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US Class I Rail Companies Report Good 2017 Earnings

From a financial perspective, 2017 was an ok year for US Class I rail companies that publicly report earnings. Coal, petroleum and intermodal contributed to earnings for these companies in one variation or another. Operational improvements and rising rates and surcharges further helped boost profits. As indicated by most of the rail companies, the outlook for 2018 is promising. In particular intermodal demand should see an increase as shippers shift from truck to a rail/truck combination thanks in part to rising truck rates, diesel prices and capacity constraints in the trucking market.

Revenue was positive across the public rail companies with CSX reporting a 3% increase for 2017, $11.4 billion. Norfolk Southern reported a 7% gain to $10.6 billion; Union Pacific 2017 revenue gained 7% to $21.2 billion and Kansas City Southern reported a record 2017 revenue of $2.6 billion, up 10.7% from 2016.

In terms of profitability, Norfolk Southern’s net income was up 15% to $5.5 billion while CSX’ net earnings were up a whopping 219% to $5.4 billion. CSX has been focused on operational improvements to ‘drive efficiencies through process improvement and respond to business mix shifts’. These improvements included workforce reduction and further measures to streamline general and administrative and operating support functions to speed decision making and cost management. Union Pacific also noted more than doubling its net income from 2016 – $10.7 billion compared to $4.2 billion in 2016. Lastly, Kansas City Southern continued to impress with record operating income of $922 million, a 13% increase from 2016.

In terms of volumes, a mixed picture emerges. Norfolk Southern’s volumes increased 5% during 2017. The company attributed it to increased steel production and drilling activity. However, in 2018, Norfolk Southern expects growth opportunities in intermodal and its merchandise markets.
CSX volumes were up 1% for the year but revenue per unit was up 4% so the company benefited from operational improvements. The only growth areas were in coal exports and in international intermodal due to new customers, strong performance of existing customers as eastern port volumes increased.

Union Pacific noted declines in its international intermodal (down 2%) and increase in domestic intermodal (up 1%). Of note, it reported an increase in parcel shipments during fourth quarter. In addition, its coal business group reported increased volumes as did its industrial products group which the majority comprises of construction, frac sand and metals.

Kansas City Southern’s volumes were up 5% with strongest performance from frac sand up 67% and crude oil up 45%. Revenue per unit was highest within the frac sand commodity, up 25% from 2016.

All four rail companies are optimistic about 2018. In addition each plans to increase capital spending for 2018. Norfolk Southern plans to spend $1.8 billion, up from $1.7 billion in 2017 while Union Pacific plans to invest $3.3 billion. The Journal of Commerce reported that Kansas City Southern plans to begin a three-year project to rehabilitate a line between Monterrey Mexico and Brownsville, Texas. Cross-border service is important to this rail company. It also plans to upgrade a couple of rail lines in Mexico to boost transport of automobiles. According to Reuters, more than a quarter of its revenue comes from U.S.-Mexico shipments. Cross-border is also important for Union Pacific which serves all the main U.S.-Mexico rail gateways and has made significant investments such as facilities in Texas to meet the growth.

All rail companies are closely watching the NAFTA re-negotiations. According to the Association of American Railroads, 35% of annual U.S. rail industry revenue is directly linked to international trade. In addition, 2018 may see increased demand for rail intermodal which could conflict with bulk/chemical transportation needs. As such, shippers may be forced to pay more for transportation this year as fuel and demand increases.

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