Class Is’ Q2 ledgers reflect pinch from costly fuel, soft economy and Midwest floods

The Class Is’ second-quarter financial results can be grouped into three categories made famous by a Clint Eastwood movie. The good: revenue records and earnings growth. The bad: lackluster operating ratios and skyrocketing fuel expenses. And the ugly: traffic and monetary losses because of Midwestern floods.

The severe weather had the greatest impact on Burlington Northern Santa Fe Corp.’s ledger. Socked by the worst flooding it has encountered in 15 years as well as extraordinarily high fuel prices, BNSF’s operating income fell 18 percent to $714 million, operating expenses jumped 25 percent to $3.8 billion and operating ratio increased 6.1 points to 83.6 compared with second-quarter 2007 levels. On an adjusted basis, the ratio rose 1.7 points to 79.2.

Capital costs associated with the flooding totaled $70 million. Although some track washouts near the Mississippi River were 20 feet long and 40 feet deep, BNSF restored network fluidity in mid-July.

“I am proud of [our] efforts to rebuild our network despite significant devastation,” said BNSF Chairman, President and Chief Executive Officer Matt Rose during a July 24 earnings teleconference.

The Class I did post a 16 percent increase in freight revenue to a record $4.3 billion primarily because — as was the case for all Class Is — rates and fuel surcharges went up. BNSF’s overall same-store rate rose 6 percent and collected surcharges increased by $400 million.

Prolonged flooding along some of its U.S. mainlines — plus high fuel prices, a stronger Canadian dollar and weaker North American economy — drove up expenses and drove down income for Canadian Pacific Railway. Net income plunged 40 percent to $155 million, total operating expenses rose 7 percent to $969 million and CPR’s operating ratio increased 4.7 points to 79.4. Fuel costs ballooned 34 percent.

The “tough quarter “significantly impacted CPR’s earnings,” said CPR President and CEO Fred Green in a prepared statement, adding that soft economic conditions likely will continue.

The lone positive result: freight revenue, which rose about 2 percent to $1.2 billion.

Floods don’t submerge up’s income

The floods cost Union Pacific Corp. 40,000 carloads and millions of dollars in track damage during the quarter. Nonetheless, the Class I’s operating income increased 18 percent to $931 million, net income jumped 19 percent to $531 million and operating ratio dropped 0.9 points to 79.6 — UP’s lowest second-quarter mark since 2002.

“It was a solid quarter despite a number of obstacles,” said UP Chairman, President and CEO Jim Young during a July 24 earnings teleconference.

Freight revenue rose 13 percent to a record $4.3 billion, with energy becoming the Class I’s first business group to top $900 million in quarterly revenue. But operating expenses increased 12 percent to $3.6 billion primarily because fuel costs, which soared 64 percent, have become UP’s largest expense item.

CSX Corp. also had a strong quarter despite escalating costs. The Class I reported record revenue of $2.9 billion, up 15 percent, and all-time-high operating income of $717 million, up 17 percent. In addition, CSX’s consolidated operating ratio declined 0.5 points to 75.3.

“We have high levels of operational productivity,” said Chairman, President and CEO Michael Ward during a July 16 teleconference.

Fuel costs that ballooned 70 percent to $537 million and added 200 basis points to CSX’s operating ratio played a leading role in driving up total operating costs 14 percent to $2.2 billion.

NS: ‘Measured’ performance

Norfolk Southern Corp. overcame several obstacles to post a record-breaking quarter, too. Railway operating revenue increased 16 percent to an all-time-high $2.8 billion, income from operations rose 16 percent to a record $799 million and net income went up 15 percent to a high-water mark of $453 million.

“By any measure, it was another strong quarter for our company despite continued weakness in the automotive and housing markets, and unprecedented fuel prices,” said Chairman, President and CEO Wick Moorman during a July 23 earnings teleconference.

NS posted revenue-per-unit growth for the 23rd-straight quarter and its operating ratio of 71.1 nearly matched second-quarter 2007’s level. But railway operating expenses jumped 16 percent to $2 billion as fuel expenses skyrocketed 76 percent to $491 million.

Meanwhile, Canadian National Railway Co. was unable to navigate around several headwinds, including the weak economy. Although revenue increased 4 percent to $2.1 billion, net income dropped 11 percent to $459 million, operating income decreased 13 percent to $707 million, operating expenses jumped 14 percent to $1.4 billion and the railroad’s operating ratio rose 6.3 points to 66.3.

The stronger Canadian dollar vs. the U.S. dollar reduced net income by about $25 million and fuel costs jumped 60 percent.

“We saw revenue gains across most of our commodity groups, although the gains only partly helped to offset spiraling fuel costs,” said CN President and CEO E. Hunter Harrison in a statement.