(Reuters circulated the following article by Nick Carey on April 19.)
CHICAGO — U.S. railroad CSX Corp. should be able to raise prices in 2007 for the third consecutive year as the competing trucking industry lifts rates to cover costs linked to new emission standards, the company’s top executive said on Wednesday.
“With the U.S. trucking industry facing a driver shortage and high fuel prices already, the higher cost of the new diesel should allow us to increase prices again in 2007,” CSX Chief Executive Officer Michael Ward told Reuters in an interview.
The trucking industry has to meet new U.S. diesel emission standards coming into force that require more expensive low-sulphur fuel and new engines.
CSX raised prices by up to 5.5 percent in 2005 and is on track to implement similar increases in 2006, which should help it achieve a goal of meeting its cost of capital, Ward said.
The Jacksonville, Florida-based company is not yet meeting that capital cost of between 8 percent to 9 percent, but Ward said CSX “will meet cost of capital within the next couple of years to justify to our lenders and shareholders the investments we are making in our network.”
The company has planned capital expenditures for 2006 of $1.42 billion, compared with $1.05 billion in 2005.
Ward spoke to Reuters a day after CSX reported first quarter earnings of $1.06 per share, significantly above market expectations of 88 cents a share.
Analysts reacted warmly to the results, in particular because profits and revenue rose despite a 1 percent decline in freight volumes on the year. Wall Street also responded to performance improvements from its “ONE Plan” efficiency drive.
Shares of CSX jumped nearly 6 percent in early trading on Wednesday but pared their gains to be up 3.5 percent at $69.63 a share in afternoon trading on the New York Stock Exchange.
Ward said the company’s previously stated target of 2 percent to 3 percent annual growth in freight volumes still stands, with the company’s sales and marketing teams working to sell capacity on the railroad.
CSX is using 65 percent of its capacity and will work to sell more based on the “improvements in service that the ONE Plan have brought us,” said Ward. This should keep the company on target to deliver the compound double-digit annual earnings growth CSX has announced for the next five years.
Ward defended the company’s fuel surcharge policy, saying that “in no way is this designed to make us money.”
U.S. railroads and other shippers have passed on higher fuel costs through surcharges, with customers complaining the railroads are profiting from the practice.
The U.S. Surface Transportation Board (STB) has called a hearing on May 11 to examine rail fuel surcharges. Ward said the main focus of the hearings is to “find out whether we have over-recovered our fuel costs.”
“I am confident the STB will find that we have not done so,” Ward said.
Ward said rising demand for ethanol, to replace the water-polluting gasoline additive MTBE, should not conflict with high demand for coal shipping on CSX’s network.
“There is not much overlap between coal and ethanol on our network,” Ward said.
“Although there may be some local shortages in ethanol this summer, it will not be because of CSX’s ability to deliver it.”