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Fuel costs that shot up 37 percent, or by $257 million, effectively dragged down BNSF Railway Co.'s financial performance in the fourth quarter.

Escalating diesel prices and an 11 percent increase in purchased services (such as locomotive and rail-car repairs) played major roles in driving up the Class I's total operating expenses 12 percent to $3.3 billion compared with fourth-quarter 2006's total. In addition, BNSF's quarterly net income was flat at $517 million and operating ratio rose 1.9 points year over year to 76.9.

"The operating ratio would have been 300 basis points lower if not for the fuel headwind," said BNSF Chairman, President and Chief Executive Officer Matthew Rose during the Class I's earnings conference this morning.

However, the railroad did post some favorable fourth-quarter financial results. Operating income rose slightly from $943 million in fourth-quarter 2006 to $950 million and freight revenue increased 9 percent year over year to a record $4.1 billion.

Agricultural products revenue jumped 24 percent to an all-time-high $804 million, coal revenue — driven by a tonnage record — rose 15 percent to $894 million, industrial products revenue increased 5 percent to $926 million and consumer products revenue inched up 2 percent to $1.5 billion primarily because of stronger yields.

For the full year, BNSF's revenue rose 5 percent to a record $15.8 billion — the fifth-straight year the railroad has set an annual high-water mark, said Rose. Operating income jumped 20 percent to $3.5 billion and net income soared 23 percent to $1.9 billion compared with 2006 totals.

But operating expenses rose 14 percent to $11.5 billion and the railroad's operating ratio increased 1.5 points to 77.3 primarily because of high fuel costs. Diesel prices will continue to be a factor in first-quarter 2008. Operating expenses are projected to rise 15 percent year over year, with three-quarters of the increase attributed to fuel costs, said Executive Vice President and Chief Financial Officer Tom Hund.

BNSF also is projecting reduced capital spending in 2008. The railroad is budgeting $2.45 billion this year vs. $2.6 billion in 2007 because of a reduction in expansion capital, said EVP and Chief Operating Officer Carl Ice.

— Jeff Stagl