Rail carriers saw mixed volumes once again in Q4, but managed to bump profits even in the generally weak environment.
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| The big recent news in the rail sector is former Candian Pacific Railway CEO Hunter Harrison association with an investment fund looking to takeover CSX. |
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We're back as usual every quarter with our review of the results and trends across freight modes, starting last week with US truckload carriers (see Tough Q4 and Full Year 2016 for Truckload Carriers).
This week, we look at the rail transport sector, and then next week we'll review results and trends in the less-than-truckload group.
As part of that review we look at the four major Class I public carriers that make up the US rail sector (Burlington Northern is of course part of public company Berkshire Hathaway, but its results are not broken out in any detail and thus are not included).
Again in Q4, rail carriers were battling several negative trends when it comes to volumes. Those include: overall softening freight volumes in the US; continued major declines in freight cars carrying coal; and low diesel prices, which make truckload carriage attractive in many lanes versus rail, as fuel surcharge costs have plummeted.
According to the Association of American Railroads, total US regular carload traffic in 2016 was down for the second straight year, falling 8.2%. The once high flying intermodal sector was up, but just a bit, growing 1.6%.
Total rail cars and intermodal units were down 5% year over year, though the second half was somewhat stronger for the carriers than the first half.
Total carloads in the quarter were mixed across all four carrier we follows, down 3% at Union Pacific and flat for Kansas City Southern, while CSX saw total carloads grow 5% and Norfolk Southern had a gain of 2%.
After Q3, CSX said it was seeing a "recession-like'' period in terms of rail freight volumes, but was more upbeat after Q4.
Of course, the big recent news in the rail sector is former Candian Pacific Railway CEO Hunter Harrison association with an investment fund looking to takeover CSX. CSX's stock has jumpred strongly on the news.
This after Canadian Pacific under Harrison tried to acquire both CSX and Norfolk Southern in recent years, but was repeatedly rebuffed by both targets. Harrison turned around Canadian Pacific's results with major improvements in efficiency.
CSX is said to have offered Harrison the CEOs job already, but many details remain to be worked out, including the amount of Harrison's pay. There are reports he is demanding a deal of as much as $300 million.
In Q4, total revenues were up 1.7% for the four carriers we follows, but profits were up a bit more, rising 3.1%, even though rates were fairly weak. Union Pacific, for example, said core pricing was up just 1%, continuing a trend that has seen rate gains drop from 4% in the first half of 2015 to 2.5%, 2.0%, and 1.5% in Q1, Q2 and Q3, respectively, in 2016.
Net income as a percent of revenue for the group was once again strong, coming in at 19.0%, up marginally from 18.8% in Q4 2015. That metric was an impressive 22.1% at Union Pacific, which led the way as usual, though that was not much ahead of Kansas City Southern's profit margins of 21.8%.
Compare those numbers to an average of just 6.4% net profits for our truckload carrier group, 4.0% profit margins at GM, or 10% at consumer products giant Unilever.
Railroads are now where the money is.
Relatedly, average operating ratios (OR), or operating expense divided by operating revenue, a key metric in the transport sector, were down nicely in Q4 to 65.8% (unweighted average) from 68.9% in Q4 2015, as the railroads continue to drive efficiencies even as revenue growth slows.
That level of OR is of course far superior to that seen in the truckload or LTL sectors, which generally see ORs in the high 80 percent levels and low 90 levels, respectively. For example, in Q4, our group of publicly traded truckload carriers saw average operating ratios of 90.3% - some 25 percentage points higher than what the rail carriers achieve.
Full Q4 financial results for our group of rail carriers is shown below:
Q4 2016 US Rail Carrier Operating Results
(See More Below)
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As usual, we provide a few highlights from the earnings releases of each carrier, though they were even more terse in Q4 than usual.
Union Pacific
Company said that "While full-year volumes were down substantially year over year, we did see
declines moderate in the fourth quarter."
Quarterly train speed, as reported to the Association of American Railroads, was
26.5 mph, 2% slower than the fourth quarter 2015.
For the full year, freight revenue totaled $18.6 billion, a 9% decrease when compared to 2015. Car loadings were down 7% versus 2015, with declines in the chemicals, coal, industrial products and intermodal business groups.
Union Pacific's operating ratio increased to 63.5%, 0.4 points higher than the full-year record set in 2015.
Core pricing was up just 1% in Q4.
CSX
Said that for "the full year 2016, the industry continued to face headwinds from low global commodity prices and strength of the U.S. dollar."
It added: "In an environment where the company lost almost $470 million of coal revenue and experienced weakness across most of its markets, CSX delivered nearly $430 million of productivity savings in 2016, while improving customer service."
Referenced its "The CSX of Tomorrow" strategy that it says "drives profitable growth in its merchandise and intermodal markets as the company progresses towards a mid-60s operating ratio longer-term."
Norfolk Southern
Company said "2016 was a pivotal year as Norfolk Southern began implementing its new Strategic Plan. We delivered $250 million of productivity savings and recorded our best ever operating ratio, notwithstanding challenging business conditions."
It added that "We are poised to continue building on our success and deliver an additional $100 million of productivity savings in 2017 on the way to our goal of $650 million of annual savings by 2020."
Kansas City Southern
Had almost nothujbng to say.
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