As with our analysis last week of Q4 2017 results and trends at US truckload carriers, it was hard to sort through what really happened with rail carriers in the quarter due to the huge impact of the new tax cuts signed into law in December.
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 Q4 Profits Up Big for Truckload Carriers Due to Tax Law Changes).
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| "CSX's performance continued to strengthen in the fourth quarter, building upon the scheduled railroading model that was instituted by Hunter Harrison," said CSX CEO James Foote. |
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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).
Carload volumes in our group were mixed, up 10% at Kansas City Southern and 7% at Norfolk Southern, but up just 1% at Union Pacific and down 8% at CSX.
According to the Association of American Railroads, total US regular carload traffic for all of 2017 was up 2.9%, with intermodal units up 3.9%. Combined, total carloads were up 3.4% versus 2016.
The big news in the quarter death of new CSX CEO Hunter Harrison in December. The controversial Harrison was implementing his vision for "Precision Scheduled Railroading" at the company, which caused major service issues at the carrier for much of 2017. CSX said the program will continue under new CEO James Foote.
In fact, last week Foote said at an industry conference that CSX plans to slash annual capital expenditures by about 20%, to $1.6 billion, over the next few years and streamline operations by eliminating "tens of thousands of touches" the railroad has had along its network.
“We’re freeing up hump yards, surplus real estate everywhere,” Foote added. "If we don’t need it, we’re going to get rid of it."
The Wall Street Journal notes that the moves "would keep the network flowing more smoothly, but the smaller footprint also could mean relying more on regional railroads and third-party providers to get loads in place to connect with CSX’s main routes."
As with the truckload carriers and many other companies, profits for Q4 at the rail carriers were all thrown out of whack as a result of the aforementioned tax cuts, which literally added in some cases billions of dollars in profits for some in Q4.
Operating ratios (OR), or operating expense divided by operating revenue, a key metric in the transport sector, were not much affected by the tax change, however. In an unweighted average across the four rail carriers, ORs impressively fell to just 62.4%, from 65.8% in Q4 2016.CSX led the way with an OR of just 60.9%, with all the carriers at 64.0% or under, we believe for the first time.
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.
Q4 2017 US Rail Carrier Results
Source: SCDigest Analysis from Company Earnings Releases
(See More Below)
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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
Fourth quarter 2017 results include previously-disclosed adjustments reflecting the impact of corporate tax reform. Excluding those items, 2017 fourth quarter adjusted net income was $1.2 billion, up 5% compared to Q4 2016.
For the full year, profits were up 10% over 2016.
Car load volumes of "industrial products," which includes consumer goods, were up 17% in the quarter, with revenue up 28%. Meanwhile, intermodal volumes were flat.
Core pricing was up just 1.75% in the quarter, down again substantially from a few years ago in a continuing trend.
CSX
"CSX's performance continued to strengthen in the fourth quarter, building upon the scheduled railroading model that was instituted by Hunter Harrison," said CEO James Foote.
New tax benefit in the quarter was $3.1 billion.
Operating income was up about 12%.
Norfolk Southern
Absent the effects of tax reform, net income was up 16.8%.
Company noted the recently completed Portageville Bridge in New York, funded from a public-private partnership.
Kansas City Southern
Company saw record fourth quarter operating income of $238 million, 13% higher than a year ago.
Overall, carload volumes increased 5% compared to the prior year, serving as a fourth quarter record.
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