(The following article by Andrew Ward was posted on the Financial Times website on April 26.)
ATLANTA — US railway operators have reported another quarter of record profits as solid economic growth continues to generate increased freight volumes.
Norfolk Southern on Wednesday became the last of the four main rail companies to release first-quarter results, revealing a 57 per cent increase in net earnings to $305m. Last week, Union Pacific, the biggest operator, said its net profits had more than doubled during the same period to $311m. The US rail industry has operated close to full capacity for two years, allowing operators to impose sharp price increases on customers such as retailers, manufacturers and energy companies.
Rising earnings have caused investors to rethink their attitude towards the rail industry, traditionally known for its low returns on capital. US rail stocks have risen by an average of 67 per cent over the past year.
In addition to the normal expansion in freight associated with economic growth, railways have also been winning business from road haulers because of a truck driver shortage and rising fuel costs. Fuel represents about 18 per cent of rail costs compared with 25 per cent of trucking costs, making it a more efficient way to move goods.
“Higher fuel costs are a railroad’s best friend up until the point at which it starts affecting the economy,” said Matthew Rose, chief executive of BNSF, the second-largest operator.
BNSF increased its net profits by 28 per cent to $410m, driven by double-digit revenue growth from consumer goods, industrial products, agricultural produce and coal.
The only large operator not to increase net profits was CSX, which reported a dip in earnings to $245m because of a one-off gain last year. But underlying profits rose 56 per cent.
Most of the industry’s growth came from higher prices rather than increased volume because the network has little surplus capacity. Union Pacific’s average revenues per carload climbed 13 per cent, compared with a 4 per cent growth in carload volume.
Rail companies have sharply increased investment in infrastructure to absorb demand. But many customers believe the industry is still not doing enough to tackle congestion.
Union Pacific, whose customers have suffered the worst service problems, saw dwell time – the time spent by freight in sidings – edge down in the first quarter, suggesting its network is starting to flow more smoothly.