(The following story by Robert Wright appeared on the Financial Times website on February 8, 2009.)
LONDON — North America’s principal rail companies underlined their growing resilience and pricing power by reporting improved operating profits for the quarter when the economic downturn started in earnest.
Over the past three weeks, the four biggest US-based operators – Union Pacific, BNSF, CSX and Norfolk Southern – all reported improved operating profits for the quarter compared with 2007, in spite of sharp volume falls in some commodities.
Anthony Hatch, an independent railroad analyst, said the last quarter’s figures showed the companies had continued to enjoy the power to maintain prices they developed in the years of strong growth between 2003 and 2007.
In the past, railroads were often forced to slash their rates during a recession to win traffic from trucking companies and keep the cash flow necessary to service their debts.
“In the fourth quarter, we went from a slowdown to a complete collapse in demand,” Mr Hatch said. “Railroads responded with a good quarter. It’s further evidence that the rail renaissance, as I call it, is actually happening.”
Railroads’ finances have improved as growing traffic levels have filled up the available capacity of their networks. For many, that has raised the returns on investments in new capacity above the cost of the capital required for the first time in more than 60 years.
Even in areas where demand fell in the fourth quarter, revenue generally fell less than traffic. BNSF, which with Union Pacific dominates rail traffic in the western two-thirds of the US, saw volumes of automotive traffic – mainly new cars – fall 28.6 per cent between the last quarters of 2007 and 2008. But revenue per unit moved rose 20 per cent. Similarly, international inter-modal traffic – shipping containers moving between ports and end-customers – fell 11 per cent but revenue per unit moved rose 5.9 per cent.
The companies’ pricing power was still more evident in the areas where demand remained strong. Norfolk Southern, which depends on coal mined in West Virginia and Pennsylvania for about a quarter of its revenues, benefited both from steady domestic demand for power station coal and continuing export demand. Coal volumes in the fourth quarter were up 5 per cent on the previous year, while revenues rose 33 per cent to $798m.
However, according to Mr Hatch, demand for railroads to move containers within North America could be a still more positive long-term sign. Many observers had believed growth in recent years in the segment was dependent on high fuel prices, which made it cheaper for trucking lines to send goods by train for most of their trips.
The only slight falls in volumes in the fourth quarter, when fuel prices fell substantially, suggest that instead a long-term shift of such traffic from road to rail is under way.