Despite Steep Traffic Declines, Class Is Register Revenue and Income Gains in 4Q

By Jeff Stagl, managing editor

How bad were business conditions for Class Is in the fourth quarter? For E. Hunter Harrison, they were the worst he had seen in his 40-plus years in railroading.

Yet, Canadian National Railway Co.’s president and chief executive officer and his counterparts at five other Class Is spent time during last month’s earnings conferences describing how their roads mostly persevered in the quarter. They overcame weak consumer demand, manufacturing cutbacks and steep traffic declines to boost revenue, earnings and/or income, and — with the exception of CN and Canadian Pacific — drop their operating ratios. The keys to their financial performance: rate increases and cost control.

Norfolk Southern Corp. not only overcame obstacles, but reached new ground. Despite an 8 percent traffic volume drop, the Class I set four fourth-quarter records: railway operating revenue at $2.5 billion (up 2 percent year over year); income from railway operations at $813 million (up 19 percent); net income at $452 million (up 13 percent); and diluted earnings per share at $1.21 (up 19 percent). In addition, NS registered a best-ever operating ratio at 67.5, which improved 4.5 points vs. fourth-quarter 2007’s ratio, and reduced operating expenses by 4 percent to $1.7 billion.

“While economic headwinds continued to exert pressure on traffic volumes, we were able to offset reduced loadings through pricing gains and cost control,” said NS Chairman, President and CEO Wick Moorman during a Jan. 28 conference.

UP: Cost-cutter extraordinaire

Union Pacific Railroad cut operating expenses even more — by 6 percent to $3.1 billion — primarily because fuel costs fell 19 percent.

UP’s earnings and operating ratio also benefited from lower fuel expenses, as well as from pricing and productivity gains, said Chairman, President and CEO Jim Young during a Jan. 22 conference.

Earnings jumped 41 percent to $1.31 per diluted share, operating revenue rose 2 percent to $4.3 billion and the railroad’s operating ratio fell 6 points to a best-ever 73.4.

BNSF Railway Co. also boosted revenue and cut expenses. Freight revenue rose 3 percent to $4.25 billion — even though traffic fell 7.3 percent — and operating expenses dropped 1 percent to $3.26 billion primarily because of lower compensation/benefits and fuel costs.

Quarterly earnings jumped 23 percent to $1.79 per diluted share. The gain can be attributed to “yields, cost control, productivity improvements and declining fuel prices,” said BNSF Chairman, President and CEO Matt Rose during a Jan. 21 conference.

In addition, operating income jumped 17 percent to $1.12 billion and BNSF’s operating ratio improved 3.2 points to 73.7.

CSX Corp. ultimately overcame a 9 percent traffic volume drop because of strong core pricing, in addition to productivity gains and aggressive cost-control measures, said Chairman, President and CEO Michael Ward during a Jan. 21 conference. CSX’s revenue rose 4 percent to $2.7 billion on the strength of coal revenue, which jumped 24 percent.

However, net earnings fell to $247 million from fourth-quarter 2007’s $365 million because of a charge associated with a write-down of CSX’s investment in The Greenbrier resort in West Virginia.

On a comparable basis, earnings increased 6 percent. Expenses were relatively flat at $1.98 billion and the operating ratio improved 2.4 points to 74.1.

CN: Cushioned by ‘shock absorbers’

For CN, a stronger U.S. dollar vs. the Canadian dollar and lower fuel costs served as what Harrison called “shock absorbers” against a 10.5 percent traffic volume decline. CN’s revenue increased 11 percent to $1.8 billion and operating income rose 11 percent to $655 million. Without the favorable foreign exchange rate, revenue would have risen only 1 percent.

“Although overall demand is much weaker, the basic driver of our business — demand for reliable, efficient, cost-effective transportation — remains intact,” said Harrison during a Jan. 22 conference.

However, CN’s operating ratio inched up 0.6 points to 62.7 and operating expenses rose 15 percent to $1.1 billion. On a foreign exchange-adjusted basis, expenses increased only 2 percent.

A tax adjustment and the favorable exchange rate positively impacted CP’s quarterly results, too. Freight revenue increased 10 percent to $1.02 billion — even though volume declined 6 percent — primarily because of rate increases, the DM&E integration and exchange rate, without which revenue would have risen only 1 percent.

Net income totaled $164 million and earnings totaled $1.05 per diluted share vs. $278 million and $1.80, respectively, in fourth-quarter 2007. Excluding a future tax benefit recorded in fourth-quarter 2007, earnings dropped only 4 percent.

However, CP’s operating ratio increased 2.2 points to 76.5 and operating expenses rose 13 percent to $810 million.

Facing “global market uncertainties,” CP will need to continue to “cut costs and remain flexible,” said President and CEO Fred Green during a Jan. 27 conference.