CSX’s Ward Says Efficiency Will Continue to Improve
(Corrects fourth paragraph of story published on April 6 to show adjusted operating ratio.)
CSX Corp. (CSX) Chief Executive Officer Michael Ward said the third-largest U.S. railroad will reduce its expenses as a percentage of revenue this year and continue that improvement in 2012.
CSX lowered costs last year as a recovering U.S. economy and Asian demand for coal boosted volume, reducing its operating ratio by 3.8 percentage points to 71.1 percent. The company has forecast its operating ratio will fall to 65 percent by 2015. Productivity improvements may save as much $140 million and the ratio will drop to the “high 60s” this year, CSX has said.
The company’s plan is “that we’re going to continue to grow and that we’re going to continue to invest,” Ward said today in an interview at Bloomberg’s headquarters in New York.
The company’s operating ratio was 88.6 percent in 2003, the year Ward was named CEO, after being adjusted for an accounting change, according to CSX. Last year’s operating ratio was the third-lowest of nine publicly traded North American railroads, trailing only Union Pacific Corp. (UNP)’s 70.6 percent and Canadian National Railway Co.’s 63.6 percent, according to data compiled by Bloomberg.
CSX, based in Jacksonville, Florida, was unchanged at $77.65 at 2:09 p.m. in New York Stock Exchange composite trading. The shares, which have climbed 20 percent this year, gained 33 percent in 2010.
Through yesterday, the shares more than doubled since 2006, compared with a 6 percent drop in the Standard & Poor’s 500 Index. Union Pacific, the largest publicly traded U.S. railroad, also more than doubled, and Norfolk Southern Corp. (NSC) climbed 37 percent.
CSX may reach its goal of a 65 percent or lower operating ratio a year early, in part by boosting its pricing faster than the rate of inflation, Peter Nesvold, a New York-based analyst with Jefferies & Co., said in a telephone interview.
“The rail story is about consistently getting 2 to 3 percent” increases in real rates, Nesvold said. “While it seems modest, if you do that year-in, year-out, the compounding effect leads to some powerful margin expansion.”
Railroads have benefited as higher oil prices widen their fuel-saving advantage over trucking companies. Railroads can move a ton of freight 156 miles to 512 miles on a gallon of fuel, compared with 68 miles to 133 miles for truckers, according to the U.S. Department of Transportation’s Federal Railroad Administration.
Oil prices from $80 to $120 a barrel boost diesel fuel prices enough to make companies more likely to consider shipping by rail instead of trucks, Ward said.
Oil above $120 becomes a “drag on the economy and is bad for everybody,” Ward said.
Crude oil for May delivery rose 39 cents to $108.73 a barrel at 2:18 p.m. on the New York Mercantile Exchange. Futures touched $109.15 today, the highest intraday price since Sept. 24, 2008.
Consumer spending in the U.S. rose more than forecast in February as incomes climbed, and the Institute for Supply Management’s measure of the nation’s manufacturing expanded in March at close to the fastest pace in almost seven years.
China’s manufacturing growth accelerated for the first time in four months, with the index rising to 53.4 in March from 52.2 in February, while India’s manufacturing grew for the 24th straight month in March as the index remained at 57.9. Russia’s factory output gauge increased to 55.6 last month, the highest in almost five years, from 55.2 in February.
Union Pacific is the largest publicly traded U.S. railroad by market capitalization and revenue. CSX trailed both Union Pacific and Warren Buffett’s Burlington Northern Santa Fe Corp. by 2010 revenue.