Wednesday, June 16, 2010

Commentary: It all boils down to productivity

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In a struggling economy, how have the railroads been able to produce solid earnings, consistently outperforming financial barometers like the Dow Jones Industrial Average or the S&P 500? It can be summed up in one word: productivity.

 

ns-productivity.jpgAt Wednesday’s 2010 Bank of America-Merrill Lynch Global Transportation Conference, Norfolk Southern Executive Vice President Finance and CFO James A. Squires illustrated how it’s done. NS’s “Productivity Scorecard,” comparing the first two months (April and May) of this year’s second quarter with the same period last year, showed some impressive gains. As the economy began to recover, carload volume grew by 25%, but crew starts grew by only 10% while the number of railroad employees fell slightly, by 1%. Gross ton-miles per employee, per gallon of fuel, and per train-hour improved 29%, 8%, and 5%, respectively.

These types of productivity gains, along with improvements in other performance and efficiency measures, are driving investors to the railroads. Growing volume, continued pricing strength, and lower costs are expected to produce higher-than-expected second-quarter profits, according to some Wall Street analysts.

The seeds of the railroads’ success story were planted 30 years ago, when the industry was partially deregulated through the Staggers Rail Act. The railroad industry still has problems—a handful of disaffected customers who seek to turn back the clock pre-Staggers, the specter of some degree of reregulation, the raid on capital budgets by the unfunded mandate of PTC—but the fact remains that this is an industry that can be counted on to stay in business—and Wall Street knows it.


William C. Vantuono, Editor