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November 2009

Rail News: Norfolk Southern Railway

Class I CEOs expect modest traffic growth, more cost controls in coming quarters


By Jeff Stagl, Managing Editor

The Class Is didn't register the financial results they hoped to attain in the third quarter. Most reported high double-digit declines in earnings and revenue as traffic volumes similarly fell by disappointing double-digit figures.

But there were a few positive developments in the quarter. All the Class Is reduced operating expenses nearly 20 percent or more and carloads at least inched up from second-quarter levels, prompting many large roads to take hundreds of locomotives and rail cars out of storage. For example, NS' traffic rose from 494,279 units in July to 513,373 units in August and 514,563 units in September, and UP's seven-day carloads reached 161,000 units by quarter's end vs. 158,000 units in August, 152,000 units in July and 146,000 units in June.

The slight traffic uptick and payoff from ongoing cost controls in the quarter was enough evidence for Class I chief executives to be optimistic during their earnings conferences last month. They believe the recession bottomed out — perhaps by the second quarter's end — and an extremely slow and modest recovery had begun.

"We are seeing sequential improvements in our markets overall," said CSX Chairman, President and CEO Michael Ward on Oct. 14. "This reinforces our view that the worst of the recession is likely behind us."

Added CN President and CEO E. Hunter Harrison on Oct. 20: "It appears that several of our markets may have hit bottom."

That the Class Is' teleconferences/Webcasts were "very optimistic in tone" seemed a bit premature since "results were not really a cause for celebration," says Matthew Scruggs, a Frost & Sullivan analyst who monitors all the Class Is and closely follows BNSF.

"Results were predictable given what we think about the economy," says Scruggs.

But the results — primarily quarter-over-quarter traffic gains — also were reassuring because "so many industries are tied into their performance and we can see how the economy's doing," he says.

The large roads' performance shook out this way:

  • In terms of earnings per diluted share, BNSF's dropped 29 percent to $1.42, CN's fell 16 percent to 93 cents, CP's tumbled 29 percent to 80 cents (on an adjusted basis), CSX's decreased 20 percent to 74 cents, NS' plummeted 41 percent to 81 cents and UP's dipped 26 percent to $1.02.
  • In terms of revenue, BNSF's declined 27 percent to $3.5 billion, CN's dipped 18 percent to $1.8 billion, CP's dropped 20 percent to 41 billion, CSX's tumbled 23 percent to $2.3 billion, NS' decreased 29 percent to $2.1 billion and UP's fell 24 percent to $3.7 billion.
  • And in terms of operating ratios, BNSF's inched down 0.5 points to 74.2, CN's was essentially flat at 62.7, CP's inched up 0.2 points to 76, CSX's dropped 1.3 points to a record 73.9, NS' climbed 3.7 points to 72.8 and UP's declined 1.2 points to 73.7.

The (lower) Cost of Doing Business

The Class Is also touted their cost-cutting prowess during the conferences, and their 3Q operating expenses showed it wasn't just rhetoric: BNSF's fell 27 percent to $2.7 billion, CN's declined 18 percent to $1.1 billion, CP's decreased 20 percent to $776 million, CSX's tumbled 24 percent to $1.7 billion, NS' plummeted 25 percent to $1.5 billion and UP's plunged 26 percent to $2.7 billion.

The large roads reduced fuel expenses by about half or more vs. third-quarter 2008 — mostly because of lower diesel prices and less fuel usage — which served as the primary cost-cutting driver.

"We set a new benchmark in the area of fuel efficiency," said CP President and CEO Fred Green on Oct. 27. "Our long train strategy [also] continues to support cost management efforts."

Despite the nominal strides in the third quarter, UP is positioning itself for a slow recovery because there likely won't be a quick economic rebound in 2010, said UP Chairman, President and CEO Jim Young on Oct. 22.

NS also is trying to carry out its growth strategy in the face of economic volatility, said Chairman, President and CEO Wick Moorman on Oct. 27.

"While my crystal ball has its usual amount of sediment swirling around inside, we're hopeful that an economic recovery may have commenced, although its shape and duration are uncertain," he said.

When closing BNSF's teleconference/Webcast on Oct. 22, Chairman, President and CEO Matt Rose offered attendees some tongue-in-cheek advice on how they could help get the economy going: "Everybody go out and buy some stuff at Wal-Mart, Target, Home Depot and Lowe's," he said.


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