Ask The Experts: January 22, 2019
Independent Transportation Analyst and Consultant
Q: Is rail going to see a new regulatory threat from Congress?
A: Joining a more aggressive STB and RTA, Hill sources here tell me that the presumptive Railroad Subcommittee leadership in the New Congress plan to hold hearings on Amtrak/NEC; Chinese railcar manufacturing – and on PSR (from a shippers point of view; the scripts were written years ago but will be dusted off along with the fake tears). In H2/19 we may see hearings on PTC, depending on the rate of progress. In any event, a new front, if less dangerous, might be opening on the re-regulatory battlefield.
Q: What are your thoughts about CSX and their start to the new year?
A: CSX – naturally – beat expectations for Q4/18, growing by 58% YOY, 3 points above the Street. The OR improved by 480bps to 60.3% for the quarter; confusing (for me) that was also the FY OR. CSX sees that FY60.3% as more realistically being ~61% given the lumpiness of RE & Line sales, etc. therefore, CSX guided towards a sub-60% OR next year (thereby achieving the 2020 goal a year early). That appears to suggest the end of the wild, multi-hundred OR point reduction period (2017-18), but the new long term OR goal isn’t clear, in order to balance with growth (and that’s a good thing, despite some plaintive analyst bleats on the call). Free cash flow jumped 88% FY18 and/but cash distribution jumped even higher (102%; the hard numbers were $3.2B and $5.4B); CSX announced another $5B buyback program to replace the just-completed one. CEO Jim Foote stated several times that their 2019 Guidance of low single-digit revenues came from reading the same headlines we all do and that repeated talks with customers suggested underlying economic strength and ’19 will see much lower fuel surcharges in the revenue mix).
Q: Overall, how did rail do in 2018?
A: Operationally it was obviously a solid year. Notably expenses shrunk by 2% despite the unit growth, safety improved (FRA reportables by 36%, for instance) and velocity gained 17%, dwell shed 13%. However, on-time originations improved, but by a point to 78% - and O-T arrivals declined sequentially to a still-not-great 58% (YOY better by 2 points, to be fair). All this with a 6% reduction in headcount (which is likely to stay around that rate of natural attrition in the next few years).
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