CSX Transportation (CSX) reported a strong third quarter for investors and shippers based on earnings and service metrics that track volume, speed, and dwells. While shippers often bemoan how much Class I railroads fixate on operating ratios, CSX is the only provider offering faster intermodal train speeds and shorter dwell times while volume is on the rise.
It’s a remarkable accomplishment since former CEO E. Hunter Harrison apologized for poor service before the Surface Transportation Board (STB) one year ago. Although shippers and intermodal marketing companies (IMCs) were displeased with service changes in September, CSX believes it will yield better service results in 2019 and beyond.
CSX's good news for shippers and investors
Investors and shippers have plenty to celebrate about in the latest CSX earnings report. Revenue, net income, and operating ratio were all better than a year ago. Through the first week of October, intermodal train speeds were up 4.3 percent and terminal dwell times improved 18 percent. Meanwhile, intermodal volume has grown 1.8 percent year to date through September. CSX is bucking historical trends of volume being inversely proportional to train speed. When volume reached five-year lows in 2016, train speeds touched five-year highs, based on industrywide data from the Intermodal Association of North America (IANA) and American Association of Railroads (AAR). When intermodal volume rose in 2014, 2015, and 2017, train speeds slowed.
How has CSX been able to outpace its peers? It involved lots of work to fix its intermodal network in northwest Ohio and elsewhere.
CSX eliminated domestic service in Detroit in September. It also eliminated 192 interline routes with Union Pacific Railroad and BNSF Railway last month. CSX simplified its steel-wheel interchange network through Chicago, rerouting freight into Chambersburg, Pennsylvania; North Baltimore, Ohio; Kearny, New Jersey; and Springfield, Massachusetts, which may prompt more crosstown truck trips in Chicago to satisfy shippers in Philadelphia; Baltimore; Boston; and Columbus, Cincinnati, and Cleveland, Ohio. CSX will also begin new service with BNSF later this month into North Baltimore, Ohio, interchanged in Chicago, and invest in a joint project to build out warehousing and transloading in the small Ohio town. In January, CSX will begin to eliminate 300 more lanes in this overall effort to simplify the network. Simpler means more reliable, faster, and even better service, according to CSX.
“[In northwest Ohio we] had multiple handlings of the same container on the network, which is a very expensive way to operate,” CSX CEO Jim Foote said on an Oct. 16 earnings call. “At that point in time, we thought we had fixed the intermodal network to a large degree. What we uncovered as we went through 2018 ... we were doing that same kind of double or triple handling of containers in many other locations on the railroad. So we are unwinding those.”
He continued, “We got rid of, I would say, about a third of that earlier this year, before the peak. And we have another piece of business that we will unwind, rationalize the lanes, get out of doing some of this double and triple handling of containers [in January].”
Foote also emphasized how he applies precision scheduled railroading when he said, “You can’t be everything to everyone. And we’re not here to win a blue ribbon for volume. We’re here to win an award for being safe, customer-focused, and efficient in making money.”
Revenue, operating income, operating ratios
Revenue climbed 14 percent to $3.1 billion. Operating income rose 49 percent to $1.3 billion and its operating ratio was 58.7, a record for the third quarter. Intermodal volume increased 3 percent to 739,000 units. Capital expenditures dropped 15 percent and shareholder distributions rose 48 percent.
Meanwhile, a precision scheduled railroader would argue that a simpler, faster, and more reliable network means shippers will pay more for such service, washing away lost business from telling customers “no” when freight is unprofitable or would overwhelm the network.
IMCs generally prefer service over volume when discussing surcharges on excess freight. Many IMCs also acknowledge that as bad as CSX was in 2017, service is much better in 2018, based on conversations with JOC.com. Few are as vociferous about CSX service as 2017 and the STB is no longer requiring the railroad to participate in weekly calls about service. Jim Filter, Schneider National’s intermodal director, told JOC.com this summer that CSX service was much better.
J.B. Hunt was one of the few not to give a glowing endorsement when asked about precision scheduled railroading on its first-ever earnings call on Oct. 15.
“In January there [are] a few things that will be discontinued, and I think that's probably the key thing that we're focused on, trying to figure out what does that exactly mean? Can we use a different ramp? Can we use a different railroad? Can we have a longer dray?” said Terrence Matthews, J.B. Hunt’s president of intermodal. “There [will] probably be less options than more, and hopefully the service will get back to where we all expect it to be and where they want it be in some form or fashion.”
Service is really what IMCs and shippers care about. The main objection to CSX’s decisions to eliminate 192 lanes in September was lack of notice and timing in the calendar, whereas responses haven’t been as contentious about the 300 lanes being eliminated because notice is longer and it will occur in January. Shippers and IMCs don’t like the push towards northwest Ohio because it’s a four-hour roundtrip to Detroit, Cleveland, Columbus, and Cincinnati, but CSX believes top-notch service into the small town will be better than less reliable service into those cities.
For shippers, service will ultimately determine whether the changes last month and in early 2019 will pay off the way CSX promises it would. Will simpler actually equal faster and more reliable? So far the answer is yes, and if that holds true, then the Harrison-Foote strategy will be a success. But if CSX reverts to historical railroad trends of slower train speeds when volumes rise, then service cuts and rigid schedules won't sit well with customers.
Contact Ari Ashe at email@example.com and follow him on Twitter @ariashe_joc.