Lower Coal Demand Cut Class I Profits

By Daniel Niepow, Associate Editor

Although the Class Is’ second-quarter financial results were mixed, one theme emerged: Lower coal volumes made a dent in already dampened profits. Even intermodal traffic, which has remained strong throughout 2015, couldn’t quite make up for the drop in coal demand.

Throughout June, for example, U.S. railroads logged decreases in their number of coal carloads, according to the Association of American Railroads’ weekly traffic reports. But coal wasn’t the only commodity that dropped; carloads of primary metal products, as well as petroleum and petroleum products, consistently fell each week.

As Kansas City Southern Chief Executive Officer David Starling put it in a press release: “[T]here are still uncertainties in many of the primary markets served by rail.”

What follows is a summation of each railroad’s 2Q results. (More detailed information on quarterly performance can be found by clicking on a Class I’s name.)

Union Pacific Railroad

A sharp decline in coal traffic and decreased overall volumes offset the positive impact of core pricing gains. Net income for the quarter fell 3 percent to $1.2 billion versus $1.3 billion in the same quarter last year. UP’s operating ratio rose 0.6 points to 64.1 and its revenue dropped 10 percent to $5.4 billion. Coal traffic plunged 26 percent to 309,000 units, industrial products carloads tumbled 13 percent to 306,000 units and agricultural products volume declined 7 percent to 225,000 units.

Norfolk Southern Railway

Likewise, strong headwinds due to weak coal demand and lower fuel surcharge revenue had an impact on NS’ results. Operating revenue fell 11 percent to $2.7 billion; net income dropped 23 percent to $433 million; and the railroad’s operating ratio climbed 3.5 points to 70. During the Class I’s earnings conference call on July 27, NS officials announced that the railroad’s capital spending budget for 2015 had been trimmed by $130 million, or about 5 percent, due to business conditions during the first half of the year.

CSX Corp.

Despite losses in coal volumes, CSX set three all-time financial records and surpassed analysts’ expectations in 2Q. Operating income rose 2 percent year over year, reaching the $1 billion mark for the first time in the railroad’s history. The Class I shaved its operating ratio to 66.8, down 2.5 points, and earned $553 million in net income, a 5 percent increase. Still, CSX’s coal revenue fell 15 percent to $630 million and overall volume decreased 11 percent.

Kansas City Southern

The Class I logged $586 million in quarterly revenue, down 10 percent, as overall carloads decreased 6 percent. Net income for the quarter totaled $112 million compared with $130 million a year ago. KCS finished the quarter with an adjusted operating ratio of 68.1, which worsened by 1.1 points.

Canadian Pacific

Canadian Pacific announced its highest-ever net income for the second quarter, along with its lowest operating ratio for the period in company history. Net income rose 12 percent to $390 million, while CP’s operating ratio fell 4.2 points to 60.9. Revenue in the quarter slipped to $1.65 million, down from $1.68 million in the previous year’s second quarter. (All figures were reported in Canadian dollars.)

CN

Cost-cutting measures paired with improved fuel costs aided CN’s better-than-expected 2Q profit, which came in at $886 million (in Canadian dollars), up from $847 million last year. The railroad’s operating ratio improved 3.2 points to 56.4. Revenue for the quarter remained flat at $3.125 million, although coal revenue dropped 26 percent.