CSX Adds to Price Increases as Economy Boosts Rail Cargo

CSX Corp. projects freight pricing to rise at a faster clip than last year as the best U.S. economic growth in more than a decade helps drive cargo demand.

“You’ll see much stronger pricing in ’15 than you did in ’14, absolutely,” Clarence Gooden, CSX’s sales and marketing chief, said today on a conference call. “I am very pleased with the pricing that we’re getting.”

Railroads have benefited from a U.S. economy that accelerated to an annual growth rate of 5 percent in the third quarter, the quickest pace since 2003. Consumer spending, buoyed by more jobs and cheap gasoline, has expanded 4 percent or more from a year earlier for the past eight months, the longest stretch since 2011.

Trucking companies can’t find enough drivers to keep up with demand and available barges to haul bulk commodities are scarce, Gooden said, which helps railroads negotiate higher prices. About 20 percent of its freight contracts are up for renewal in the first quarter, CSX said.

“Pricing right now is very much in favor of the carriers,” Gooden said.

Last year, CSX’s revenue per carload unit fell 0.5 percent to $1,830, mostly because of a 6.8 percent decline in coal pricing. This year, coal will likely be little changed while freight prices in all other segments increase, Gooden said.

Oil Shipments

Even as oil prices have plummeted below $50 per barrel from more than $100 in July, the Jacksonville, Florida-based railroad may see its daily crude trains rise to about 4 to 4.5 this year from 3.5, said Chief Executive Officer Michael Ward in a telephone interview today. The growth in daily crude trains, which averaged about two at the end of 2013, will slow.

The oil carloads from North Dakota’s Bakken fields won’t dry up because existing wells are profitable even if West Texas Intermediate crude is $30 to $35 a barrel, he said.

“We don’t see an impact to us in 2015,” Ward said. “When you get into ’16 and beyond, it might make a difference because our read is for a new well you probably need to be in the $50 to $60 range.”

CSX, the largest railroad in the eastern U.S., reported quarterly net income rose to $491 million, or 49 cents a share, from $426 million, or 42 cents, a year earlier. That met the 49-cent estimate of 26 analysts surveyed by Bloomberg.

Sales rose 5.3 percent to $3.19 billion as a 6 percent increase in carloads offset a 1 percent decline in revenue per unit. Analysts had predicted $3.18 billion.

CSX climbed 0.3 percent to $33.65 at the close in New York, while the Standard & Poor’s 500 Railroads Index fell 0.3 percent.

Chemicals Surge

Carload growth in the quarter was led by a 15 percent gain for chemicals, driven by crude and fracking-sand shipments. Coal rose 11 percent, while grain dropped 2.7 percent. CSX’s intermodal carloads increased 5 percent.

Even though crude-by-rail has grabbed attention as West Texas Intermediate sinks, those shipments make up only about 2 percent of CSX’s volumes. Falling crude prices that would damp tank-car traffic also leave more money in consumers’ pockets, said Lee Klaskow, a senior logistics analyst with Bloomberg Intelligence.

“Lower oil equates to lower gasoline prices, and that means people will be spending more,” he said. “It’s likely to be offset by other freight that the rails haul,” such as autos or containers of consumer goods.

Gains in other freight categories, including crude, have helped CSX and the rest of the rail industry weather the slump in coal shipments as utilities switch to cheaper natural gas. Coal accounted for 23 percent of CSX’s fourth-quarter revenue, down from 31 percent three years earlier.

Slower Speeds

An eventual respite in crude-by-rail demand may help CSX and other railroads improve service, which deteriorated amid a harsh winter in 2014 coupled with an unexpected surge in grain and oil shipments. CSX’s average train speed fell to 20.4 miles (32.8 kilometers) per hour in the quarter, from 22.9 mph a year earlier.

“It’s pretty good for the railroads,” John Larkin, a Dallas-based analyst at Stifel Financial Corp., said by e-mail. “In a perfect world, their service would be better, they would have fewer capacity restraints and the coal business would not have downsized so dramatically.”

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