Plunge in Intermodal Business Dampens Freight Railroads’ Earnings for 2nd Quarter

This story appears in the Aug. 3 print edition of Transport Topics.

A sharp drop in intermodal business helped to drag down second-quarter earnings for the largest North American railroads.

Intermodal revenue dropped by $474 million to $956 million at Burlington Northern Santa Fe, the railroad that hauls the most intermodal freight. Its intermodal volume fell 19%.

That trend was matched at Union Pacific, where shipments dropped 18% and revenue was off $174 million to $595 million.

Total intermodal loads at CSX fell 14%, while Norfolk Southern Corp.’s volume slipped 20%. Canadian National Railway followed suit, with business off 19%, measured by shipments.

“The intermodal market and trucks have been pretty tough for a year and a half or more,” James Young, CEO of Union Pacific, said during a conference call. “[In] many cases, when you look at the pricing, it’s not sustainable.”

Clarence Gooden, chief commercial officer for CSX, agreed, saying that “the truckers are about as low as some of them are going to be able to go and still survive.”

Profits fell at four of the five largest railroads operating in the United States, repeating the first-quarter pattern. Before the recession-induced results this year, rail earnings had been rising for at least five years.

Net income fell 20% at CSX, 45% at Norfolk Southern and 16% at Canadian National, which relies on solely domestic U.S. business and cross-border traffic for about 70% of its total shipments.

Union Pacific reported a 12% drop in net income to $468 million, which included a profit of $72 million from a Utah land sale.

Burlington Northern managed to post a net income of $404 million, up from $350 million a year ago, when profit was reduced by $108.5 million to pay costs related to past environmental damage in Montana.

Analyst Ed Wolfe of Wolfe Re-search said in an investor note that cost-cutting such as head count reductions helped to minimize the earnings decline for railroads.

Lower fuel expenses helped, too. Burlington Northern’s spending on fuel was reduced by $782 million, helping to cushion the blow from a $1.16 billion drop in revenue.

The negative earnings trend was reflected in lower rates per intermodal shipment, which carriers attributed in part to lower fuel surcharge collections.

Norfolk Southern rates per shipment declined the most at 14%, followed by Burlington Northern and CSX at 12%. Union Pacific dropped 6%, as did Canadian National.

CSX’s Gooden said he believes that pricing for intermodal freight has stabilized at current levels.

The price declines on some bulk coal, chemical and grain shipments were less severe than intermodal. For example, Burlington’s revenue per coal shipment fell 2.9% and Union Pacific’s chemicals revenue on that basis declined 2%.

All carriers attributed the intermodal volume declines primarily to the international business, which sagged as imports declined along with consumer demand.

From the domestic rail intermodal standpoint, the picture was mixed.

Union Pacific, which recently gained some Hub Group contract business that Burlington Northern previously hauled, said its domestic intermodal shipments rose 4%, while Burlington’s fell 15%.

CSX domestic intermodal volume rose 2%, while Norfolk Southern’s fell by the same percentage.

“Weak domestic and global economic conditions and related excess trucking capacity impacted volumes across all of our lines of business,” Donald Seale, Norfolk Southern’s executive vice president, said on a July 29 conference call. He noted that the economic weakness drove away more domestic business than companies such as J.B. Hunt Transport Services were able to convert from trucking to intermodal.

Like motor carriers that are anticipating current market conditions to continue, none of the railroads foresaw much growth in the second half.

“We’re not expecting to see the same step-up in volumes that we normally would see between third and second quarters in a normal year,” said Matt Rose, CEO of Burlington Northern Santa Fe. “Now, that may happen later in the quarter, but we’re not expecting to see it.”

“Our expectation for a fall peak [in freight volumes] is very minimum,” Gooden said.