If there’s a lesson from U.S. railroads’ first quarter financial performance, it’s this: They’re not likely to let any slowdown in the economic recovery in the coming months derail healthy earnings.
The major U.S. railroads displayed a new level of pricing power in the first quarter, reporting robust earnings on slim volume growth. The top three U.S. railroads, excluding BNSF, which doesn’t publicly report earnings, registered double-digit profit growth on a volume gain of a mere 1 percent. Norfolk Southern and CSX Transportation reported record profit, while Union Pacific posted record revenue despite the sluggish traffic growth. The four publicly traded major U.S. railroads, including Kansas City Southern, increased total profit 26.2 percent.
KCS, the smallest of the five major U.S. railroads, boosted traffic roughly 7 percent year-over-year, but the gains were less impressive, considering the company’s smaller market share. More telling was the 78 percent year-over-year jump in intermodal traffic on the railroad and its Mexican subsidiary, Kansas City Southern de Mexico, in the same period. That’s driven by increased manufacturing in Mexico, the Port of Lazaro Cardenas’s double-digit volume growth and the hundreds of millions of dollars KCS has invested south of the border in recent years.
Among the four U.S. railroads, revenue per carload and intermodal, a key indicator of pricing, rose about 7 percent. About half to two-thirds of the increases are driven by increased pricing, with the rest gained through more efficient operations, wrote John Larkin, managing director at Stifel Nicolaus. More efficiency gains are expected, as the North American Class I railroads plan to spend more than $16 billion on network improvements this year.
The railroads flexed their pricing power even more when it came to intermodal traffic. The average revenue per intermodal unit among the four U.S. railroads expanded 9.1 percent against volume growth of about 5.6 percent. The disparity between volume and pricing growth helped push the four railroads’ intermodal revenue up 14 percent from the first quarter of 2011.
The majority of the intermodal growth comes from the domestic side, driven by steady expansion of U.S. manufacturing. CSX, for instance, said domestic volume rose 9 percent year-over-year, setting a first quarter record. The 9 percent jump in international traffic was largely due to the railroad’s new deal with Maersk Line, not organic growth of port traffic.
“We’ve been growing that domestic intermodal 6 percent to 7 percent for the last six or seven years. And we think the conditions in the highway trucking are going to continue to fuel that,” Michael Ward, CSX CEO, president and chairman, told investors on April 18.
The railroad’s major rival, NS, boosted intermodal traffic 10.4 percent, outpacing CSX’s growth of about 8.5 percent. NS handled roughly 30 percent more intermodal volume in the first quarter than its Jacksonville, Fla.-based rival.
Domestic intermodal growth might slow if manufacturing analysts are right in expecting U.S. production to slip into a lower gear. A quarterly index by the Manufacturers Alliance for Productivity and Innovation suggests factory output will continue to grow but at a more modest pace for the rest of the year. A potential dip in domestic intermodal growth could be partially offset by shippers’ overall push of freight from truck to rail, as diesel prices stay volatile and truck capacity tightens.
A boost in container volume at the ports of Savannah, Ga., and Charleston, S.C., in March also could signal an uptick in intermodal volumes down the road.
Similar growth at West Coast ports is particularly needed, as UP’s intermodal volume rose just 1 percent year-over-year in the first quarter. A 6 percent increase in intermodal traffic helped the railroad weather the 3 percent decline in international loads, said Eric Butler, UP’s executive vice president of marketing and sales.
“In international intermodal, we’re still cautious and, as a result, only expect slow growth,” he told investors on April 19.
International intermodal appears to have fared better for the two major Canadian railroads. Canadian National said intermodal volume at its two west coast gateways, Vancouver and Prince Rupert, outpaced the total trans-Pacific market. Volume tied to the Port of Halifax slipped, however, and traffic driven by the Port of Montreal was flat. A 22 percent bump in cross-border traffic helped push total intermodal volume up 13.4 percent year-over-year.
“For intermodal, there’s no reason for it to really slow down. It might go from market to market, east to west, but we have a solid plan,” CN President and CEO Claude Mongeau said.
Canadian Pacific, the smaller of the country’s two top railroads, saw a smaller pace of intermodal growth, a 3.3 percent year-over-year gain. Volume tied to the ports of Vancouver and Montreal was up from last year, and domestic intermodal in the U.S and Canadian lanes “delivered growth over last year,” said Jane O’Hagan, CP’s executive vice president and chief marketing officer.
The Canadian railroads were less aggressive in capitalizing on their intermodal pricing power. CN and CP raised revenue per intermodal unit 3.9 percent total, while the average gain from carload and intermodal unit increased 8.2 percent in the same period. CN kept its industry lead in terms of operating ratio, and CP improved its own ratio, a key measure of profitability, amid a proxy fight.
The already contentious fight over leadership of the railroad will heat up further ahead of the proxy vote slated for May 17 at the annual shareholder meeting. With the industry delivering robust profit regardless of the volume growth, the CP battle adds a rare element to the railroad landscape: uncertainty.