(The following story by Robert Wright appeared on the Financial Times website on September 20, 2009.)
The US railway that spent 18 months fighting a hedge fund demanding it cut investment is spending $1.6bn this year to prepare for a post-recession rebound, said its chief executive.
The comments by Michael Ward, of CSX Corporation, are the latest bullish sign from the US railroad sector, where improved returns and profitability of recent years have held up surprisingly well in the recession’s slump in traffic.
It is a sign of renewed confidence from CSX, which was one of the worst-performing large US railroads for many years. This followed its botched integration in 1999 of parts of Conrail .
Between October 2007 and April this year, The Children’s Investment Fund, a London-based hedge fund, tried to push CSX to raise borrowing, hand cash back to investors and reduce capital spending. TCI, which with 3G, another hedge fund, had appointed several directors to CSX’s board, sold its stake suddenly in April.
CSX is now “on a par with or better than” other large US railroads, Mr Ward says. In this year’s second quarter, CSX had an operating ratio – the proportion of revenue taken up by operating costs – of 73 per cent. This is better for example than the 74.8 per cent of the Norfolk Southern railroad or the 75.2 per cent of the Burlington, Northern and Santa Fe railroad – both had been better performers in recent years.
“One of the big questions everybody has had is, ‘How do [railroads] fare during a recession?’” said Mr Ward. “We’re doing quite well, all things considered. The market is starting to say, ‘Gee, this railroad industry can withstand a recession’.”
The company was investing in track upgrades and terminals to receive and distribute goods to be ready for the recovery, Mr Ward added. “We’re still finding $1.6bn this year for further investments.”
Traffic fell less sharply in the second quarter of the year than in the first, Mr Ward said. Unusually, the third quarter was so far producing higher traffic levels than the second. But some forms of traffic, including automotive parts and intermodal traffic – goods moved in shipping containers – were down sharply from their peak.
CSX has responded by parking 600 of its 3,600 engines and 30,000 of its 93,000 coaches, while putting 2,400 employees on extended leave. “What we’ve been able to do is resize the network,” Mr Ward said. “We said, ‘We have much lower volumes here. How do we still serve the customers well and do it with a lot fewer trains and a lot fewer people?’”
But long-term factors that fuelled recent years’ rail traffic growth were still at work, he insists. They included a growing tendency for trucking companies to use trains for long-haul moves of containers, to save on expensive fuel and labour, though rate cuts from desperate small trucking lines masked the trend.
“We think long term, so we don’t overreact to some of these short-term aberrations,” Mr Ward said.
Factors favouring rail would re-emerge particularly strongly when consumer spending rebounded, Mr Ward said.
He expected that to happen in spite of recent increases in saving by US consumers.
“We think the highways in the US are going to get more and more congested.
“There’s going to be a real position for us and we’re investing accordingly.”