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BNSF’s Operating Margin Fell in Q2 2018

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BNSF’s operating margin

Previously, we discuss Berkshire Hathaway’s (BRK.B) BNSF (Burlington Northern Santa Fe) Coal segment’s performance. In this part, we’ll discuss the railroad’s operating margin performance in the second quarter.

While BNSF’s revenues rose 12% YoY (year-over-year) in the second quarter, the operating expenses grew 15.4% YoY. The company’s operating profit rose 5.4% YoY to $1.8 billion in the second quarter from $1.7 billion in the second quarter of 2017. Higher growth in BNSF’s operating expenses compared to the revenues indicates that the operating margin contracted. The railroad’s operating margin contracted by 200 basis points to 32% in the second quarter—compared to 34% in the second quarter of 2017.

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BNSF’s operating expenses breakup

In the second quarter, BNSF’s compensation and benefits expenses rose 5.8% YoY due to labor inflation, higher volumes, and increased health and welfare costs. Fuel expenses rose 43% YoY to $830.0 million from $577.0 million in the second quarter of 2017. Increased average fuel prices and higher volumes led to higher fuel expenses.

The purchased services expenses grew 17.4% YoY during the second quarter. Increased purchased transportation costs for BNSF’s logistics services business and higher intermodal ramping, drayage, and other volume-related activities drove the purchased services higher in the second quarter. Materials and other expenses rose 54.2% YoY to $381.0 million from $247.0 million in the second quarter of 2017. The rise in these expenses was due to increased locomotive materials, derailment-related costs, and personal injury expenses.

Peers’ operating margins

In the second quarter, most of the Class I railroads (XLI) experienced higher volumes and pricing gains. As a result, the YoY operating margin was higher for some of the railroads during the second quarter. While Norfolk Southern (NSC) and CSX (CSX) were able to improve their operating margins, Union Pacific (UNP) and Kansas City Southern (KSU) witnessed a contraction in the second quarter.

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