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Focus: Transportation Management

Feature Article from Our Transportation Management Subject Area - See All
 

From SCDigest's On-Target E-Magazine

- Aug. 20, 2014 -

 

Logistics News: Q2 2014 Rail Carrier Review

 

With Q1 Weather Woes Behind them, US Rail Carriers See Revenue and Profits Soar Even as Rate Hikes Moderate


SCDigest Editorial Staff

 

US rail carriers enjoyed something of a blow out Q2, with solid revenue gains based on generally strong carload volumes, even as pricing power continues to wane.

SCDigest Says:

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Union Pacific's operating ratio of 63.5% was an all-time quarterly record, 2.2 points better than the second quarter 2013 and 1.3 points better than the previous all-time quarterly record set in the third quarter 2013.
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We're back as usual every quarter with our review of the results and comments from leading public rail carriers, as the last of them finished up their Q2 2014 earnings reports in the last few weeks.

 

Last week, we covered the US truckload sector (see Q2 2014 Truckload Carrier Review and Comment).

Here 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)

 

Shortly, we'll have the same analysis for the less-than-truckload (LTL) sector.

 

The quarter and first half of the year saw generally strong volume gains, according to the Association of American Railroads.

 

Through the first six months of the year, total rail carload traffic was up 4.5%, according to AAR data, led by intermodal car growth of 5.9%, as shown in the graphic below.

 

Based on data from the rail carriers, it appears Q2 produced even more positive numbers.

 

 

1H 2014 Rail Car Growth

 

 

                                           Source: Association of American Railroads

 

 

As shown in the table below, revenue for the group was up a solid 8.8%, on carload growth that averaged between 7 and 8%.

 

Kansas City Southern and Union Pacific led the way, with revenue growth of 12.2% and 9.9%, respectively.

 

Profits were also strong, up 19.2% versus Q2 in 2013, and net income as a percent of revenue rose to a very strong 19.2%. It wasn't that long time ago that railroads were a very challenged industry in terms of profits. Union Pacific was able to achieve operating income as a percent of revenue of 22.8%, a number that would stand up in almost every sector.

 

For Second Quarter Ending June 30, 2014   Data in $Thousands            
Carrier Total Operating Rev Including Fuel Change 2013 to 2014 Total Volume Growth (Revenue Carloads) Volume Growth General Merchandise, Auto, Ag.,  etc.* Volume Growth Coal Volume Growth Intermodal Net Income Change 2013 to 2014 Net Income as % of Revenue  Net Income as % of   Revenue  2013 Operating Ratio  Operating Ratio 2013 
Union Pacific $5,661,000 9.9% 8.0% 8.0% 1.0% 12.0% $1,291,000 16.7% 22.8% 21.5% 63.5% 65.7%
CSX $3,244,000 6.5% 8.0% 8.0% 6.0% 7.0% $529,000 1.5% 16.3% 17.1% 69.3% 69.1%
Norfolk Southern $3,042,000 8.6% 7.8% 6.6% 2.6% 10.1% $562,000 20.9% 18.5% 16.6% 66.5% 70.1%
Kansas City Southern $649,700 12.2% 7.0% NA 1.0% 7.0% $130,200 729.3% 20.0% 2.7% 68.3% 69.0%
Total Carriers $12,596,700 8.8%         $2,512,200 19.2% 19.9% 18.2% 66.9% 68.5%
* KCS Southern moves almost exclusively bulk commodities and materials                

 

 

There was general improvement in the carriers' operating ratios, or operating expense divided by operating revenue, a key metric in the transport sector. Here again Union Pacific led the way, driving its OR down to a record 63.5%. Norfolk Southern also had strong OR performance in Q2, driving its number down to just 66.5% from 70.1% in Q2 2013.

 

All that even as pricing power by the rail carriers seems to have waned a bit in recent quarters. A few years ago, pricing gains in the 5% range were commonly cited. In 2013, that dropped to more like 4%, and in the past two quarters core pricing gains have been more in the 2% range - but that didn't stop the profit machine in Q2.


(Transportation Management Article Continued Below)

 
CATEGORY SPONSOR: SOFTEON

 
 

Below we post similar results for the first half of 2014. As can be seen, those numbers are solid but not quite as strong as those for just Q2, meaning Q2 results were stronger than those in the first quarter, where bad weather had a big impact on performance.

 

For 1H 2014     Data in $Thousands ]            
Carrier Total Operating Rev Including Fuel Change 2013 to 2014 Total Volume Growth (Revenue Carloads) Volume Growth General Merchandise, Auto, Ag,  etc. Volume Growth Coal Volume Growth Intermodal Net Income Change 2013 to 2014 Net Income as % of Revenue  Net Income as % of  Revenue  2013 Operating Ratio  Operating Ratio 2013 
Union Pacific $10,947,000 8.0% 7.0% 6.9% 4.0% 8.0% $2,379,000 15.3% 21.7% 20.4% 65.2% 67.4%
CSX $6,256,000 4.1% 5.0% 5.0% 3.0% 6.0% $927,000 -5.7% 14.8% 16.4% 72.3% 69.7%
Norfolk Southern $5,731,000 3.4% 3.4% 2.8% -5.1% 7.1% $930,000 1.6% 16.2% 16.5% 70.5% 72.4%
Kansas City Southern $1,257,100 11.0% 5.0% NA 2.0% 5.0% $223,400 87.6% 17.8% 10.5% 70.9% 69.8%
Total Carriers $24,191,100 6.0%         $4,459,400 9.3% 18.4% 17.9% 69.7% 69.8%
* KCS Southern moves almost exclusively bulk commodities and materials                

 

 

In this section, we usually post comments from each carrier's earnings call that shed some insight on a carrier's strategy or market trends, but the carriers were unusually terse in Q2, so we will mostly let some charts do the talkimg.

 

Union Pacific

 

Union Pacific's operating ratio of 63.5% was an all-time quarterly record, 2.2 points better than the second quarter 2013 and 1.3 points better than the previous all-time quarterly record set in the third quarter 2013

 

UP illustrated recent trends in "core price."

 

 

Source: Union Pacific

 

CSX

 

CSX said it "Leveraged strong growth environment to produce all-time quarterly records for revenue, operating income, and earnings per share."

Company said the strong environment will lead to an increase in planned capital investment in 2014 of approximately $100 million, increasing the total from $2.4 billion from the $2.3 billion planned before. Capital spending will be consistent with the 16-17% of revenue goal. The money will be used to enhance key infrastructure and adds freight cars to help drive long-term growth.

CSX said core pricing gains fell to .6% from 2.3% in 2013.

 

As shown in the chart below, CSX has added about 10% to its locomotive count since Q3 2013.

 

 

Source: CSX

 

 

Norfolk Southern

 

Nothing of much interest this quarter.

 

 

Kansas City Southern

 

 

Cross-border revenue (Mexico) increased 24%.

 

The graphic below shows the consistent gains in productivity that rail carriers such as KCS have been able to achieve in recent years, a key factor in the continued reductions in operating ratios we have seen from the rail carriers.

 

 

Source: Kansas City Southern

 

Back with Q2 LTL results next week.

 

Any reaction to our Q2 2014 rail segment review? Let us know your thoughts at the Feedback button (for email) or section (for web form) below.

 


   
 

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