In a clearly slowing environment in terms of overall volumes, the four publicly traded US rail carriers had somewhat different fates in Q2, as Union Pacific blew most of its competition out of the water. Like all modes of transportation, the rail sector is very dependent on factors outside of its control. Those include the overall economy (weak during Q2, with US GDP growth of likely just 1% or so), environmental regulations (which have been significantly pushing utilities away from use of goal), import volumes (which impact intermodal volumes) and more.
According to the Association of American Railroads (AAR), total rail volumes were up just .8% in the first half, as shown in the graphic below. But that basically flat volume through the end of June belied a lot of dynamics within that total. (Note these numbers do not include the volumes of Canadian railroads operating in the US.)
Intermodal traffic was up 3.6% in the first half of the year, while traditional rail car loads were down 1.5%. All told, that led to a total traffic gain of just 0.8% in the quarter.
Coal volumes continue to shrink, down 4.6%, though that is better than the mid-double-digit decreases seen over many recent quarters. But suddenly those losses in coal for some rail carriers are being made up in part by sharp increases in oil shipments from booming US oil production and restrictions on new pipeline construction.
And coal has a huge impact on the rail industry's fortunes, though that varies by carrier. Even with recent sharp declines over the last 18 months or so year-over-year, coal still accounted for 39.4% of total car load volumes in the first half. While oil volumes have grown 47.9% in the first half, the total oil car loads were only about 11% of coal volumes.
Given that, the overall results for the rail sector were still fairly impressive, as pricing power appears to remain in place - though perhaps more so for some than others.
In recent years, the rail carriers have overall largely move in lock step, but that changed in Q2, when Union Pacific was ascendant, at least in terms of the bottom line. UP saw profits rise to record territory, up 10.4%year over year even though car load volumes actually fell 1%.(See Q2 results table below.)
Rail Carrier Q2 2013 Results
In its earnings report, Union Pacific said its rates were up about 5% yet again in Q2.
CSX saw profits up 4.5%, while Norfolk Southern saw profits down 11.3%, and Kansas City Southern saw profits tumble some 87%, though this was primarily due to some one-time, non-operational issues.
In fact, KCS's operating ratio (operating costs versus operating revenues) came in at a strong 69%, though Union Pacific led the way with an OR of an amazing 65.7%, simply unimaginable in this industry until the past few years. UP reiterated its goal of achieving an operating goal of below
65% by 2017. (See graphic below.)
Union Pacific Plans to Drive Record Operating Ratios Even Lower
By contrast, leading truckload carriers have ORs in the mid-80% range at best, and less-than-truckload carriers, with the exception of Old Dominion, struggle to get below 95%.
Results for the first half of the year, as shown in the table below, are largely the same as for Q2, with the exception that Kansas City Southern's profits are higher without the one-time charges in
Q2.
Rail Carrier 1H 2013 Results
Net income as a percent of revenue in the first half were 20.4%, 16.5%, 16.5%, and 10.5% across Union Pacific, CSX, Norfolk Southern and Kansas City Southern respectively. Those are numbers that would be welcome by virtually any other business sector, as the industry has moved in the past decade from having one of the worst returns on invested capital to one of the best.
Comments by management were pretty sparse in Q2. Below are a few highlights.
Union Pacific
Company touted that "When combined with solid core pricing gains, we more than offset the slight
shortfall in volumes to generate best ever quarterly earnings and operating ratio performance," and that "Quarterly freight revenue increased 5% compared to the second quarter 2012, driven by core pricing gains."
CSX
Noted that "second-quarter revenue was nearly $3.1 billion, a slight increase from the same quarter last year, as strong service resulted in overall increases in volume and pricing," with rates outside of the coal business was up 4.1% in Q2.
Company said it "remains on track to achieve its goal of sustaining a high-60s operating ratio by 2015, while remaining focused on attaining amid-60s operating ratio longer-term."
Kansas City Southern
Continuing the overall theme, the company said that ""The combination of solid revenue growth, a steady mid-single digit improvement to pricing and continued control over operating expenses resulted in a second quarter operating ratio of 69.0%, a 1.5 point improvement over last year's adjusted operating ratio."
Norfolk Southern
Company was hurt more by coal woes than any other, with revenues down a whopping 17% in Q2.
Source: SCDigest