Modest intermodal gains not enough to offset third-quarter CSX loss

Modest intermodal gains not enough to offset third-quarter CSX loss

CSX Transportation won back cargo lost to over-the-road competitors and made modest intermodal gains in the third quarter, but it was still not enough to stem the flow of money out of the company.

Over the past three months, the Jacksonville, Florida-based railway has been battered by diminishing demand for coal, a slumping carload market and struggling service. Net earnings were down 39 percent year-over-year in the third quarter, dropping to $507 million. Revenue was also down 9 percent to $2.94 billion as gains in price were more than offset by the combination of lower fuel recovery, a three percent overall volume decline and continued transition in CSX’s business mix, the company said.

That loss was softened by gains in intermodal volume.

Total intermodal volumes in the third quarter were up 6 percent year-over-year, hitting 731,000 units. Revenue derived from the railway’s intermodal business was up 1 percent year-over-year at $451,000.

It’s a modest increase over the second quarter’s 5 percent year-over-year intermodal volume gains, but a more substantial increase over the first quarter’s 1.2 percent growth.

There have been indications that domestic intermodal conversion has slowed industry-wide and CSX has said it is recovering after losing domestic intermodal business to the trucking sector last year.

Domestic intermodal business at CSX performed well in the third quarter, up 15 percent year-over-year driven by consumer growth and highway-to-rail conversions. International volumes, however, declined by 5 percent year-over-year, as strength in shipments moving to inland destinations was negated by competitive losses, the company said.

The railway still beat Wall Street expectations. CSX executives said earlier this year during a second-quarter earnings call that they were already girding for a flat third quarter.

“CSX’s third quarter results demonstrate the company’s ability to leverage improving service while controlling costs in a dynamic environment,” Michael Ward, chairman and CEO, said in a statement. “Our performance supports strong pricing and continued efficiency gains as we continue to drive value for customers and shareholders.”

Expenses declined 11 percent year-over-year, thanks to the collective effects of continued low fuel prices, cost reductions reflecting lower volume and savings from efficiency initiatives. Executives Wednesday highlighted a number of productivity measures that have helped counteract losses in the third quarter.

CSX has lengthened trains by 10 percent, returned several leased locomotives and furloughed about 1,400 employees, said Ward. The resulting $933 million in operating income drove a third-quarter record operating ratio of 68.3 percent.

CSX also highlighted improving train speeds in the third quarter, an indication of improving service reliability and consistency. Average speeds hit 20.5 miles per hour in the third quarter, up from 20.2 in the first. The third quarter averaged some of the fastest speeds CSX has seen all year. Those speeds, however, remain well below 2013 levels: train speeds in the third quarter of 2013 averaged 23.3 miles per hour.

In the end, moderately faster trains, cost-cutting efficiencies and modest intermodal gains were not enough to combat declining coal volumes, which fell 18 percent year-over-year to 261,000 tons in the third quarter, a result of mild weather, high stockpiles and low natural gas prices favoring the alternative energy sector, the company said. CSX’s total merchandise volumes also fell roughly 4 percent year-over-year to 720,000 carloads.

There’s little doubt, Ward said, “commodity prices and the strength of the U.S. dollar are challenging many of our markets.”

Wednesday was CSX’s first earnings conference call without Oscar Munoz, who left his post as president and chief operating officer at the railroad to join United airlines last month.

“What we’ve said for some time is the initial point of recovery was this quarter, the second quarter,” Munoz said in July on a second-quarter earnings call. The railroad, he said, is looking to “accelerate” now. “It just hasn’t happened, yet.”

And it still won’t happen for months to come, so long as factors outside company control impacting the carload sector — the U.S. dollar, weather, natural gas production — do not change, said Frank Lonegro, chief financial officer, on Wednesday’s third-quarter conference call.

“Our outlook for the fourth quarter is down,” said Lonegro. “We expect volumes to decline…we'll be cycling strong demand from the environment last year. It will be more of the same for the third quarter.”

Contact Reynolds Hutchins at reynolds.hutchins@ihs.com and follow him on Twitter: @Hutchins_JOC.