Thursday, April 26, 2012

Higher rates result in higher revenues for Class I railroads

Increased rates appear to have held firmly as Class I railroads reported positive revenue growth for first quarter of 2012. Norfolk Southern and CSX reported revenue up 6% to $2.8m and $3m respectively. Kansas City Southern revenue was up 12% to $547m and Union Pacific (UP) revenue was up 14% to $5.1bn.  Canada’s Canadian National (CN) reported 12.6% increase in revenue to $2.3bn.

Record profits were noted at Norfolk Southern, an increase of 26% to $410m; CSX with an increase of 13.7% to $449m; CN with an increase of 16% to $781.3m and UP with an increase of 25% to $863m.

However, despite the strong increases in revenue and profit, growth in volume was minimal for some providers. UP, Norfolk Southern and CSX all reported only 1% increases. A decline in demand for coal was the primary culprit of the lackluster increase in volume. However, CN reported a 5% volume increase noting double-digit volume increases in its intermodal and metals and minerals business units. Intermodal volume growth of 18% and automotive volume growth of 14.4% helped Kansas City Southern achieve 7% increase in volume.

Intermodal remains strong for the railroads – particularly domestic networks. International intermodal networks continue to remain weaker than domestic networks but should pick up as the year progresses . Norfolk Southern noted a 3% decline in its international intermodal service mostly due to volume reductions associated with Maersk.

The warm winter and weak demand for electricity attributed to declines in coal however, the railroads noted strong increases from automobile manufacturers. According to industry forecasts, 2012 North American automotive production of vehicles is expected to increase 13% over 2011. CSX, UP, Norfolk Southern and Kansas City Southern all noted increases in not only volume but also revenue from this segment.

Kansas City Southern, one of the smaller Class I railroads and perhaps one of the most unique has invested heavily in Mexico providing service from Mexico’s west coast port of Lazaro Cardenas into the US. The company reported cross border revenues increased 28% with cross border grain revenues increasing 26% and cross border intermodal revenue increasing 87%. Nearsourcing to Mexico was attributed to the increase in cross-border activity particularly within the automotive industry. According to Kansas City Southern, automobile manufacturing in Mexico is projected to increase by over 40% by 2015.

As the railroads continue to take freight from trucks via such services as intermodal,  Kansas City Southern and Norfolk Southern recently launched a joint service – TMX – which runs a 53ft rail-controlled container on a dedicated route between Kansas City Southern’s intermodal centers in Mexico and Norfolk Southern’s intermodal centers in Atlanta, Georgia and Charlotte, North Carolina. The service is designed to be competitive with truck-only service.

The outlook for the railroad industry should remain positive particularly as the automotive industry continues to increase production throughout the North American region. Intermodal should also continue to see modest growth. Combined, these should offset any further possible declines in agriculture and coal.