3Q: A few headwinds, but mostly smooth sailing

By Jeff Stagl, Managing Editor

From escalating fuel costs to a weak housing market to a strong Canadian dollar, the Class Is faced several stiff headwinds in the third quarter. But not stiff enough to prevent five of the seven large roads from sailing their way to banner financial results. Only Canadian National Railway Co. and Norfolk Southern Corp. were hampered by the choppy waters.

Sluggish forest products traffic and an unfavorable exchange rate put a double whammy on CN’s quarterly results. Operating income tumbled 9 percent to $785 million and net income fell 2 percent to $496 million compared with third-quarter 2006’s totals. In addition, revenue totaled a flat $2.1 billion — primarily because forest products carloads declined 11 percent — CN’s operating ratio rose 3.5 points to 62 and operating expenses rose 6 percent to $1.3 billion.

“Few of us expected that the Canadian dollar would surge beyond parity with the U.S. dollar during the quarter,” said CN President and Chief Executive Officer E. Hunter Harrison in a prepared statement.

Unpleasant surprises
NS officials didn’t anticipate significant traffic declines in key coal, intermodal and automotive sectors, either. But as a result, the Class I’s railway operating revenue fell 2 percent to $2.35 billion, net income tumbled 7 percent to $386 million and the operating ratio went up from 70.1 to 71.1.

Although general merchandise revenue rose 1 percent, coal and intermodal revenue fell 3 percent and 6 percent, respectively.

However, NS’ quarterly operating expenses totaling $1.67 billion remained flat as casualties and other claims dropped 34 percent and diesel costs rose only slightly.

“We’re reducing operating costs wherever possible, but we’re not cutting costs in areas where we’ll have to spend additional dollars to catch up in the future,” said NS Chairman, President and CEO Wick Moorman during an Oct. 24 earnings conference.

A 7 percent rise in fuel costs and 2 percent drop in industrial products traffic didn’t catch BNSF Railway Co. by surprise. The Class I set several all-time quarterly records by relying on a diversified traffic mix, cost-control efforts and improved yields.

Freight revenue increased 4 percent to a record $3.95 billion primarily because agricultural products volume rose 8 percent. BNSF also reported record operating income of $1 billion, up 9 percent year over year.

“Operating income exceeded $1 billion for the first time in our history despite continued economic softness in consumer and industrial products” said BNSF Chairman, President and CEO Matt Rose.

In addition, BNSF’s operating ratio improved 1.3 points to 74.6 and operating expenses increased only slightly to $3.1 billion.

Union Pacific Railroad set records, too. The Class I established all-time quarterly marks for operating revenue at $4.2 billion (up 5 percent), traffic volume at 2.52 million units (up 1 percent) and operating ratio at 76 (a 5.1-point improvement).

UP also reported operating income of $1 billion, up 34 percent, net income of $532 million, up 27 percent, and operating expenses of $3.19 billion, down 1 percent.

The Class I posted stellar results primarily because of operating efficiencies derived from several initiatives, including process-improvement driver the Unified Plan.

“We’re seeing initiatives kick in and efficiencies come on,” said Chairman and CEO Jim Young during an Oct. 18 conference.

Kansas City Southern had a record-setting quarter, too. The Class I’s operating income jumped 27 percent to a record $98.2 million. In addition, revenue rose 6.8 percent to $444.1 million, net income increased 58 percent to $41.8 million and the operating ratio improved 3.5 points to 77.9.

Quarterly operating expenses totaled $345.9 million, a 2.2 percent year-over-year increase primarily because of higher compensation and benefits, and other costs.

“Within the context of a slower-than-expected economy, we are encouraged by ... our operating performance,” said KCS Chairman and CEO Mike Haverty.

So is CSX Corp. The Class I’s revenue totaled a record $2.5 billion, up 3 percent. An 8 percent gain in revenue per unit helped offset a 4 percent traffic volume decline while net income jumped from $328 million to $407 million.

In addition, the surface transportation operating ratio improved 1.9 points to 77.9 and total surface transportation operating expenses rose only slightly to $1.95 billion.

If CSX continues to control costs and increase income, its operating ratio will reach the low- to mid-70s by 2010, said Chairman, President and CEO Michael Ward during an Oct. 17 conference.

“We’ve come a long way both as a company and an industry, transitioning from a cyclical company to one that can go through periods of softness and still deliver,” he said.

DM&E deal no distraction
Canadian Pacific Railway has come a long way, too. The Class I overcame the strong Canadian dollar, weak forest products traffic and distractions posed by its Dakota Minnesota & Eastern Railroad Corp. (DM&E) acquisition to post financial gains.

Freight revenue totaled $1.1 billion, up 2 percent. Coal and intermodal revenue each rose 7 percent and grain revenue went up 6 percent, offsetting declines in forest products and sulphur/fertilizer revenue. In addition, CPR’s net income rose 34 percent to $229 million, operating ratio improved 1.1 points to 72.9 and operating expenses increased less than 2 percent to $906 million even though fuel costs rose 15 percent.

“With the recent acquisition of the DM&E, we are well positioned to continue our growth,” said CPR President and CEO Fred Green during an Oct. 30 conference, adding that the Surface Transportation Board might rule on a DM&E control transfer in May 2008 if the transaction’s considered a minor one or, in fall 2008 if it’s not.