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Economic softening, a weak housing market, severe winter storms and the appreciation of the Canadian dollar certainly were stiff headwinds for the six largest Class Is in the fourth quarter. But soaring fuel costs proved to be a gale-force wind.

During their earnings conference calls last month, senior officers lamented the operating ratios that could have been if not for escalating diesel prices. Nonetheless, they remained relatively upbeat about their respective railroad’s quarterly financial performance.

Union Pacific Railroad’s operating ratio dropped 0.2 points to 79.4 compared with fourth-quarter 2006’s ratio. However, fuel expenses — which jumped 30 percent to $913 million — added 3.6 points to the ratio, while severe storm-related traffic losses and costs added another 0.5 points, said UP Executive Vice President and Chief Financial Officer Robert Knight Jr.

Still, operating revenue rose 6 percent to a record $4.2 billion and operating income increased 7 percent to an all-time-high $864 million even though weather issues slowed traffic in December.

“Our carloads were up 2.5 percent at the end of November,” said UP Chairman, President and Chief Executive Officer Jim Young.

Diesel prices a drag
BNSF’s quarterly operating ratio, which increased 1.9 points to 76.9, would have been 300 basis points lower if not for fuel costs, said Chairman, President and CEO Matt Rose. A 37 percent rise in fuel expenses, along with 11 percent increase in purchased services, drove up operating expenses 12 percent to $3.3 billion.

On the positive side of the ledger, freight revenue increased 9 percent to a fourth-quarter record $4.1 billion and operating income rose slightly to $950 million.

CSX Corp.’s fuel expenses soared 32 percent to $357 million in the fourth quarter as the average price per gallon rose by 75 cents, said EVP and CFO Oscar Munoz. The increase affected CSX’s operating ratio, which still dropped 2.5 points to 76.4 because of yield management and productivity improvements.

“We will continue to drive our operating ratio to the low- to mid-70s by 2010,” said Chairman, President and CEO Michael Ward.

CSX boosted earnings 5 percent to $365 million and increasing surface transportation revenue 7.5 percent to $2.6 billion.

At Norfolk Southern Corp., quarterly fuel costs jumped 38 percent to $353 million — the major reason total expenses rose 4 percent to $1.8 billion, said EVP and CFO James Squires. But NS still was able to decrease its operating ratio 1.5 points to 72, boost income from railway operations 12 percent to $686 million and increase net income 4 percent to $399 million. Plus, operating revenue rose 6 percent to $2.5 billion.

“I get asked all the time how deep and long-lasting are the changes in the marketplace that drive performance,” said NS Chairman, President and CEO Wick Moorman. “Well, we had a downturn last year, and in the face of it, we lowered our operating ratio.”

Canadian National Railway Co. did, too — barely. The railroad’s operating ratio dropped 0.1 points to 62.1. That’s in spite of fuel costs that jumped up 49 percent and a Canadian dollar that strengthened throughout the quarter, said EVP and CFO Claude Mongeau. Overall, operating expenses declined 3 percent to $1.2 billion.

However, revenue decreased 3 percent to $1.9 billion and operating income fell 3 percent to $716 million. Although the intermodal, petroleum/chemicals, metals/minerals and coal commodity groups posted year-over-year revenue gains, tough market conditions reduced forest products revenue by 19 percent, said CN President and CEO E. Hunter Harrison.

Hardly dollar for dollar
Canadian Pacific Railway’s revenue was flat at $1.2 billion. Excluding the impact of a stronger Canadian dollar — which appreciated 15 percent in the quarter — revenue would have increased 5 percent, said EVP and CFO Mike Lambert.

In addition, CPR’s operating ratio increased 1.2 points to 74.3 primarily because fuel costs jumped 25 percent and added more than 100 basis points to the ratio, said President and CEO Fred Green.

“Fuel is masking our improvements in productivity,” he said.

CPR also reported that net income more than doubled to $342 million primarily because of lower income tax rates. In addition, the Class I noted a slight increase in equity because of the Dakota, Minnesota & Eastern Railroad Corp. acquisition, which still is undergoing Surface Transportation Board (STB) scrutiny.

CPR will submit a safety integration plan to the STB on Feb. 5, said EVP and COO Kathryn McQuade, adding that the board still expects to issue a decision on the transaction Sept. 30.