Railroads’ operating margins
Earlier, we assessed the changes in US railroads’ freight volumes in 2Q17. In this part, we’ll cover the operating margins of these railroads. Railroads focus on one important metric, operating ratio. The operating ratio is the flip side of operating margin. Operating margins are expressed as operating income as a percentage of revenue.
Eastern US operating margins
The 2Q17 operating margin for Norfolk Southern (NSC) was 33.7%, up 230 basis points from 31.4% in the same quarter last year. While NSC’s revenues jumped 7.5% in 2Q17, operating expenses rose 3.9% in the same quarter. The company’s operating margin growth has been in line with its efficiency improvement 2020 plan.
NSC rival CSX’s (CSX) operating margin saw a 1.6% rise in 2Q17. The company’s margins rose to 32.7% in that quarter from 31.1% a year before. The company registered 8% growth in revenues on a 6% rise in operating expenses. With CEO Hunter Harrison’s precision railroading model, CSX will most most likely witness higher operating margins in the coming quarters.
Operating margins of Western US railroads
In the Western US, dominant carrier Union Pacific’s (UNP) 2Q17 operating margins rose by 340 basis points to 38.2% from 34.8% in 2Q16. The sizeable rise in operating margins was on account of 10% growth in revenues against a 4% rise in operating expenses. Notably, UNP’s G55 + 0 efficiency plans have seen results in 2Q17. G55 denotes an operating ratio of 55%, whereas “0” represents zero injuries.
BNSF Railway (BRK-B) registered a 1.6% rise in operating margins in 2Q17. The company’s margin was 34% in the same quarter compared with 32.4% in the same period last year. Note that BNSF’s operating revenues jumped 14.5% in that quarter, whereas operating expenses rose 11.8%.
Kansas City Southern (KSU) was an exception in the peer group with lower operating margins of 36.5% in 2Q17. The same was 38.7% in the second quarter last year. KSU’s operating expenses rose 19.6% on a 15.4% increase in operating revenues. Non-class I railroad Genesee & Wyoming (GWR) reported a 140-basis-point rise in 2Q17 operating margins. The same was 18.8% compared with 17.4% in 2Q16.
Operating margin of Canadian railroads
Among all the US Class I railroads (XLI), Canadian National Railway (CNI) is an industry leader in operating margins. But, surprisingly, the company’s operating margins in 2Q17 contracted marginally to 44.9% from 45.5% in the second quarter last year. Even though CNI’s operating revenues rose by an enviable 17.2%, its operating expenses jumped higher by 18.4% in the reported quarter.
CNI rival Canadian Pacific Railway’s (CP) 2Q17 operating margins expanded 330 basis points to 41.3% from 38% in 2Q16. CP was the only company that reported a wide gap between the revenue growth and rise in operating expenses. The company’s operating revenues jumped 13.3% in 2Q17, whereas operating expenses rose 7.2%.
The next article discusses the cash flows of these railroads in 1H17.