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Chalk up best-ever quarterly earnings for BNSF Railway Co. in the third quarter. The Class I’s earnings climbed to $2 per diluted share, up 35 percent compared with third-quarter 2007’s earnings.

The record earnings, which include a favorable nine cents per share impact related to a tax settlement, were driven by yield improvements, a productivity boost and declining fuel prices in the quarter, said Chairman, President and Chief Executive Officer Matt Rose during BNSF’s earnings conference held yesterday.

In addition, freight revenue jumped 21 percent to $4.8 billion even though traffic volume declined 2 percent to 2.6 million units in part because the railroad collected higher fuel surcharges ($570 million) and increased rates an average of 6 percent.

Agricultural products revenue soared 33 percent to a record $909 million, coal revenue jumped 23 percent to an all-time-high $1.05 billion, industrial products revenue increased 17 percent to a record $1.1 billion and consumer products revenue rose 16 percent to $1.7 billion compared with third-quarter 2007 totals.

BNSF also reported operating income of $1.2 billion, up 21 percent, and net income of $695 million, up 31 percent vs. last year.

Operating expenses totaled $3.7 billion, up 21 percent compared with third-quarter 2007 expenses. Fuel costs, which skyrocketed 37 percent to $1.3 billion, accounted for 80 percent of the year-over-year increase, said Executive Vice President and Chief Financial Officer Tom Hund. BNSF paid an average diesel price of $3.72 per gallon in the quarter vs. $2.31 in third-quarter 2007. However, fuel prices that reached $3.93 per gallon in July had fallen to $3.47 per gallon in September, said Hund.

Fuel expenses severely impacted the Class I’s third-quarter operating ratio, which was flat at 74.7 vs. third-quarter 2007’s ratio of 74.6.

“The ratio would have been below 68 if you extract the impact of fuel costs,” said Rose.

Fortunately for BNSF, the railroad’s financial performance received a big boost from network fluidity improvements. Productivity increased by 2.2 percent compared with third-quarter 2007’s mark. In addition, car velocity increased from an average of 195.2 miles per day to 205.5 miles per day and system on-time performance (OTP) rose from 81 percent to 86.7 percent — the railroad’s highest OTP since 2003, said EVP and Chief Operations Officer Carl Ice.

Looking ahead, BNSF executives expect relatively strong financial performance in the fourth quarter after a promising third quarter. They project revenue to increase 8 percent to 10 percent, volumes  to remain slightly lower and earnings to range between $1.70 and $1.80 per share.

“While we are all concerned about the current financial and economic situation, we continue to be optimistic about the future of our diverse franchise and we remain confident about our long-term prospects,” said Rose.

— Jeff Stagl