Profits Jump at Largest Railroads Despite Drop in Freight Traffic

By Rip Watson, Senior Reporter

This story appears in the Oct. 27 print edition of Transport Topics.

North America’s five biggest railroads flexed their pricing muscles to earn $2.85 billion in the third quarter, raising revenue per shipment 20% despite lower freight traffic.

Most railroads reported record earnings for the quarter as less-than-truckload earnings generally fell and truckload profit rose.

By comparison, the 15 trucking companies that reported earnings through Oct. 23 had aggregate net income of $300 million, based on a Transport Topics compilation from company re-ports. That means those five railroads earned nine times more profit from their combined revenue of $17.8 billion, not quite double the $9.7 billion in revenue for the trucking fleets.

“Railroads have pricing power that truckers don’t have,” said Jason Seidl, a Dahlman Rose analyst. “On the worst day at a railroad, you have a duopoly. Trucking is a highly fragmented marketplace, so they have no pricing power at all.”

Rails’ revenue growth reflected a mix of underlying rate increases and higher fuel-surcharge collections, the companies said.

Part of the upbeat rail picture was a double-digit increase in domestic intermodal freight switched from the highway, primarily in the East. Total North American rail traffic fell 1.8% in the quarter, the Association of American Railroads said.

Revenue per load rose 24% and profit rose 35% at Norfolk Southern. Load revenue and profits gained 21% and 29% respectively at CSX Corp., while Canadian National Railway made 10% more per shipment and 14% more in profits.

In the West, Union Pacific Corp. raised revenue per shipment 22% and net income by 32%. Burlington Northern Santa Fe Railway reported increases of 23% and 31% on that basis.

Seidl said railroads also are gaining from: continued ability to raise rates at double-digit rates as old contracts expire; more fluid network operations as traffic declines; and fuel-surcharge collections that are climbing as diesel prices drop.

BNSF’s net income reached $695 million, or $2 a share, as revenue rose 21% to $4.91 billion. Domestic intermodal traffic rose 5% and revenue rose 21%, but international intermodal traffic dipped 10%. Total traffic dropped 1.5%.

At Norfolk Southern, about 40% of the increased revenue per shipment was rate increases and 60% was fuel surcharges. The rail line’s revenue rose 23% to $2.9 billion, driving net income to $520 million. Coal revenue per load was up 43%, largely due to higher exports.

Norfolk Southern’s domestic intermodal business rose 18%, including a 25% rise in less-than-truckload freight. Revenue per intermodal load rose 16%. 

The rail earnings picture looks similar for this quarter.

“[Union Pacific] expects to produce strong year-over-year earnings growth in the fourth quarter despite the continuing effect of the economic slowdown on our business,” Chief Executive Officer James Young said in a statement.

“For intermodal, we expect to see continued growth in our domestic market as we collaborate with truckload carriers, beneficial owners and third parties to convert traffic from the road to rail,” said Norfolk Southern Executive Vice President Donald Seale on Oct. 21.

At rival CSX, domestic intermodal volume rose 10%, while international fell 8%, slightly less than the 9% drop at Norfolk Southern. CSX’s intermodal revenue rose at an 18% rate, lagging the 23% per shipment increase on carload freight.

CSX said the pricing gains on freight such as coal and grain offset a drop of 2% in total freight.

Net income for CSX when a year-earlier tax gain was excluded hit $382 million and revenue increased 18% to $3 billion.

Union Pacific profit reached $703 million and revenue rose 16% to $4.85 billion despite a 5% drop in volume. Grain revenue rose 27% and coal rose 28%, while domestic intermodal rose 2% and international fell 14%.

For Canadian National, net income rose to C$552 million ($530 million U.S.), as revenue rose 12% to C$2.26 billion. The rail line’s operating ratio was an industry-leading 62.6.