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By Jeff Stagl, Managing Editor
In 2009's latter half, Class I chief executive officers saw subtle signs that the economy had bottomed out and a slow recovery had begun. They were encouraged that those signals translated into slight traffic increases in the third and fourth quarters compared with the first and second, yet were leery of concluding that the carload gains were suastainable.
After a strong first quarter that included burgeoning traffic — and the healthy revenue and income gains that come with it — the CEOs are much less skeptical about the economy's staying power.
During an April 14 earnings presentation that provided details on a 5 percent traffic gain vs. first-quarter 2009 and record operating income, CSX Corp. Chairman, President and CEO Michael Ward bluntly stated, "We believe the recovery is sustainable."
Norfolk Southern Corp., which increased traffic 9 percent to 1.6 million units, posted a number of 52-week carloading highs during the quarter, prompting Chairman, President and CEO Wick Moorman to believe the period will provide a strong platform from which to build momentum through the rest of the year.
"Volumes continue to strengthen not only year over year, but also, and perhaps more significantly, on a sequential basis from the fourth quarter, which is almost unheard of in our industry," he said during an April 27 earnings conference. "If the recovery continues on pace, we are confident that we can continue to improve our operating ratio and earnings as the year progresses."
CN President and CEO Claude Mongeau concurs, especially after the Class I boosted carloads by 16 percent and increased operating income by 25 percent.
"If the economy continues on its recovery trend, increased traffic levels and solid execution should help CN produce strong financial results in 2010 and beyond," he said in a prepared statement.
At Union Pacific Railroad, first-quarter traffic jumped 13 percent to 2.1 million units — its first quarterly volume gain in two years.
"We saw a pick-up in demand across the network. What a difference a year makes," said Chairman, President and CEO Jim Young during an April 22 conference, adding that a year ago, "everyone was trying to find the bottom" of the economy's downward spiral.
Canadian Pacific President and CEO Fred Green also noted the improving economy's effect on traffic — which increased 8 percent to 625,000 units — as well as on revenue and income gains.
"Our results reflect both improvements in the economy and CP's proven ability to rapidly adjust to changes in our customers' demands," he said in a prepared statement.
For Kansas City Southern, a strengthening economy meant a 15 percent jump in carloads to 443,200 units. Volume rose in five of six commodity groups and bested the fourth quarter's total by 2 percent, which — echoing Moorman's comments — is "highly unusual," said KCS Chairman and CEO Mike Haverty in a prepared statement.
"Historically, first-quarter carloadings lag the fourth quarter on our railroad," he said.
As a result of Q1 traffic gains, there was no lagging in revenue generation for the Class Is as CN's rose 6 percent to $2 billion, CP's increased 4 percent to $1.2 billion, CSX's shot up 11 percent to $2.5 billion, KCS' skyrocketed 26 percent to $436.3 million, NS' soared 15 percent to $2.2 billion and UP's jumped 16 percent to $4 billion. In addition, their earnings climbed by high single or double digits while a few Class Is set operating income records.
In terms of operating ratios, CN's decreased 2.4 points to 69.3, CP's dropped 5.7 points to 82.4, CSX's declined 2.3 points to a record 74.5, KCS' plummeted 11 points to 75.2, NS' fell 5.1 points to 75.2 and UP's plunged 5.3 points to a record 75.1.
Although each Class I reported higher Q1 operating expenses primarily because of rising fuel costs, they all anticipate earnings and income gains, strong revenue generation and healthy operating ratios in Q2 and beyond if traffic and efficiency trends hold.
UP officials believe current demand levels mean the Class I could post a double-digit volume gain again in the second quarter, while CSX officials expect double-digit earnings growth through 2010. Although the growth rate is "still somewhat unclear," NS also is anticipating good things ahead, said Moorman.
"Against the backdrop of an improving economy and continuing leverage as volume grows, the stage is set for a favorable 2010," he said.