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August 2009

Rail News: Norfolk Southern Railway

Although Class Is revenue and traffic Were Way Down in 2Q, So Were Costs


By Jeff Stagl, Managing Editor

A statement Canadian Pacific included on a PowerPoint slide as part of its second-quarter earnings presentation best summarizes the seven Class Is’ quarter: “Excellent cost control helps counter weak volumes.” Double-digit drops in operating expenses —

driven by productivity improvements, frugal asset management and lower fuel prices — helped large roads compensate for double-digit decreases in carloads.

“From a cost perspective, we delivered a strong quarter,” said CP President and Chief Executive Officer Fred Green during the July 30 presentation.

However, from just about every other perspective — including earnings and revenue — the quarter was anything but strong for most Class Is because the recession continued to tax their traffic.

CP’s total revenue of $1 billion fell 21 percent and carloads tumbled 24 percent to 745,000 units compared with second-quarter 2008 figures.

Excluding a foreign exchange gain and loss on long-term debt and other items, the Class I’s income declined 33 percent to $92 million and diluted earnings per share decreased 39 percent to 54 cents.

Nonetheless, CP improved its operating ratio 1.2 points to 77.9 and cut operating expenses 23 percent to $737 million.

A record despite the recession

Union Pacific Railroad’s operating ratio dropped 2.3 points to a record 77.3 primarily because of efficiencies, pricing gains and cost controls — operating expenses plunged 30 percent to $2.6 billion.

But revenue tumbled 28 percent to $3.3 billion, net income declined 12 percent to $468 million and traffic dropped 22 percent to 1.9 million units.

“Usually, volumes increase from the first to the second quarter, but that was noticeably absent this year,” said UP Chairman, President and CEO Jim Young during a July 23 earnings presentation.

BNSF Railway Co.’s operating ratio dropped 4.4 points to 75.2 and operating expenses dropped 33 percent to $2.5 billion, as fuel costs plunged 61 percent. In addition, non-adjusted earnings rose 18 percent to $1.18 per share, beating analysts’ expectations of $1.00 per share, and non-adjusted operating income increased 12 percent to $797 million.

“The second quarter is further evidence that we can manage effectively with whatever the economy throws at us,” said BNSF Chairman, President and CEO Matt Rose during a July 23 presentation.

However, freight revenue plummeted 26 percent to $3.2 billion as traffic volume decreased 19 percent and fuel surcharge revenue declined by about $600 million.

CSX Corp. posted similar results. Revenue tumbled 25 percent to $2.19 billion and traffic volume fell 21 percent, but the Class I lowered its operating ratio 1.9 points to 73.4.

Earnings per share from continuing operations dropped 24 percent to 72 cents and operating expenses declined 27 percent to $1.6 billion primarily because fuel and materials/supplies costs plummeted 66 percent and 28 percent, respectively.

“Even in this difficult business environment, we are still strengthening our operations, optimizing our resources and making the right investments to prepare our network for the future,” said CSX Chairman, President and CEO Michael Ward during a July 14 presentation.

So is CN, which attained its best-ever service metrics in the quarter while operating expenses dropped 20 percent to $1.1 billion.

“I’m pleased with what I thought was a pretty stellar performance when you consider the challenging environment that we experienced in the second quarter,” said CN President and CEO E. Hunter Harrison during a July 20 presentation.

Not-so-pleasing was revenue, which dropped 15 percent to $1.6 billion; net income, which declined 16 percent to $350 million; carloads, which plunged 22 percent to 928,000 units; and the operating ratio, which increased 1 point to 67.3.

Kansas City Southern had the toughest quarter among the large roads, save for expenses.

Earnings plunged 87 percent to seven cents per share, revenue tumbled 30 percent to $341.3 million and KCS’ operating ratio rose 8.8 points to 87.3. Operating expenses declined 22 percent to $297.9 million as fuel and compensation/benefits costs dropped 56 percent and 18 percent, respectively.

“Efficient rail operations and continued stringent expense controls partially mitigated the effects of the prolonged global recession on KCS’ second quarter,” said Chairman and CEO Mike Haverty in a prepared statement.

Operating ratio up, costs down

Norfolk Southern Corp.’s operating ratio worsened, too, rising 3.7 points to 74.8. The Class I also drove down costs, cutting railway operating expenses 29 percent to $1.4 billion.

In addition, NS’ railway operating revenue plunged 33 percent to $1.9 billion and net income plummeted 44 percent to $247 million or 66 cents per diluted share.

But — similar to his counterparts at the other Class Is — NS Chairman, President and CEO Wick Moorman believes better times lie ahead because the recession is receding and traffic volumes are stabilizing.

“We have seen a couple of signs of increased economic activity with a few of our customers over the past few weeks,” said Moorman during a July 29 presentation. “While I think that it’s too early to tell if these are genuine green shoots or not, we’re at least encouraged that we’re not seeing large parts of the lawn continue to die off.”


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