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Focus: Transportation Management

Feature Article from Our Transportation Management Subject Area - See All

From SCDigest's On-Target E-Magazine

Dec. 7 , 2011


Logistics News: Rail Carrier Profit Engines Roll On, While LTL Sector Slowly Crawling Out of Its Hole


Public Rail Carriers Show Profit Growth Well Above Changes in Volumes; LTL Carriers are Slowly Turning the Financial Ship Around On Rate Increases, Business Discipline

SCDigest Editorial Staff


Warren Buffet certainly seemed to know what he was doing when he took rail carrier Burlington Northern private two years ago, as our analysis of Q3 financial performance for the sector shows the remaining four public rail carriers continuing to enjoying robust levels of profits.

SCDigest Says:

The once not very profitable rail sector now finds itself with operating ratios (operating costs as a percent of operating revenues) of 70% or lower - meaning margins are fat
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Meanwhile, the beleagured less-than-truckload (LTL) sector showed real financial improvement in the third quarter, with some of them actually showing a profit for a change - including Old Dominion, of course, which continues to show dramatically better financial performance than its competitors.

As shown in the graphic below, the four large US public rail carriers (Union Pacific, CSX, Norfolk Southern, and Kansas City Southern) saw revenues in Q3 rise in aggregate more than 15% - while volume growth was mostly low.

Union Pacific and CSX saw basically flat rail car loadings in the quarter, and Norfolk Southern saw loadings up a modest 3.2%. Only Kansas City Southern saw a real spike, with loadings up 13% in Q3, driven by a big 22% spike in its intermodal business.

These revenue gains were driven in part by increases in rail surcharge revenues, which were up about 5% for most of the carriers, with a couple of them saying they were able to do a better job in Q3 of recovering their cost of fuel than in previous quarters.

But net of fuel surcharges, clearly price and other "mix" factors were involved given that revenue and profit jumped so much above the levek of increase in volumes.

Net income in the sector for the quarter ws up a very strong 19% in aggregate, led by Kansas City Southern's 98% gain. Increases in net income for UP, CSX and NS were up 16%, 12% and 24.5% respectively,

This once not very profitable sector now finds itself with operating ratios (operating costs as a percent of operating revenues) of 70% or lower - meaning margins are fat. Compare that with the truckload carrier sector, which even in this most recent strong quarter had most carrierswith operating ratios in the low to mid-80% range.

As shown below, LTL carriers of late have had trouble getting below the 100% level, above which operating expense are greater than revenues, and LTL carriers are now feeling much better good when operating ratios jst get top the mid-90% range.


Q3 2011 Rail Carrier Performance



Source: SCDigest Analysis

For a larger image of ths chart, click here: Q3 2011 Rail Carrier Financial Performance.

In terms of rail pricing trends, the chart below from Union Pacific really tells the story.


Union Pacific Rate Trends



As the chart shows, UP has enjoyed year-over-year rate increases of more than 5% in every quarter since Q2 of 2010, with another 4.5% in Q3 even as its demand (car loadings) was flat for the quarter. In UP's intermodal segment, loadings were actually down 6% in the quarter, while revenue per carload was up 8%.

Other carriers noted similar pricing trends.


(Transportation Management Article Continued Below)




LTL Sector Comes Up for Air - Sort Of

The overall picture is much different in the LTL sector, but in a sense the trends were similar, meaning much better revenue gains than volume growth, while LTL carriers seen to believe that the worst is behind them.

Financial results for four major public LTL carriers (YRC Worldwide, Arkansas Best (ABF), Old Dominion and Conway) are shown in the graphic below.


Q3 2011 LTL Carrier Performance


Source: SCDigest Analysis

For a larger image of ths chart, click here: Q3 2011 LTL Carrier Financial Performance.

As can be seen, revenues for the group were up 12-24% (12.6 in aggregate), while tonnage was up a much smaller amount, and was even down at ABF (Conway did not break out tonnage figures).

Again, fuel played a role, but for a change pricing in the sector did too, with rates clearly up 5% or so for most in the group year-over-year. Most of the carriers in the group also discussed having more discipline in terms of focusing on more profitable freight and customers, and focusing on better network efficiencies.

Given all that, even YRC Worldwide manage to get is operating ratio below the 100% level, with ABF and Conway at 96.1% and 95.2%, respectively.

Of course, Old Dominion continued to lap the field in terms of finacial performance, with an operating ratio of just 82.1%, closer to its truckload brethren, and having net profits equal to 7.8% of sales, much higher than the others.

Old Dominion noted that is using its cash by adding new terminals in Madison, WI, Altoona, PA and Canton, OH in the quarter.

YRC showed a large net loss again for the quarter, actually larger than Q3 2010, but it continued its turnaround on the top line. Much of that loss was attributable to factors related to its on-going financial restructuring, and the company was actually able to achieve a positive cash flow of $9 million from operations in Q3, as concerns about its immediate viability have largly dissipated.

Conway saw its LTL profits jump more than 200% in the quarter, on a revenue gain of just 13%.  It said its revenue per hundred weight increased 6.7% when fuel surcharges are stripped out. Keep in mind that many factors and special charges outside of core operatings can impact net profit from quarter to quarter.

Anything stand out to you in these Q3 results for rail carriers and the LTL sector? Let us know your thoughts in the Feedback section below.


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