growth, increased fuel surcharge revenue, core pricing gains and positive mix all contributed to the increase.

Union Pacific's 65.1% operating ratio was flat compared to the first quarter 2016. Higher fuel prices negatively impacted the operating ratio by about 1.3 points.

CSX

Union Pacific's 65.1 percent operating ratio was flat compared to the first quarter 2016. Higher fuel prices negatively impacted the operating ratio by about 1.3 points.

CSX said it "is making adjustments throughout the company to improve asset utilization, achieve greater operations efficiency and reduce its cost structure."

New CEO Harrison said that "As the business environment continues to improve and we implement Precision Scheduled Railroading, CSX will realize these objectives while driving volume growth and achieving a new level of financial performance."

Norfolk Southern

First-quarter net income was $433 million, up 12% year-over-year, a result of a 7% rise in income from railway operations.

Commented that "Our strategy provides a strong foundation for growth at low incremental costs, a powerful formula for enhanced shareholder value."

The railway operating ratio, or operating expenses as a percentage of revenues, was 70.0 percent, a first-quarter record.

Kansas City Southern


Record first quarter revenues of $610 million, an increase of 8% over first quarter 2016 on a 6% increase in carloads.

 

Operating income of $211 million, a first quarter record and 12% higher than prior year.

 

Excluding the estimated impact of Mexican peso depreciation, revenue increased by 11% compared to the first quarter of 2016.


Any reaction to the Q1 review of the rail sector? Let us know your thoughts at the Feedback section below.

 

Your Comments/Feedback

Srihari

Senior Consultant, Infosys
Posted on: May, 22 2016
Great article. I am a little suprised not to see BNSF in the mix while I understand their financial mode/operation is a little different. 

That would only give a complete perspective with all the players in the pool.

Mike O'Brien

Senior editor, Access Intelligence
Posted on: May, 26 2016
Surprised to see Home Depot fall off the list; thought they were winning with Sync?

Julie Leonard

Marketing Director, Inovity
Posted on: Jun, 27 2016
Using the right tool for the right job has always been a best practice and one of the reasons, we feel, that RFID has never taken off in the DC as exponentially as pundits have been forecasting since 2006. While these results may seem surprising to those solely focused on barcode scanning, the adoption of multi-modal technologies in the DC makes perfect sense for greater worker efficiency and productivity.

Carsten Baumann

Strategic Alliance Manager, Schneider Electric
Posted on: Aug, 19 2016

The IoT Platform in this year's (2016) Hype Cycle is on the ascending side, entering the "Peak of Inflated Expectation" area. How does this compare to the IoT positions of the previous years, which have already peaked in 2015? Isn't this contradicting in itself?

Editor's Note: 

You are right, Internet of Things (IoT) was at the top of the Garter new technology hype curve not long ago. As you noted, however, this time the placement was for “IoT Platforms,” a category of software tools from a good number of vendors to manage connectivity, data communications and more with IoT-enabled devices in the field.

So, this is different fro IoT generally, though a company deploying connected things obviously needs some kind of platform – hoe grown or acquired – to manage those functions.

Why IoT generically is not on the curve this year I wondered myself.

 

 

Jo Ann Tudtud-Navalta

Materials Management Manager, Chong Hua Hospital, Cebu City, Philippines
Posted on: Aug, 21 2016

I agree totally with Mr. Schneider.

I have always lived by "put it in writing" all my work life.  I am a firm believer of the many benefits of putting everything in writing and I try to teach it to as many people as I can.

This "putting in writing" can also be used for almost anything else.  Here are some general benefits (only some) of "putting in writing":

1. Everything is better understood between parties involved.  There are lots of people types who need something visual to improve their understanding.
2. Everyone can read to review and correct anything misunderstood.  This will ensure that all parties concerned confirm the details of the agreements as correct.  This is further enhanced by having all parties involved sign off on a hard copy or confirm via reply email.
3. Everything has a proof.  Not to belittle the element of trust among parties involved, it is always safest to have tangible proof of what was agreed on.
4. There will be a document to refer to at any time by any one who needs clarification.
5. The documentation can be useful historical data for any future endeavor.  It provides inputs for better decisions on related situations in the future.
6. This can also be compiled and used to teach future new team members.  "Learn from the past" it is said.

There are many more benefits.  Mr. Schneider is very correct about his call to "put it in writing".





Sandy Montalbano

Consultant, Reshoring Initiative
Posted on: Aug, 24 2016
U.S. companies are reshoring and foreign companies are investing in U.S. locations to be in close proximity to the U.S. market for customer responsiveness, flexibility, quality control, and for the positive branding of "Made in USA".

Reshoring including FDI balanced offshoring in 2015 as it did in 2014. In comparison, in 2000-2007 the U.S. lost net about 200,000 manufacturing jobs per year to offshoring. That is huge progress to celebrate!

The Reshoring Initiative Can Help. In order to help companies decide objectively to reshore manufacturing back to the U.S. or offshore, the nonprofit Reshoring Initiative's free Total Cost of Ownership Estimator can help corporations calculate the real P&L impact of reshoring or offshoring. http://www.reshorenow.org/TCO_Estimator.cfm

Robert

Transportation Manager, N/A
Posted on: Aug, 30 2016
 Good article!  I am sending this to my colleagues who work with me.  We have to keep this in mind.  Thanks!

Ian Jansen

Mr, NHLS
Posted on: Sep, 14 2016
SCM is all about getting the order delivered to the Customer on date/ time requested because happy Customers = Revenue. Using the right tools to do the right job is important and SCM is heavily dependent on sophisticated ERP systems to get right real data info ASP.

I've worked in a DC with more than 400,000 line items and measured the Productivity of Pickers by how many "picks" per day.

I've learned that one doesn't have to remind Germany about your EDI orders.

Don Benson

Partner, Warehouse Coach
Posted on: Sep, 15 2016
Challenge - to build and sustain effective relationships at the level of the organizations that are responsible for effectively coordinating and colaborating in an otherwise highly competitive environment 

Jade

Admin, Fulfillment Logistics UK Ltd
Posted on: Oct, 02 2016
Of course we all need to up our game. We need to move with the times, and always be one step ahead of what the future will bring.

Mike Dargis

President of asset-based carrier based in the Midwest, Zip Xpress Inc. (at ZipXpress.net)
Posted on: Oct, 03 2016
Thanks for the article, but I know there's a lot more to this issue than just the pay rates. Please check out my blogs on the subject at www.zipxpress.net.

Blaine

Inventory Specialist, Syncron
Posted on: Nov, 16 2016
Lora, great article! I agree that companies choose the 'safe' solution more often than not. My solution is a bolt-on for legacy ERP's and we even face challeneges of customer adoption. Most like to play it safe and choose an ERP upgrade, which is more costly, time consuming, and has lower ROI across the board. Would love to learn more about your company, we are always looking for partnerships.

Blaine
blaine.schultz@syncron.com

Bob McIntyre

National Account Executive, DBK Concepts LLC
Posted on: Nov, 21 2016
This is a game changer in GE's production and prototyping.  It also has huge implications across the GE global supply chain with regard to the management of their support and spare parts network. 
 
 

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