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U.S.-based major railroads’ total profit growth slowed dramatically in the second quarter, as Norfolk Southern Railway and Kansas City Southern Railway saw double-digit declines in earnings gains on a year-over-year basis.
The five major U.S.-based railroads’ profit rose 1.5 percent year-over-year to $3 billion in the second quarter, compared with a 10.8 percent year-over-year gain in the first quarter. Although both were still profitable, NS saw its second quarter profit fall 11 percent, largely because of weak coal traffic, and KCS’s profit plummeted 87 percent on debt retirement costs and unfavorable foreign currency fluctuations. The industry’s revenue growth increased slightly, rising nearly 3.2 percent in the second quarter, compared with a roughly 3 percent gain in the first quarter. The railroads’ revenue growth in the second quarter outpaced that of the general economy, which expanded at a rate of 1.7 percent.
Even with the slowdown in profit growth, the industry’s second quarter earnings were strong and showed that carriers can still exercise strong pricing power and find operational efficiencies amid a sluggish economic recovery. Railroad executives during earnings calls displayed confidence that the economy would improve in the second half.
“Our current outlook is for the economy to show some improvement from the sluggishness we've seen in the second quarter,” Eric Butler, executive vice president of market and sales at Union Pacific Railroad, told investors on July 18. “Although we'll continue to face challenges in some markets, our diverse franchise still provides opportunities to grow in others.”
Unlike their American counterparts, Canada’s two major railroads saw profit growth speed up in the second quarter. Canadian Pacific Railway and Canadian National Railway’s total profit gains rose 32 percent year-over-year in the second quarter, compared with a 15.8 percent decrease in the prior quarter. CN fared better in the second quarter partly because it wasn’t hurt by cold weather and heavy snow as it was in the first quarter. Under the relatively new leadership of CEO E. Hunter Harrison, CP’s profit hit a second quarter record of $245 million, and its operating ratio improved by 10.6 percentage points to 71.9 percent.