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August 2010

Rail News: Union Pacific Railroad

Railroad earnings: Class Is post stellar second-quarter 2010 results

By Jeff Stagl, Managing Editor

In the second quarter, Class Is met most of their financial and operational goals. It wasn’t much of a surprise that their earnings beat expectations, or their income and revenue shot up on a year-over-year basis given the weak comparison figures from second-quarter 2009, the large roads’ low point during the recession.

“A year ago, KCS was in the depths of the worst freight recession since the Great Depression,” said Kansas City Southern Chairman and Chief Executive Officer Mike Haverty in a prepared statement.

It also wasn’t a shocker that Class Is’ traffic jumped up by more than double digits.

KCS’ volume soared 24 percent year over year to 468,400 units and Norfolk Southern Corp. not only boosted quarterly volume 22 percent to 1.7 million units, it ratcheted up traffic 9 percent vs. the first quarter’s total.

The second quarter “represented the fourth consecutive quarter of sequential volume improvement,” said NS Chairman, President and CEO Wick Moorman during a July 27 earnings presentation. “We also posted 52-week highs in several commodity groups.”

In addition, Union Pacific Railroad’s volume grew in each of its six business groups in the same quarter for the first time in six years and CSX Corp. posted a quarterly coal traffic gain for the first time since fourth-quarter 2008.

Sub-70 Ratios a Surprise

However, it was quite unexpected that three Class Is would post 2Q operating ratios below 70, something that hasn’t happened since the number of U.S. and Canadian Class Is dwindled to seven in the late 1990s.

CN’s ratio improved 6.1 points to an industry best 61.2, NS’ ratio improved 5 points to a record 69.8 and UP’s ratio improved 8 points to a record 69.4.

The sub-70 ratio was the “real highlight” of the quarter, said UP Chairman, President and CEO Jim Young during a July 22 earnings presentation — an 18 percent gain in traffic volume to 2.2 million units and 71 percent jump in operating income to $1.3 billion notwithstanding.

The other Class Is — minus BNSF Railway Co., of course, which no longer publicly releases its financial results — also posted encouraging operating ratios even though they didn’t dip under 70. Canadian Pacific’s improved 4.3 points to 77.8, KCS’ improved a whopping 15 points to a record 72.4 and CSX’s improved 2.4 points to a record 71.2.

CSX’s 2Q ratio shows that a mid- to upper-60s ratio “is within reach,” said Robert W. Baird & Co. Inc. analysts in a report on the Class I’s earnings, adding that the ratio “reflects the momentum in the underlying business.”

In terms of quarterly revenue, CSX’s soared 22 percent to $2.7 billion; CP’s rose 20 percent to $1.2 billion; CN’s increased 18 percent to $2 billion; KCS’ jumped 35 percent to a record $461.6 million; NS’ climbed 31 percent to $2.4 billion; and UP’s ballooned 27 percent to $4.2 billion.

Class Is posted revenue gains in just about every commodity group — including automotive, which had tanked the past few quarters. The only traffic segments that struggled were those associated with the still-weak commercial and housing construction markets, such as cement and lumber.

The Cost of Doing Business

Meanwhile, the only financial category that didn’t measure up for Class Is in 2Q was operating expenses, although each railroad touted its cost-control efforts either during financial presentations or in prepared statements. Primarily driven up by higher fuel and compensation/benefit costs, the large roads’ expenses clocked in thusly: CSX’s climbed 18 percent to $1.9 billion; CP’s rose 13 percent to $960.1 million; CN’s increased 7 percent to $1.25 billion; KCS’ went up 12 percent to $334.4 million; NS’ jumped 22 percent to $1.7 billion; and UP’s shot up 14 percent to $2.9 billion.

For the remainder of 2010, Class I CEOs expect the economic recovery’s sloth-like trajectory to continue.

“We see slow and steady growth,” said UP’s Young.

CSX already has demonstrated that it can be successful in a wide array of economic conditions, said Chairman, President and CEO Michael Ward during a July 13 earnings presentation.

“And that’s what we will continue to do,” he said.

Ditto for CP.

“Our proven track record of quickly adjusting our resources to meet changing volume demands position us well for the second half,” said President and CEO Fred Green in a prepared statement.


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