Market Overview

CSX Looking To Take Advantage Of Tight Truck Capacity

CSX Looking To Take Advantage Of Tight Truck Capacity

With precision scheduled railroading firmly in place after nearly four years, CSX (NASDAQ: CSX) is seeking to gain more market share through short-term and long-term opportunities, in part because of how the railroad addressed capacity needs in the third quarter.

"If you'd had this kind of traffic surge across the rail network in North America four, five years ago, we would be now talking about gridlock across all the major cities in the country and we wouldn't be doing anything," said CSX President and CEO Jim Foote during his company's third-quarter earnings call late Wednesday. Foote was referring to the fast pace of the recovery in North American rail volumes in the third quarter following a COVID-19 pandemic-induced volume trough in April and May.

But "now with the common mindset of how you run a railroad, we were able to respond. We're able to pivot. We are nimble. We can add capacity, we could shrink capacity. We can rightsize our business and we can do that much more effectively and much more logically and thoughtfully," he said.

Foote continued, "I hope we get to the day — the sooner the better — [where] we got to start hiring more and more people because the business is growing and growing. … But in the meantime, we're not going to add back assets … when we don't need them. But the minute we do … we'll put them on, so we can move the freight."

CSX is seeking customers that might want the price competitiveness of shipping over rail versus truck, especially in lanes that might have been more truck-focused. Executives said CSX was able to convert some traffic to rail in the second and third quarters from customers within the forest products, metals and agricultural sectors, among others. A tight truck market for intermodal, coupled with driver shortages in markets such as Southern California and Chicago, have also supported conversions to rail service.

"This intermodal space is one where we can continue to grow faster than the economy repeatedly every year. And so, we're doing a lot of different things, working on a lot of new different products with customers, looking to take more share off the highway, really talking about the benefits of intermodal," said Mark Wallace, CSX executive vice president of sales and marketing. 

Having terminals with technology such as automated cranes with GPS technology and tools that allow truck drivers to go in and out of terminals more easily have also helped to reduce terminal dwell time and eliminate bottlenecks, executives said. 

The fall peak is "robust" and has been strong through the pandemic, Wallace said. According to CSX's conversions with customers, e-commerce will likely remain strong through Thanksgiving and Christmas and then "deep into" the first quarter, Wallace said. 

Tight truck capacity has also enabled CSX to engage with potential customers from commodities representing merchandise and industrial volumes. 

"They're looking in these tight times now and their business levels are down to save some cost. Obviously transportation costs for them is a significant headwind," Wallace said. "And so, as we all know that the 12% to 15% discount that rail offers given with our good service product has allowed us to go and sit down with our customers and they can't get trucks, the truck market is tight, the spot rates are up."

Wallace continued, "And so we are seeing conversions there and we hope that continues and hopefully that traffic that comes to us. … Even after the truck market eases up a little bit, if we're able to show the power of rail and keep performing like we know we can, hopefully a lot of that traffic will stick on CSX going forward."

Although CSX's existing customers are "cautiously optimistic" about the back half of the fourth quarter and 2021, some headwinds remain, including uncertainty over the U.S. presidential election and the U.S. federal government's economic stimulus package. Uncertain outcomes over the COVID-19 pandemic during wintertime also weigh on the market heading into 2021, according to Wallace.

But channel partners at the ports and international steamship lines "are seeing a lot of strength" beyond the Chinese New Year and deep into the first quarter of 2021, which could benefit intermodal, Wallace said. The direction of the domestic natural gas market could also factor into how rail volumes perform between now and early next year.

"It's been a challenging year, probably something that none of us have ever seen in our careers before. But our job is to continue to stay close [ to CSX's operating teams] … so that we're prepared to handle the freight, when it comes back," Wallace said.

CSX's lay of the land beyond 2020

As its fellow Class I operator Canadian Pacific (NYSE: CP) alluded to during its third-quarter earnings call earlier this week, CSX is eyeing opportunities to develop its real estate holdings.

"It's a great opportunity for us. In terms of the real estate sales … we have a great pipeline. … I'm pretty excited about what we have in store over the next few years there. All these things tend to take time to get to a close, but we're working pretty hard on that area," said CSX Chief Financial Officer Kevin Boone. "Since CSX is one of the largest landowners in the eastern United States, CSX should leverage out as much as we can."  

From a capital expenditures perspective, CSX has an additional 20% to 30% it can bring on to increase network capacity through offerings such as long sidings, double-tracking and "good" yards. 

CSX is also conducting hiring classes for train and engine employees, and it has locomotives in storage that it can pull out, Foote said. 

"We're quite comfortable with continuing to bring on business as we move forward," Foote said. 

Third-quarter financial results

CSX reported third-quarter 2020 net income of $736 million, or 96 cents per share, compared with $856 million, or $1.08 per share, in the third quarter of 2019 amid a drop in revenue and "lower economic activity resulting from the COVID-19 pandemic."

Third-quarter revenue fell 11% year-over-year to $2.65 billion, with intermodal volume growth more than offset by declines in coal and merchandise volumes, CSX said. Lower fuel surcharge revenue also affected overall revenue.

But expenses were down 11% to $1.51 billion amid "continued efficiency gains and volume-related reductions," the company said. 

CSX 2020 Value 2019 Value Y/Y Gross Change Y/Y % Change
Freight revenue $2,648.0 $2,978.0 ($330.0) -11.1%
Carloads (000s) (incl. intermodal) 1,522 1,569 -47 -3.0%
Revenue per carload $1,740 $1,898 -$158 -8.3%
Intermodal shipments (000s) 717 673 44 6.5%
Intermodal revenue per carload $621 $664 -$43 -6.5%
Gross ton miles (in billions) 90.3 97.1 -7 -7.0%
Revenue per tonmile $45.50 $49.10 -$4 -7.3%
Fuel Expense (millions) $119 $223 -$104 -46.6%
Employee counts (average) 19,313 21,331 -2,018 -9.5%
Train velocity (mph) 19.6 20.3 -1 -3.4%
Dwell time (hours) 9.7 8.9 80.0% 9.0%
OR% 56.9% 56.8% 0.1% 0.2%
EPS $0.96 $1.08 -$0.12 -11.1%

For more information on CSX's third-quarter results, go here.

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