Kansas City Southern operating income sets quarterly record

Energy and autos spur traffic growth
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KANSAS CITY, Mo. — Kansas City Southern on Friday reported all-time high quarterly operating income and the railroad set a record for second-quarter revenue thanks to strong growth in energy and automotive traffic.

Revenue was up 15 percent for the quarter, to $656 million, on a 6-percent increase in carloads. Operating income for the quarter was up 9 percent, to $239 million. The railroad’s operating ratio rose to 63.5 percent, up from 61.3 percent a year ago, largely due to one-time gains that pushed last year’s operating ratio down.

“This was clearly the strongest growth quarter we’ve seen in more than two years,” CEO Pat Ottensmeyer said on the railroad’s earnings call.

Carloads were up in four of KCS’s six commodity groups, led by robust gains in energy-related traffic, which was up 41 percent, and automotive business, which was up 23 percent.

The railroad is gaining momentum, KCS executives said, as growth ramps up and protectionist trade sentiment subsides.

“Some of the storm clouds that have darkened our horizon seem to be going away,” Ottensmeyer said regarding controversies about the North American Free Trade Agreement.

The U.S., Mexico, and Canada next month will begin renegotiating the treaty, rather than tearing it up as President Donald Trump and his administration had threatened. It’s encouraging, KCS executives said, that streamlining customs at border crossings is among the goals of the negotiations. And the railroad doesn’t have any concerns with the list of items the U.S. aims to renegotiate, Ottensmeyer says.

KCS brought several new capacity projects online during the quarter, including a new terminal that serves the Kia assembly plant near Monterrey, Mexico; new trackage at the expanded Sanchez Yard in Nuevo Laredo, Mexico; six miles of double-track near auto production areas in Mexico; as well as a new 10,000-foot siding in its corridor serving the port of Lazaro Cardenas on Mexico’s Pacific Coast.

The improvements at Sanchez Yard, along with better customs and crew-change procedures, enabled KCS to increase its daily train count across the Laredo bridge by 15 percent as cross-border traffic volume grew 11 percent. Time to process southbound traffic fell 13 percent, while northbound trains were processed 5 percent faster.

KCS expects further enhancements at the Laredo gateway. It’s begun a pilot program for using international crews and co-location of U.S. and Mexican customs is planned.

Terminal dwell decreased to 22.2 hours during the quarter, which was 5 percent better than the first quarter and down 10 percent from the peak in the fourth quarter of 2016. Average train velocity slipped, to 27.1 mph from 28.4 mph a year ago, due in part to an increase in bulk trains in the U.S., says Jeff Songer, chief operating officer.

The majority of U.S.-based crews have been recalled to work amid the traffic growth. KCS still has 8 percent of its locomotive fleet in storage, however, and was able to handle the additional traffic with roughly the same number of road units.

KCS has a favorable outlook for about two-thirds of its traffic this year, including intermodal, chemical and petroleum, and automotive business. The railroad has a neutral view on nearly a quarter of its traffic, including energy and agriculture and minerals business. Industrial and consumer traffic, which accounts for 13 percent of volume, is the only segment with an unfavorable outlook.

Energy-related business is booming since Mexico began allowing imports of fuel from the U.S. KCS’s shipments of diesel, unleaded gasoline, and propane helped push energy traffic up 223 percent this year. More growth is expected as storage and distribution terminals are built in Mexico.

Although intermodal volume fell 1 percent in the quarter, cross-border intermodal traffic surged 23 percent. KCS’s joint intermodal service with BNSF Railway, launched in December, is growing faster than expected.

“We’re very pleased with the results of the new service,” says Brian Hancock, chief marketing officer.

KCS reported earnings per share of $1.27, and adjusted earnings per share of $1.33. Wall Street analysts were expecting KCS to report earnings of $1.27 per share, according to Thomson Reuters I/B/E/S, up from $1.22 a year ago.

NEWSWIRETrains News Wire

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