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Supply Chain News: As Volumes Continue to Decline, Rail Carriers See Solid Profits in Q3


Profits Dip 9.4 Percent, but Operating Ratios, Margins Remain Strong

Nov. 8, 2016
SCDigest Editorial Staff

Rail carriers saw volumes sag sharply almost across the board in Q3, but most managed modest rate hikes in the quarter and overall profitability, while down on a year-over-year basis, remained strong.

Supply Chain Digest Says...

Overall a strong performance in a weak quarter, as the rail carriers managed the cost side of the income statement by furloughing emloyees and parking locomotives.

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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 Q3 Truckload Profits Down, but Carriers Generally Hang Tough.)

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).

In the limited data from Berkshire that was released, Burlington Northern saw operating income fall 12% year-over-year, very similar to results at other rail carriers.


Again in Q3, rail carriers were battling several negative trends when it comes to volumes. Those include: overall softening freight volumes in the US, perhaps a sign of a weakening economy; continued major declines in freight cars carrying coal; and falling diesel prices, which make truckload carriage increasingly attractive in many lanes, as fuel surcharge costs have plummeted.


According to the Association of American Railroads, total US regular carload traffic in Q3 was down 7.0% year over year, while volumes in the once high flying intermodal sector were down again, 5.3% in the quarter.

Total carloads in the quarter were weak for all four carriers, down 4-8% for all four that we track. Coal volumes were ugly, down 14-21% for all but Kansas Cuty Southern, where they fell just 1%.


But "general merchandise" volumes - which includes everything from autos to consumer products and chemicals - were weak as well, down1-4% across our carrier group.


CSX in fact said it was seeing a "recession-like'' period in terms of rail freight volumes.

Naturally enough, those lower volumes led to declining revenues, down 7.2% across the four carriers, though part of that decline was also caused by lower diesel prices one again year-over-year. It is also a slight improvement from the 11% drop in revenue seen in Q2.


But despite those sluggish volumes, several of the rail carriers indicated they were able to increase rates modestly in Q3. Despite the weak freight environment, Union Pacific, for example, said rates were up 1.5% in Q3, though that is the weakest quarterly rise in some time, as shown in the chart below.


Core Pricing Gains were Down at Union

Pacific in Q3, but Still Positive in Weak Market



Source: Union Pacific



CSX said it saw "strong pricing" in the quarter, but did not provide details.


Net income was down 9.4% for the group, led by Union Pacific, where profits fell 3.0%, but Norfolk Southern actually saw profit rise 1.8% in a tough qurter.


Net income as a percent of revenue for the group fell a bit, to 19.7% from 20.1% in Q3 2015. That metric was an impressive 21.1% at Union Pacific, which led the way as usual. Compare those numbers to an average of just 5.9% net profits for our truckload carrier group, and 8.0% at GM and 5.0% at consumer products giant Kimberly-Clark in Q3.


Railroads are now where the money is.


Relatedly, average operating ratios (OR), or operating expense divided by operating revenue, a key metric in the transport sector, were up slightly in Q3 to 66.4% (unweighted average) from 65.9% in 2015 - overall a strong performance in a weak quarter, as the rail carriers managed the cost side of the income statement by furloughing emloyees and parking locomotives.


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. For example, in Q3, our group of publicly traded truckload carriers saw average operating ratios of 90.1% - some 24 percentage points higher than what the rail carriers achieve.

Full Q3 financial results for our group of rail carriers is shown below:


Q3 2016 US Rail Carrier Operating Results




(See More Below)


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As usual, we provide a few highlights from the earnings releases of each carrier, though they were even more terse in Q3 than usual. SCDigest is starting to wonder if that is not the result of the carriers just trying to keep their heads down while achieving strong profitability even in tough times to avoid more regulatory scrutiny.


Union Pacific

Company said it saw "positive core pricing," though in its presentation materials for analysts it was noted that pricing was up just 1.5%.

UP noted that "The macroeconomic environment still has its challenges - an unstable global economy, the relatively strong U.S. dollar, and continued soft demand for consumer goods."

For what it's worth, company said it saw strength in import beer volumes - we didn't know those travelled by rail.


Company stated that "With macroeconomic and energy headwinds impacting most markets, CSX once again delivered solid financial results in the third quarter."

Said it saw "strong pricing" in the quarter, but did not provide details.

It added that CSX is positioning itself to maximize shareholder value by leveraging network improvements, technology enhancements and superior service to capture growth opportunities and achieve a mid-60s operating ratio longer term."

Norfolk Southern

Norfolk Southern's Q3 operating ratio of 67.5% was its best in any quarter since Q3 of 2014, and a drop from 69.7% in Q3 2105.

The company has a goal of achieving an operating ratio below 65% by 2020.

Characterized pricing in the quarter as "strong."

Company noted that "The composite service metric, which measures train performance, terminal operations, and operating plan adherence, improved 8 percent in the quarter, and 14 percent for the first nine months, compared with the same periods last year."

Kansas City Southern

Company said its ntermodal revenue declined 7%, but that was "largely attributable to service disruptions on our Mexican network."

Any reaction to the Q3 results and trends from the rail carriers? Let us know your thoughts at the Feedback section below.


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