Norfolk Southern, CSX optimistic about 2013 outlook

A few weeks shy of their respective first quarter earnings announcements East Coast-based Class I railroads Norfolk Southern and CSX are feeling pretty good about their businesses.

Norfolk Southern CEO Wick Moorman stated in the company’s 2012 annual report that the future is promising for the rail carrier, which saw 2012 come in as its second best year ever in its history in terms of revenue at $11 billion, operating income at $3.1 billion, net income at $413 million, and earnings per share at $5.37.

“Despite significant challenges in our coal business, we delivered solid results for our shareholders,” Moorman said in the report. “From an operations perspective, the railroad ran extremely well, setting all-time highs for most of our service and velocity metrics. We also continued our strong record of reinvesting in the company, with more than $2.2 billion in capital spending, including completion of some key projects to drive future growth. Looking at 2013 and beyond, I continue to have a very positive outlook for our business. Our railroad is running well, and we have demonstrated resilience in the face of a slow economic recovery. While the coal business will continue to be a wild card for the immediate future, it traditionally has been a mainstay for Norfolk Southern, and we continue to believe in it long-term.”

The top executive at NS added that the railroad’s coal business will continue to be a “wild card for the immediate future” but that it has served as a mainstay for it and will be in the long run, too.

He also cited the various opportunities in emerging energy markets, a topic which continues to gain significant traction among freight railroads, including moving crude by rail, as well as sand, pipe, and other materials for shale gas production.

Last fall, NS opened its Birmingham Regional Intermodal Facility. NS officials said the $97.5 million facility is part of the $2.5 billion Crescent Corridor initiative, which aims to establish an efficient, high-capacity intermodal freight rail route between the Gulf Coast and the Northeast. This facility is located on a 316-acre site in McCalla, Alabama. 

In October, Moorman said there is no other intermodal rail public-private project today that compares with the magnitude of the Crescent Corridor in terms of job creation or environmental benefits.  And he said that because of its strategic location and the growing intermodal demands throughout the country, the Birmingham terminal will serve as a major gateway for truck-competitive freight moving between the South and Northeast and enable NS to launch new service from Birmingham to the Northeast and to Mexico.

CSX looking good, too: In its 2012 Annual Report issued last week, CSX Chairman, President, and CEO Michael Ward said that even with a significant drop in its coal business, it is better off than it was a year ago, and he said in withstanding the coal decline, it has made quick adjustments in its operations while also focusing on safety, service, and productivity, which he described as three mainstays of its operations.

“Experience has shown that when CSX does those things well, we can turn good conditions into great results, or bad conditions into better results,” Ward said, adding that CSX believes that its key businesses other than coal will outpace the slow, steady growth that is expected in the economy in 2013, with little reason to believe the economy cannot gain momentum if Congress is able to pass more meaningful legislation to improve the long-term fiscal outlook and restore confidence.

Ward also cited various factors that portend a strong future for the freight railroad sector, including:
-the inevitable movement of more freight as the population and its consumption rise;
- the pressing need to deliver freight efficiently between ports and people as global trade continues to build;
- the increasing congestion on the nation’s highways, driving freight to rails, among others;
-the re-industrialization of America as the country’s efficient labor force and relatively inexpensive energy combine to create cost advantages for local or regional U.S. producers and demand for exports;
-the challenges associated with labor, fuel and other costs at trucking companies, which today are partnering with railroads for longer-haul movements; and
-the nation’s need for more environmentally friendly transportation solutions.

CSX, said Ward, plans to invest $2.3 billion level into its rail network this year, following approximately $8 billion invested in the past four years.

CSX is a major stakeholder in the National Gateway, a roughly $850 million public-private partnership (PPP) infrastructure initiative designed to provide a highly efficient freight transportation link between the Mid-Atlantic ports and the Midwest. CSX said one of the National Gateway’s chief objectives is to alleviate freight bottlenecks in the Midwest that cause delays for West Coast-originated freight through the creation of a double-stack cleared corridor for intermodal shipments between the Midwest and mid-Atlantic ports.

Heavy capital expenditures are not a new trend by CSX and its Class I brethren by any stretch. In February, the Association of American railroads reported that the seven North American-based Class I railroads plan to invest an estimated $24.5 billion in 2013 “to build, maintain and upgrade America’s rail network to ensure freight railroads can continue to deliver for the nation’s economy,” with $13 billion of that investment allocated towards projected capital expenditures to upgrade or enhance rail capacity.

When asked what the top benefits of this spending from the perspective of its Class I members, AAR President and CEO Ed Hamberger told LM that these investments are essential to meeting not only the customer needs of today, but also the future needs of customers.

“Keep in mind, too, that many of these investments are made in coordination with customers—whether it involves custom facilities and track, special types of cars and equipment or investments that support improved means of loading and unloading shipments,” he explained.