Class Is Post Solid 3Q Financials

By Jeff Stagl, Managing Editor

The positives and negatives were readily apparent in Class Is’ third-quarter financial results. The positives: diverse traffic mixes, rate increases in the 6 percent range, productivity boosts and declining fuel prices. The negatives: soft traffic volumes, hurricanes, a weak Canadian dollar vs. the U.S. dollar and still-extraordinarily high diesel costs vs. third-quarter 2007 levels.

Overall, the Class Is posted stellar results despite the divergent forces, namely in the form of higher earnings (although, for some roads, not as high as Wall Street expected), income and revenue gains (including a few record-setters), and lower operating ratios.

Norfolk Southern Corp. turned in an eye-popping score sheet, which included five records and the road’s first sub-70 operating ratio at 69.1, down 2 points. Railway operating revenue increased 23 percent to a record $2.9 billion, income from operations jumped 31 percent to an all-time-high $894 million, net income soared 35 percent to a record $520 million and diluted earnings per share rose 41 percent to a record $1.37.

“It was an exceptional quarter for our company, [confirming] the strength of our diversified business portfolio,” said NS Chairman, President and CEO Wick Moorman during an Oct. 22 earnings conference.

However, railway operating expenses jumped 20 percent to $2 billion. The main culprit: fuel costs, which soared 64 percent to $474 million.

Go With the Flow

Union Pacific Corp. also reported strong results despite a diesel-cost headwind.

A more fluid network, pricing gains and higher fuel surcharges helped the railroad boost diluted earnings per share 38 percent to $1.38; operating income, 21 percent to a record $1.2 billion; and net income, 32 percent to $703 million. Operating revenue rose 16 percent to a quarterly best $4.8 billion.

The railroad boosted average velocity in the quarter more than 2 mph to 23.7 mph, “our best network velocity in five years,” said UP Chairman, President and CEO Jim Young during an Oct. 23 earnings conference.

UP also dropped its operating ratio 1.1 points to a post-merger-best 74.9. But operating expenses rose 14 percent to $3.6 billion primarily because fuel costs jumped 44 percent to $1.1 billion. Excluding fuel and other costs, expenses would have risen 2 percent.

Meanwhile, BNSF Railway Co. chalked up its best-ever quarterly earnings at $2 per diluted share, up 35 percent, because of a favorable tax settlement, yield and productivity gains, and declining fuel prices in the quarter, said Chairman, President and CEO Matt Rose at an Oct. 23 earnings conference.

In addition, freight revenue rose 21 percent to $4.8 billion (even though traffic fell 2 percent), operating income increased 21 percent to $1.2 billion and net income jumped 31 percent to $695 million.

Operating expenses rose 21 percent to $3.7 billion as fuel costs skyrocketed 37 percent to $1.3 billion. Diesel expenses also severely impacted BNSF’s operating ratio, which was flat at 74.7 (“The ratio would have been below 68 if you extract the impact of fuel costs,” said Rose).

Kansas City Southern would prefer to extract third-quarter costs associated with hurricanes Gustav and Ike. Storm-related expenses shaved more than one full point off the operating ratio — which still improved 0.5 points to 77.4 — and about 7 cents per diluted share off earnings, said Chairman and CEO Mike Haverty in a statement. Prior to the hurricanes, KCS’ traffic volume was up 1.5 percent in the quarter. But by quarter’s end, volume had dropped by 0.9 percent.

Even so, operating income rose 13 percent to a record $111 million, net income jumped 17 percent to $48.9 million and revenue increased 10.7 percent to a record $491.5 million. Operating expenses rose 10 percent to $380.5 million primarily because fuel costs soared 35 percent to $90.1 million.

Diesel costs and economic malaise were the main reasons CSX Corp.’s overall earnings fell 6 percent. However, earnings from continuing operations jumped 40 percent to $382 million, or 94 cents per share.

Operating expenses rose 15 percent to $2.2 billion, but minus fuel costs — which soared 54 percent to $508 million — expenses would have increased 7 percent. Yet, operating income jumped 31 percent to a record $733 million, revenue rose 18 percent to about $3 billion and the operating ratio improved 2.5 points to a third-quarter best 75.2.

CSX is boosting revenue because it’s setting rates based on the value the Class I is creating for customers and “our diverse business portfolio allows us to capitalize on some segments while others are experiencing weakness,” said Chairman, President and CEO Michael Ward during an Oct. 15 earnings conference.

All on Execution

Canadian National Railway Co. increased earnings and revenue for the same reasons. Diluted earnings per share jumped 21 percent to 96 cents, net income increased 14 percent to $456 million and operating income rose 10 percent to $697 million. In addition, revenue increased 12 percent to $1.9 billion.

“Operational execution during the quarter was outstanding, with notable gains in network fluidity, productivity and asset utilization,” said President and CEO E. Hunter Harrison.

However, CN’s operating ratio inched up six-tenths of 1 point to 62.6 and operating expenses rose 13 percent to $1.15 billion, primarily because of higher fuel and purchased services/material costs.

Escalating diesel costs and foreign exchange gains and losses on long-term debt hampered Canadian Pacific Railway’s earnings and net income, which both decreased 21 percent to 86 cents per diluted share and $134 million, respectively.

The Class I’s operating ratio rose 3.1 points to 72.9 and operating expenses rose 11 percent to $746.5 million, primarily because fuel costs jumped 49 percent. Although fuel consumption dropped by 2.6 percent, the average diesel price CPR paid in the quarter rose 64 percent to $3.94 per gallon.

Fuel expenses were a “serious headwind,” as were lower-than-expected bulk volumes, said CPR President and CEO Fred Green during an Oct. 28 earnings conference.

One tailwind for CPR: freight revenue, which rose 8 percent to $962 million.

— Jeff Stagl, Managing Editor