Railroads beat lowered first-quarter earnings expectations

By Tony Hatch

We've all had it up to here with the polar vortex, literally and as discussed in what seemed like every company's first-quarter earnings report. Railroads were probably the poster children for the winter effect, each one losing revenues and seeing costs jump, service deteriorate and industry safety — long a positive story — go under the microscope as they struggled to contend with the bad weather.

Doubly unlucky, the worst of the weather centered on the northern Midwest. It was the fourth-worst winter on record for Chicago, the rail hub of the continent and the exact spot where all four types of growth — cyclical, secular, episodic (grain) and new (crude by rail) — converge. So, we knew the rails would take a hit in terms of service, productivity and earnings, and they did.

Given all of that, and despite the intensive scrutiny, the rails all handled themselves fairly well in the first quarter and on their Q1 conference calls, beating reduced expectations almost across the board (with Genesee & Wyoming Inc., perhaps, the exception). For the most part, the market has been appreciative, if a bit slow — the rails' five-year compound annual growth rate of 27 percent vs. the S&P's 16 percent, serves as an example. Their capex record, safety improvements and service gains have all been documented — and yet, railroads were subject to intensive questioning in the conference calls during Q1 earnings week. Amid growing business-press hostility, railroads' track record is being challenged by recent events on the safety/service fronts.



Rails improving with the weather. During their conference calls, railroad officials said that for the most part, the service issues were improving along with the weather, the effort and the spend, and most showed how recent metrics reflect that. BNSF Railway Co., in particular, symbolizes rails' current issues. At BNSF, revenue ton miles have caught up to the 2006 pre-recession peak, even if units (carloads) did not, suggesting increases in tons and length of haul. But BNSF's 400,000 added loads last year was exactly half of the whole industry's growth, with North Dakota alone absorbing some 150,000. The related service issues have been well publicized, and recently BNSF has been quite public with the issue and its efforts to resolve it — officials were all over the American Short Line and Regional Railroad Association's 101st annual conference in San Diego (held April 22-25), where they reiterated their plan to improve by region, methodically, and to have the final one (the northern region) up to snuff by year's end. It is essential that BNSF does so — and it is ironic that the railroad is a non-public (thought to be able to be more "strategic") railway.



The test match. I have long called for the "second phase" of the Railroad Renaissance led by (domestic) intermodal (see my white paper —"Ten Years After: The Second Intermodal Revolution") and new-era energy and industrial recovery; the given was always a stable regulatory environment, and strong capex to provide capacity and service reliability — with safety, too, being a given. Now that is, or appears to be, challenged. The risk was, is and will be "execution" — the shipper demand is there. We see it in traffic, in macro numbers, in anecdotes and in shipper capex. Even the bad news isn't so bad. The reduced Chinese iron ore growth of 19 percent last year paled compared with 60 percent a decade ago, but it was actually twice as many tons. When we look at service issues, crude-by-rail safety and growth prospects, we see that with solid execution, the thesis remains intact — even if all of the risks are called into play.


Tony Hatch is an independent transportation analyst and consultant, and a program consultant for Progressive Railroading's RailTrends® conference. Email him at abh18@mindspring.com.