Class I Financials: A First-Rate Second Quarter in 2006

The six largest Class Is had a lot to share when they announced second-quarter financial results in late July: revenue and income records, five operating ratios in the 70s and one in the the 50s, ongoing fuel-cost blues — even a plan to boost capital spending.

For Union Pacific Railroad, the quarter was one of its best ever. Second-quarter operating revenue rose 17 percent to a record $3.9 billion and revenue carloads increased 5 percent to an all-time-high 2.5 million units compared with the same 2005 period.

"For the first time, we moved 200,000 carloads in a seven-day period,” said UP President and Chief Executive Officer Jim Young during the railroad’s July 20 earnings conference.

The railroad also improved its operating ratio 4.3 points to 81.7 — its best quarterly ratio in more than two years.

With traffic demand at an all-time high, UP officials said they’re considering a plan to increase capital spending by about $400 million in 2007. The Class I would use the funds to expand coal line and terminal capacity, purchase locomotives and accelerate double-track construction on the 760-mile Sunset Route between Los Angeles and El Paso, Texas.

Double-digit winning streak
Escalating freight demand also helped CSX Corp. increase earnings for the 10th-straight quarter. Net earnings of $390 million more than doubled the $165 million CSX earned in second-quarter 2005.

In addition, the company’s quarterly surface transportation revenue increased 12 percent to a record $2.4 billion. The surface transportation operating ratio improved 7.1 points to 73.4 compared with second-quarter 2005.

“We will continue to work toward our long-term goal of an operating ratio in the mid-70s,” said Executive Vice President and Chief Financial Officer Oscar Munoz during a July 19 conference.

Canadian National Railway Co. already is way past the 70s and into the 50s. The road’s second-quarter ratio improved 2.6 points to a record and Class I-best 58.6 compared with the same 2005 period.CN also generated record quarterly revenue of $1.72 billion, up 6 percent, and earned net income of $643 million, up 8 percent.

Meanwhile, Canadian Pacific Railway overcame a more than $60 million drop in coal and potash revenue to boost total revenue 2 percent to $989.4 million compared with the same 2005 period. Gains in intermodal, automotive, grain, and industrial and consumer products traffic offset carload decreases in the two bulk commodities.

CPR also boosted net income more than 300 percent to $331 million and improved its operating ratio 0.4 points to a record 75.1 compared with second-quarter 2005.

Best ratio in seven years
Norfolk Southern Corp. didn’t set a quarterly operating ratio record, but at 71.7, the Class I recorded its best since the 1999 Conrail integration.Nevertheless, the railroad set records for operating revenue at $2.4 billion (up 11 percent year-over-year), income from railway operations at $677 million (up 14 percent) and carloads at 2 million units (up 4 percent).However, railway operating expenses of $1.7 billion increased 10 percent compared with second-quarter 2005 primarily because of a $179 million rise in fuel costs.

BNSF Railway Co.’s expenses took a blow from higher fuel prices, too. A $217 million increase in diesel costs helped increase second-quarter operating expenses 17 percent to $2.8 billion compared with the same 2005 period.

But BNSF increased freight revenue 18 percent to a record $3.6 billion and operating income, 22 percent to a record $863 million. In addition, the Class I’s operating ratio improved 0.7 points to 76.0 compared with second-quarter 2005.