The railroad industry expects to keep hauling more freight in the months ahead, but the profits should remain strong whether the freight demand grows or not.
That’s the message coming from several major railroads and partner companies as they report earnings for the July-September quarter. Some had scant volume gains in the third quarter, others found demand perking up, but all looked for some level of growth to continue.
Within that slow-growth outlook, some rail officials see cross currents among cargo groups rather than a broad-based expansion.
One example came from western giant Union Pacific Railroad, the largest freight carrier in North America, which reported a 16 percent increase in profit year-over-year to $904 million even though traffic increased just 1 percent.
UP had to battle Midwest floods through most of the quarter that caused delays and forced it to reroute shipments, and a Texas heat wave so severe it displaced some track and forced numerous delays. Still, UP said fuel surcharges and “core pricing gains” of 4.5 percent helped push average revenue per load up by 14 percent.
Yet in some key cargo areas, UP has seen unexpected weakness arise. “I’ve been disappointed by the weakness on our international intermodal peak season,” John Koraleski, UP’s chief marketing officer, told analysts. The railroad’s marine container business fell 12 percent in the third quarter because of weak import volumes at West Coast ports.
But that was partly offset by a pickup in domestic intermodal loadings that swelled as the quarter progressed. By October, UP was pulling so many loads away from long-haul trucks that domestic box volume was 7 to 8 percent higher than last year.
UP also saw grain exports weaken, but automotive shipments finally overcame the springtime supply chain shocks stemming from Japan’s earthquake, and energy shipments were bubbling higher.
CSX Transportation in the East and Midwest enjoyed a 12 percent profit gain to $464 million, also with just a 1 percent volume increase.
Michael Ward, CSX chairman, president and CEO, told CNBC that customer feedback points to “continued modest growth in the coming quarters.”
In the third period, Ward said of 10 major cargo categories for CSX, “five of them grew in volume in the quarter, two of them were flat and three were down. So it’s a little bit of a mixed bag, and clearly the economy moderated some.”
But the railroad was able to raise average per-unit receipts 10 percent, and boost revenue across all cargo groups. Coal traffic shrank 1 percent, for instance, but per-unit revenue rose 16 percent. Intermodal volume was flat from a year ago, but average receipts from pricing and fuel fees climbed 15 percent.
Rather than fearing that a weak economy may soon tip into recession, Ward said, “We’re encouraged” by freight trends and customer guidance.
Automotive traffic is one reason. Not only is it bouncing back, but low inventories of finished vehicles also suggest higher shipment levels ahead. “We expect the automotive (traffic) to continue to pick up steam as the year progresses, and then next year,” he said.
And don’t bother telling Kansas City Southern that the economy could be flat-lining. Its north-south route map in the south-central U.S. and Mexico is seeing big volume gains.
KCS also hiked per-shipment average revenue 10 percent, but traffic grew even faster at 13 percent and third quarter profit doubled to $99.8 million.
Some of those numbers were swelled by comparison with a 2010 period depressed by lane shutdowns from Hurricane Alex, but volume grew solidly even after adjusting for those effects. And this year brought other weather woes, as historic Missouri River flooding struck the home base of the KCS network.
KCS President and CEO David Starling does not see freight about to shut down, either. “We remain confident that our mid-single-digit volume and mid-teen revenue growth guidance for 2011 is attainable,” he said.
Some big manufacturers of rail equipment were yet to report, and what they say about new orders could suggest if railcar demand is holding steady or starting to slacken.
However, GATX, a major railcar fleet lessor, has already reported a strong third quarter in which rail unit profit soared 93 percent to $63 million because of high levels of North American demand for many car types.
Lease pricing and term lengths increased in the quarter, and the fleet utilization rate rose to 98.2 percent of the 109,091 cars GATX offered by the end of September.
A tight equipment market this fall is a good sign for freight. As President and CEO Brian Kenney said, “Operating conditions remain favorable in the North American rail market.”