Tracking Rails’ Recovery

Tracking Rails’ Recovery

Major North American railroads are in good shape to take advantage of a 2010 economic recovery. With their aggressive cost-cutting and rate-hike discipline, they reported double-digit profit margins for 2009, despite recession-driven declines in traffic and revenue.

Revenue at the four largest U.S. carriers — Union Pacific Railroad, BNSF Railway, CSX Transportation and Norfolk Southern Railway — plunged 22 percent last year, to $45 billion, and net income sank 23 percent to $5.8 billion.

Still, by idling railcars, engines and workers, and renegotiating enough old customer contracts to boost their average pricing while improving their average length of haul, those same carriers averaged a 12.9 percent profit relative to their revenue.

That’s down just slightly from a 13 percent average profit margin the top four U.S. railroads generated in 2008, a year when their receipts and profits grew before the bottom began to fall out of freight traffic after the late-2008 financial meltdown.

NS took a bigger hit than some others; 2009 earnings fell 40 percent to just over $1 billion, and the carrier’s profit margin slid from an above-average 16.1 percent in 2008 to 13 percent last year.

But the carrier also has taken steps to limit the impact of 2009’s drop in freight demand and to prepare to take more freight in the future. NS executives said they took more than 35,000 railcars out of the company’s active fleet at the worst of the freight downturn last May, and idled nearly 700 locomotives.

“As we’ve gone through the year, we have right-sized our operating plan to match our volume,” Mark Manion, executive vice president for operations, told Wall Street analysts on Jan. 27.

Although traffic improved enough in the July-December period to bring much of that equipment back on line, the company still had about 20,000 freight cars and 200 locomotives stored by year-end, Manion said.

Donald Seale, the company’s chief marketing officer, said second-half 2009 volume rose 8 percent from the first six months of the year, and “we expect to maintain the volume momentum from the fourth quarter as we head into the new year.”

NS will soon complete a three-year project to carve a double-stack container train route from southeastern Virginia ports around Norfolk across the Appalachian Mountains to Ohio. Seale, like executives at most other railroads, also looks for “a slowly improving economy” to lift traffic.

Overall traffic counts at major U.S. railroads continue to trail the pace of late November, as the economic recovery appears to have slowed at year-end and as a series of winter storms buffeted the U.S. rail network.

But economists say a mild rebound remains on track, evidenced by a surge in factory activity for January that was reported by purchasing agents at the Institute for Supply Management. Some rail officials also noted in their quarterly earnings comments a recent jump to 52-week highs in chemical tankcar loadings, which usually rise when factories need more materials for production and packaging.

All the top-tier North American railroads had to adjust for declines in fuel surcharge revenue from 2008, which had included a sharp spike in diesel costs early in the year that propelled the pass-along fuel fees higher. And they have continued to face fierce, rate-killing competition for trailer and container loads from hungry truckers.

Some rail lines had to overcome specific problems, but they came through with flying colors.

Canadian National Railway’s final 2009 quarter was marked by a brief strike by locomotive engineers in Canada, and an ongoing struggle to win over some Chicago-area suburbs hostile to its 2009 takeover of a short line so CN trains can bypass the congested downtown track network.

But CN enjoyed a 1.6 percent increase in fourth-quarter profit to $548 million. That gave it a quarterly profit margin of 31 percent and a 25 percent margin for the year. While that was buoyed by some tax benefits and track sale to a passenger rail system, its rail-only operations still led the industry in margin.

Canadian Pacific Railway also posted a fourth-quarter gain, aided by tax benefits. President and CEO Fred Green cautioned that “markets remain uncertain,” and another CP official said, “We’re modeling slow growth” for 2010.

Kansas City Southern, the smallest of the Class I railroads, has its operations split between lines in the U.S. and Mexico. The Mexican line was hit especially hard last year when automobile factories shut down; this year’s improved auto traffic is bringing solid gains.

Contact John D. Boyd at jboyd@joc.com.