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10/23/2009


Rail News: Rail Industry Trends
BNSF pushes productivity, cost controls in wake of eroding business from weak economy



The third quarter wasn’t a good one for BNSF Railway Co. when it came to generating revenue and boosting income. But the period included evidence that the railroad’s ongoing productivity initiatives and cost controls are paying off.

Yesterday, BNSF reported earnings of $1.42 per diluted share — including six cents per share from a favorable coal rate case adjustment — down 29 percent compared with third-quarter 2008 earnings. Operating income fell 25 percent to $901 million, net income tumbled 30 percent to $488 million, carloads dipped 17 percent to 2.1 million units and freight revenue plunged 27 percent to $3.5 billion, including a $725 million decline in fuel surcharge revenue.

Coal revenue decreased 10 percent to $940 million because of soft demand and mild summer weather; agricultural products revenue declined 21 percent to $715 million primarily due to reduced domestic loadings and international grain shipments; consumer products revenue plummeted 36 percent to $1.1 billion because of reduced international and domestic intermodal, and automotive volumes; and industrial products revenue tumbled 34 percent to $747 million due to lower demand for construction and building products.

“All five segments of our industrial products business were down,” said Executive Vice President and Chief Marketing Officer John Lanigan during BNSF’s earnings teleconference and Webcast held yesterday, adding that taconite and steel moves were the hardest-hit commodities.

However, efficiency gains and cost controls helped BNSF shave its operating ratio by 0.5 points to 74.2 and reduce its operating expenses by 27 percent to $2.7 billion compared with third-quarter 2008 figures.

“While volumes have been down, we have taken the opportunity to further capitalize on our tradition of ongoing productivity improvements, which will provide significant operating leverage as volumes increase,” said Chairman, President and Chief Executive Officer Matt Rose. “In addition to improving service, those productivity initiatives should offset most, if not all, of our annual cost inflation.”

BNSF attributes about half of the $1 billion drop in operating expenses to lower diesel prices as fuel costs plunged 55 percent to $606 million. Excluding fuel, operating expenses would have declined 12 percent, said EVP and Chief Financial Officer Tom Hund. The railroad also reduced fuel usage — measured as gallons burned — by 17 percent.

In addition, material costs fell 18 percent to $183 million, purchased service expenses dropped 16 percent to $453 million, and compensation and benefit costs declined 15 percent to $872 million. As of Sept. 30, BNSF employed 37,359 people compared with 41,103 on Sept. 30, 2008. In addition to furloughs, which to date total about 2,800, the railroad continues to store 900 locomotives and 28,000 rail cars because of reduced volumes, said EVP and Chief Operations Officer Carl Ice.

Jeff Stagl

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