Reynolds Hutchins, Associate Editor | Jul 19, 2016 4:36PM EDT
Like many of its competitors, Kansas City Southern Railway found the second quarter a dud for intermodal volume growth, with traffic dipping 1.5 percent year-over-year.
The Missouri-based railway still reported Tuesday better-than-expected second-quarter profit, thanks in large part to cost-cutting initiatives and a rebound in service after floods slowed the railroad’s cross-border network earlier in 2016.
Second-quarter net income was up 10 percent year-over-year to $120.1 million, KCS executives said on their quarterly earnings call Tuesday morning.
That double-digit uptick, though, was not attributable to major gains in freight volume. Overall freight volume was flat for the railway, executives said. The railroad’s intermodal business declined 1.5 percent year-over-year and related revenue was down 6.6 percent to $91.4 million.
Overall revenue for the quarter fell 3 percent year-over-year to $568.5 million.
That said, in his first quarterly earnings call as KCS president and CEO, Patrick Ottensmeyer said he was optimistic that business is beginning to rebound.
“On balance, we were pleased with our second-quarter 2016 results, particularly with the positive volume trend experienced during late May and the entire month of June,” Ottensmeyer told investors and analysts on the call.
General freight volume was up 2 percent in June versus June 2015, he said.
The second-quarter performance of KCS mirrors intermodal volume declines seen at other railroads industry-wide in 2016. U.S. railways’ cumulative intermodal volume was down 2.7 percent year-over-year for the first 26 weeks of 2016, the Association of American Railroads reported just last week.
In the midst of the ongoing downturn in coal and other carload volume, Class I railways have turned to their intermodal business to help make up for the loss. That effort has been hurt in recent months by the soft freight economy — what many are calling a “freight recession.”
Granted, unlike other major North American railroads, which have reported precipitous declines in coal volume, it should be noted KCS coal volume was down only 1 percent in the quarter. Still, the ongoing decline in carload commodity volume has made railways’ intermodal business much more valuable.
KCS has also faced a unique challenge to its intermodal business in the first half of 2016 after torrential downpours in the Gulf Coast region knocked out service on more than one of the railway’s lines.
“Our service was affected for the second consecutive quarter by the impact of flooding in the Houston, Texas, area, which resulted in a three-week shutdown of a bridge on the route KCS utilizes for its cross-border traffic,” Ottensmeyer said.
While bridge repairs were being made, KCS had to detour considerable traffic onto other carriers’ routes, which did manage to hurt the company’s intermodal business — although spokespeople have declined to say or estimate by how much.
With coal volume struggling and intermodal business flat, KCS executives on the call said a large part of the quarter’s profit was derived from cost-cutting initiatives.
“In the absence of volume growth, we were able to focus on cost,” Ottensmeyer said.
Operating income at the railroad increased 18 percent year-over-year in the quarter to $220 million. Meanwhile, the railway’s operating ratio, a measure of profitability, improved to 61.3 percent, compared with 68.1 percent in the second quarter 2015.
With freight volume improving in May and June, coupled with a focus on keeping costs down, Ottensmeyer said he is optimistic about the second half of 2016. It’s a new optimism for KCS, since that optimism has been typically prefaced with “cautious” in past quarterly calls.
“We will continue to focus on cost control and continued improvement in operating ratio,” Ottensmeyer said. “We feel the outlook for the rest of the year is very positive.”
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