During second quarter 2016, North American railroads continued their struggles with declining traffic volumes. Total revenue units (carloads and intermodal units) were down for all carriers but those involved with Mexico (FXE, KCS, and KCSM). While KCS traffic volumes remained flat, FXE and KCSM saw some growth, indicating greater acceptance of Mexican railway transportation among shippers, a still growing national economy, or some combination thereof. General merchandise was up for only BNSF, KCS, and KCSM (accounting for all of KCS’s growth), while intermodal was down for all carriers except FXE and KCSM. Coal carloadings were down across the board, continuing the decline in that once highly important commodity. Revenue ton-miles were also down for all railroads, except for FXE, KCS, and KCSM.
Not surprisingly, lower year-over-year traffic volumes led to lower revenues for almost all carriers. FXE was the only railroad able to buck the declining revenue trend this quarter. In addition, FXE, GWR, and CN, were the only railroads to increase average revenue per car year-over-year.
In terms of operating ratio, BNSF, CN, FXE, GWR, KCS, KCSM, and NS all lowered theirs year-over-year.
Cost control at KCS, KCSM, and NS had a large influence on operating ratio improvement, while revenue growth per RTM had a greater bearing on those at BNSF and FXE. For CN, both revenue growth and cost control helped it to improve its operating ratio year-over-year.
This quarter, improvements in operating ratio were not necessarily followed by greater operating income year-over-year. While FXE set a new quarterly operating income record for itself, only KCS and KCSM improved their operating income year-over-year.
Operationally, all carriers lowered their average yard dwell and raised train velocity relative to last year. In addition, CP, CSX, FXE, KCS, KCSM, and UP improved their year-over-year employee utilization, as measured by revenue ton-miles per employee.
Finally, capital expenditures were generally either flat (CN, CP, and NS), or down (every other carrier, with UP showing the largest absolute decline), compared to last year. It is interesting to note that Q2 2016 tie purchases by railroads were substantially higher than any other quarterly purchases over the past two years, indicating more roadway maintenance work in the coming quarters.
Altogether, it looks as though Q2 2016 was the quarter of the Mexican railroads. FXE and KCSM were able to not only counteract the declining volume trend affecting the greater North American railroad industry, but they were also able to either grow their revenue (FXE), or at least arrest the decline (KCSM) affecting the other North American carriers. Further, both FXE and KCSM were able to lower their operating ratios to keep more of that revenue flowing to their bottom lines.
One last note: on September 8, the Surface Transportation Board released its industry cost of capital number and the rate of return on net investment for all Class Is under its purview for 2015. The cost of capital fell once again to 9.61%. However, rather than seeing more railroads become revenue adequate, the number remained at four, as in 2014. For 2015, CN and CP’s US operations were deemed revenue adequate, while BNSF and UP were also. Interestingly, 2015 is the first year that NS was not deemed revenue adequate since 2010.