Our quarterly "North American Class I Freight Rail Performance" report provides comparative operating and financial metrics across the continent's seven largest railroads: BNSF Railway (BNSF), Canadian National Railway (CN), Canadian Pacific Kansas City Ltd. (CPKC), CSX Transportation (CSX), Ferromex (FXE), Norfolk Southern Railway (NS), and Union Pacific Railroad (UP). All comparisons are for the current reporting quarter to the year ago quarter (Q2 2024 to Q2 2023).
Quarterly railroad revenue and income growth
All of the seven railroads showed some level of revenue growth in Q2 2024 compared to Q2 2023, although only CPKC and FXE saw record quarters (CN came close). The revenue growth leader for the quarter was CPKC, which reported a 13.5% increase, with 5.9% growth in revenue ton-miles (RTMs). FXE had the second highest increase in revenue for the quarter, at 7.3%, but reported RTMs fell by 10.3%.
All the railroads except CSX and FXE showed an increase in net income for the quarter. The biggest increase was at NS, due to putting the E. Palestine, OH incident in the rearview mirror. CPKC also registered a strong increase in income due to the merger and growth in single-line traffic. Over a longer two-year span, however, all of the railroads except FXE have seen modest declines in net income.
Intermodal and carload traffic changes
BNSF and FXE were the intermodal growth leaders in Q2, with double digit increases. Surprisingly, intermodal did not grow for CPKC, mainly due to interline intermodal traffic shifting to competitor FXE, as CPKC is focusing on single-line movements. Canadian intermodal also showed weakness for the quarter, likely due to the looming threat of a Canadian rail strike.
Excluding coal traffic, FXE, CPKC, and BNSF were the carload growth leaders, with 3.5+% quarterly growth. All the railroads, however, logged growth in carload traffic for the quarter compared to a year ago.
Moving on from coal
In this quarter’s report, we broke out coal volumes separately from non-coal volumes. The structurally declining coal business heavily impacted BNSF and UP in Q2 in terms of volume decline. CSX and NS saw only modest declines in coal volume by comparison, thanks to exports, particularly of met coal.
But the good news is that non-coal volumes for Q2 grew across all of the railroads. While not much can be done to stem the phasing out of coal, railroads can refocus on demand trends that offer more growth potential, such as shorter haul and interline intermodal. Another key trend is nearshoring, which favors Mexico as a low-cost manufacturing base, and rail has room to grow market share here. Investment may be needed, however, to increase infrastructure capacity. FXE’s metrics this quarter reflected congestion woes for bulk traffic, likely due in part to FXE working to launch higher-value intermodal services.
Moving on from railroad margins
FXE’s congestion issues led to a large increase in operating ratio for the quarter. Operating ratio improvement for NS, UP, and CPKC correlated with a reduction in costs per RTM for the quarter.
Operating ratios overall have been holding in the 60-65% range for the past two years, while operating income has been drifting slightly downward due to a longer term decline in US traffic volumes. This strongly suggests that railroads are close to maximizing margins. A continuing focus on margin improvement is not likely to yield significant improvements in operating income. As we have written about this year, higher shareholder returns in the future will require shifting to a revenue growth focus.
Railroad service levels and safety
Service levels appeared relatively flat this quarter. Only NS registered improvements in both dwell time and average train velocity, while only CSX logged somewhat worse performance on both metrics. With regard to safety, only CPKC and UP reduced employee incidents for Q2. This kept the industry average down, but employee incidents increased a bit on most of the other railroads, likely attributable to an influx of new employees. Equipment incidents were down for all railroads except CPKC – which saw only a minor increase.
Rail industry outlook for the second half of 2024
The remainder of 2024 looks to be a challenging time for the rail industry and the logistics sector as a whole. A sluggish freight market is making it more difficult to grow other traffic to offset the continued decline in coal, while a Canadian rail strike in Q3 is a distinct possibility. And capacity issues are starting to show in Mexico and Western Canada — both areas of historically high traffic growth.
Note: BNSF revenue ton-mile data is not included in the current version of the report, as the required data (from the Surface Transportation Board) will not be available until August 30. We will update the report thereafter.
