During the Great Depression a lot of young fellows who were down on their luck chose to chance it by hopping aboard a freight train and "riding the rails" in search of better chances. The practice was apparently so popular that it quickly worked its way into American cultural mythology through the music of legendary folk singers like Woody Guthrie, Leadbelly, Doc Watson and Ramblin' Jack Elliott. The popularity of this mode of travel partly stemmed from the fact that the trains kept on running through the Depression, presumably because they managed to stay profitable through those difficult days. (To learn more about the Great Depression, be sure to read our related article What Caused The Great Depression?)
Fast forward about 80 years: America is once again facing down some pretty hard times. But just like back in the Dirty Thirties, the railways are still rolling, and are managing to turn out unexpectedly good profits, despite slumping freight traffic.
Costs Down, Prices Steady
Recently, major U.S. railroads like Union Pacific (NYSE:UNP), Burlington Northern Santa Fe (NYSE:BNI), CSX Corp. (NYSE:CSX) and Norfolk Southern (NYSE:NSC) managed to report fairly impressive earnings gains during a quarter that saw the overall economy go off a cliff.
Here's a quick summary of the fourth-quarter EPS numbers recently reported by some of these railways and the comparable number for the same period a year earlier:
- Union Pacific - $1.31 vs. $0.93 in 2008
- Burlington Northern - $1.79 vs. $1.46 in 2008
- CSX - $0.90 vs. $0.86 in 2008 (excluding a one-time charge)
Profits rose in all cases despite a reduction in rail freight volumes that ranged between 10% and 12%.
So why is it that this time-worn industry is still managing to keep its profit growth on the rails despite the clear slump in business? Two reasons: aggressive cost controls and the ability to keep freights high - and in some cases move them higher.
For example, Union Pacific recently showed no hesitation about imposing some fairly tough cost-cutting measures. It recently furloughed 3,100 hourly workers and denied its top 148 managers any salary increases. The company also expects to boost revenues by raising freight rates by 6% in 2009.
Shippers Could Seek to Renegotiate Rates
But despite the good news, some industry observers caution that the gravy train could soon come to a grinding halt if hard-pressed shippers seek to lower their costs by pushing to renegotiate freight rates. One survey of shippers revealed that 48% of respondents would seek to renegotiate. However, CSX CEO Michael Ward was recently quoted as saying that 80% of his company's shipping contracts for 2009 had been successfully concluded, despite a 6% rate increase for this year.
The Bottom Line
The railways appear to be managing themselves better than most other sectors in this latest business downturn. It's little wonder that Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) spent $271 million this month to up its stake in Burlington Northern to 21.8%. When the conductor shouts "All Aboard!", I guess it's time to get on the train.