(The following story by Randolph Heaster appeared on The Kansas City Star website on October 26.)
KANSAS CITY — Railroads and truckers move freight that fuel the nation’s economy, but in the face of an economic slowdown, railroads are doing well while trucking companies are in a skid.
That was evidenced by earnings announcements of two prominent area transportation companies Thursday, Kansas City Southern and YRC Worldwide Inc.
Kansas City Southern beat investor expectations in its third quarter, showing sharp increases in both its earnings and revenues. The company’s stock was up 68 cents in trading Thursday, closing at $37.24 a share.
On the other hand, Overland Park-based YRC endured another tough three months in what is becoming a disappointing year. The trucking giant reported earnings below investor expectation and 57 percent lower than the last year’s third quarter. YRC released its results after the markets closed but its stock was down more than 70 cents a share in after-hours trading after closing at $25.96. Last week, it hit a series of 52-week lows.
Bill Zollars, YRC chairman and chief executive, has been widely quoted in recent weeks about the economy’s softness and the lack of a “peak season” occurring for the trucking company. August and September are normally the months the transportation companies get especially busy as shipments for the holiday season generate higher volumes. That has not happened this year.
“The peak season will be very muted,” said Jason Seidl, transportation analyst at Credit Suisse. “No one is experiencing higher volumes.”
While YRC and other trucking firms report disappointing results and are lowering forecasts, Kansas City Southern and other rail carriers posted higher profits and revenue for the third quarter.
The trucking and rail companies are essentially in the same business, but there is far less competition for the railroads.
“It’s absolutely, 100 percent because of pricing,” Seidl said. “The railroads now have the ability to pass on their rates to customers after years and years of price declines.”
In most cases, railroad customers do not have more than two choices if they want to ship by rail.
“It’s a duopoloy, and in many cases railroads have captive shippers,” which are customers who can only use one carrier, Seidl said.
On the other hand, trucking customers have a wide array of choices in a very competitive field that pressures rates lower.
“Shippers can use virtually any trucker they want, unless it’s some highly specialized commodity,” Seidl said.
Another factor is the types of goods railroads move that cannot be hauled by truck.
“Even though you’re seeing softness in freight volumes, railroads move commodities not impacted by the economic slowdown, such as agriculture and coal,” Seidl said. “If we have an especially frigid winter, you’ll see higher demand for coal from the utilities going into 2008.”
For the three months ended Sept. 30, Kansas City Southern earned $41.8 million, or 48 cents a share, on $444.1 million in revenue. During the same time last year, the company earned $26.4 million, or 32 cents a share, on $415.7 million in revenue.
Michael R. Haverty, Kansas City Southern’s chairman and chief executive, said the company showed improved operating results despite a slower-than-expected economy. The company said it expected more revenue to be generated from the recent completion of the first-phase expansion of the Port of Lazaro Cardenas in western Mexico, which the railroad serves.
Late Wednesday, Kansas City Southern also said it planned to seek approval from both the U.S. and Mexican governments to build a new rail bridge over the Rio Grande River southeast of Laredo, Texas.
For YRC, however, a weak freight market drove earnings sharply lower, in addition to slightly lower revenue. Management changes also were announced with YRC’s release of quarterly results.
For the three months ended Sept. 30, the company earned $40.74 million, or 70 cents a share, on $2.46 billion in revenue. Last year at this time, the company earned $95.79 million, or $1.64 a share, on $2.57 billion in sales.
Bill Zollars, YRC’s chairman and chief executive, said that YRC National Transportation and YRC Logistics have performed better than the industry average in a difficult environment but that YRC Regional Transportation needs some attention.
“YRC Regional Transportation faced additional challenges from consumer-mix and integration issues, and as a result, performed well below expectations,” he said. “We are taking appropriate actions to address these performance issues.”
YRC also announced that Jim Staley, president of YRC Regional, is retiring at the end of the year. He is replaced by Keith Lovetro, who recently joined the company.