US Rail carriers enjoyed a second consecutive strong quarter, driven largely by surging demand for 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 Truckload Carriers See Mixed Q2 Results, with Signs of Freight Strength Coming).
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| Net income as a percent of sales was 20,1%, up from 18.6%, 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 5-6% at all but CSX, which saw 2% growth.
According to the Association of American Railroads, total US carload traffic for the first six months of 2017 was up 4.5%, with traditional car loads rising 6.4% and intermodal units up 2.7%, setting a record for the first half of the year.
But those numbers belie the role coal played in the volume jumps. Based on growing internal US demand this year and a strong export market - up 60% in the first half of the year - coal volumes were up 47% at Kansas City Southern, 32% at Norfolk Southern, 17% at Union Pacific, and 7% at CSX.
Conversely, volumes in "general merchandise" were up in the mid to low single digits in the quarter for each carrier.
The big news in the quarter again related to Hunter Harrison's second quarter as CEO of CSX, after having previously turned around Canadian Pacific in a big way.
Amid many initiatives related to Harrison's quest to implement what he calls "Precision Scheduled Railroading," CSX ran into a number of service issues in recent months, prompting a letter from the Surface Transportation Board calling out a series of complaints across many service areas.
In an email to customers, Harrison then blamed the delays and other issues on a small percentage of recalcitrent employees who are not getting on board with the new program. The rail workers union shot back that the service issues were all at Harrison's feet. Lots of logistics drama at CSX.
Profits for our group in Q2 were up a robust 18.5% in the quarter. Net income as a percent of sales was 20,1%, up from 18.6%, in numbers that compare favorably with almost any industry. By way of comparison, the same measure in Q2 was 13.7% at Procter & Gamble, and 8.8% at UPS. Union Pacific as usual led the way in the group, with a net profit margin of 22.2%.
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 64.8% (unweighted average) up from the 66.0% in Q2 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.
Q2 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
Company reported a second quarter record operating ratio of 61.8%, a 3.4 point improvement compared to the second quarter 2016 and close to an all-time record.
Quarterly freight revenue improved 11% compared to the second quarter 2016, as volume growth, increased fuel surcharge revenue, core pricing gains and positive mix of traffic all contributed to the increase.
"Core pricing" was up 1.5%, continuing a several quarter string of more modest rate increases.
CSX
"We are implementing Precision Scheduled Railroading on an expedited timetable, converting switching operations, balancing the network, streamlining resources and getting more out of our assets," said new CEO Hunter Harrison.
That means the company "is on track to achieve record efficiency gains and a step-function improvement in its key financial measures for the year."
Said the company saw "strength in core pricing.
CSX continues to expect to drive a full-year operating ratio in the mid-60s.
Norfolk Southern
Company saw all-time record operating ratio of 66.3%.
Kansas City Southern
Company reported record second quarter revenues and earnings per share, as well as an all-time record quarterly operating income.
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