Will cost-cutting offset traffic woes?

Fourth-quarter Class I railroad earnings previews
Trains Industry Newsletter
Get a weekly roundup of the industry news you need.
By signing up you may also receive occasional reader surveys and special offers from Trains magazine. View our privacy policy.
92211436993184
An eastbound UP freight train rolls through Hanna, Wyo., on June 22, 2015.
Chase Gunnoe
The Class I railroad earnings season kicks off on Tuesday, Jan. 17, when CSX Transportation announces its full-year and fourth-quarter results after the stock market closes. Here’s what to watch.

MIXED BAG FOR PROFITS

Railroads faced numerous headwinds in 2016. Among them: Traffic declines, depressed coal shipments, increased competition from trucks, lower fuel surcharge revenue, and faltering price increases.

The Class Is responded by laying off employees, parking locomotives and cars, idling yards and shops, and taking steps to improve efficiency, such as running longer trains. Just how much these cost-cutting efforts paid off will show up in the railroads’ earnings reports.

In the East, CSX projected its earnings per share would be flat to slightly up, while Norfolk Southern was expecting flat to moderate traffic growth for the fourth quarter. Union Pacific expected its fourth-quarter volumes to be down slightly. In Canada, Canadian National expects earnings to grow by 1 percent or so for the year, while Canadian Pacific expects its full-year earnings growth to be in the mid-single-digit range.

WHAT TO WATCH
Capital Expenses: Railroads typically announce their annual capital budgets during their January earnings calls. While the Class Is are expected to continue to spend roughly the same amount on basic maintenance and continue to pay for positive train control installation, how much they will earmark for capacity improvement projects remains an open question.

Most of the Class Is shelved at least some capacity projects in 2016 amid the traffic downturn. CSX is expected to ramp up its growth spending as part of the CSX of Tomorrow strategy, which likely will focus on extending sidings and adding double-track on its corridor linking Chicago, Atlanta, and Jacksonville.

Locomotive purchases are also part of railroads’ capital budgets. Most Class I railroads — including Canadian Pacific, CSX, Union Pacific, and Norfolk Southern — have said they don’t expect to order additional units anytime soon.

Operating Ratios: In the third quarter, Canadian National posted a record-low operating ratio of 53.3 percent. Canadian Pacific has been closing the gap with CN, which has led the industry for years. Both railroads will tell you that operating ratio is just one key measure among many. But the reality is that executives in Calgary and Montreal pay close attention to their rivals. Norfolk Southern is also under the microscope after pledging to push its operating ratio to 65 or below by 2020, and below 70 for 2016, under new CEO James Squires.
ClassIearnings
Outlook for 2017: During earnings calls, executives are expected to provide more detail on each railroad’s outlook for various traffic segments this year. Traffic strengthened in December, with gains in 13 out of 20 categories tracked by the Association of American Railroads.

The Trump Effect: What are railroads’ expectations for free trade in North America and how will they respond to President-elect Donald J. Trump’s pressure on the auto industry, in particular, regarding Mexican manufacturing? This is a key growth segment for Kansas City Southern, which has called itself the NAFTA railroad, referring to the North American Free Trade Agreement that permits goods to move tariff-free among the U.S., Canada, and Mexico. Cross-border traffic also is important for CP and CN, and on Jan. 13, a Trump spokesman said cars made in Canada could be subject to a border tax, as well.

Pricing: Last year most of the Class Is had difficulty maintaining price increases at the levels that have seen over the past few years. Will this troublesome trend continue in the fourth quarter? The industry aims for freight rate increases above the level of inflation, which allows railroads to profitably invest in their networks.

NEWSWIRETrains News Wire

  • Previous Day
  • January 16, 2017
  • Next Day
Leave a Comment
Want to leave a comment?
Only registered members of TrainsMag.com are allowed to leave comments. Registration is FREE and only takes a couple minutes.

Login or Register now.
Please keep your feedback on-topic and respectful. Trains staffers reserve the right to edit or delete any comments.
0 COMMENTS
FREE DOWNLOAD

FREE DOWNLOAD

The Genesee & Wyoming 

Newsletter Sign-Up

By signing up you may also receive occasional reader surveys and special offers from Trains magazine.Please view our privacy policy
Subscribe Up To 58% off the newsstand price!
Subscribe To Trains Mag Today
+