Class I Railroads: High Returns and Competitive Edge in a Consolidated Market

Financial Performance and Profitability

Class I Railroads are demonstrating strong financial performance and profitability through improved terminal performance, strategic share repurchases, and a focus on enhancing profitability across all business lines. Executives express confidence in continued financial improvements, driven by operational efficiencies and exemplary service levels.

"And some of the as Alan said, exiting the quarter, some of the leading indices are the very things you look for in terminal performance that start to cascade into financial benefit relative to our expense and profitability, yield of all things." --- (NSC, Fireside Chat, 2024/04/10)

"With share repurchases, we expect to repurchase around $1.5 billion in 2024 as we maintain our current leverage. Before I turn it over to Kenny, I’d summarize our second quarter financial performance as strong and our confidence in the future stronger as we continue to unlock the potential of our great franchise." --- (UNP, earning call, 2024/Q2)

"That being said, I don’t see any reason why we can’t continue to see improvement in that metric as we expect across many other metrics, in our financial performance over time if the formula, the equation that we have going for us right now is able to continue, and we’ve got confidence that we’ll be able to do that." --- (CSX, earning call, 2024/Q2)

"And our locomotives, our car cycles, some of those yields that I'll talk about, are important elements to closing the performance gap financially, at the same time delivering exemplary service levels to restore the confidence of the shippers and to really attack" --- (NSC, conference, 2024/05/22)

"our opportunity and our job is to improve the profitability of every line of business that we have." --- (UNP, earning call, 2024/Q1)

Operational Efficiency and Technological Advancements

Class I Railroads emphasize operational efficiency through resource optimization, cost control, and labor efficiency gains. Technological advancements are balanced with reliability and cost considerations, while safety remains a top priority. These strategies enable them to compete effectively and respond to market opportunities.

"So very important to us. On the operational excellence piece, efficiency and being resource properly and using our network is very important." --- (UNP, conference, 2024/06/25)

"Now there's a lot of technology advancements and that's stretching out and you throw dollars at a lot of things you can accomplish things. But the reality is that there's a careful balance of the reliability and also balancing as you as it was noted, the rates do matter and how much customers are paying." --- (BRK.B, event transcript, 2024/05/04)

"As you will hear from John, Ed, and Mark, we were able to overcome market weakness through increasingly strong progress on our six key operational metrics by responding to market opportunities and growing volume and remaining laser focused on controlling costs. We also take seriously our commitment to being the gold standard of safety in the industry and continue to make progress on improving our safety culture and metrics." --- (NSC, earning call, 2024/Q2)

"We expect to deliver labor efficiency gains in the second half while continuing to ensure the training pipeline is stable to offset attrition and support future growth. Also, as a reminder, our union employees are receiving a 4.5% wage increase effective on July 1st, and that will be reflected in a higher sequential cost per employee." --- (CSX, earning call, 2024/Q2)

"Now let's review our key efficiency metrics on Slide 13. While maintaining focus on enhancing safety and service, it is equally crucial that we do so in a cost-effective manner, enabling Kenny and the team to compete in a broader range of markets." --- (UNP, earning call, 2024/Q1)

Impact of Market Consolidation

Market consolidation has led to increased volumes and new contracts for Class I Railroads like CSX, while NSC has leveraged operational alignment to secure additional revenue. UNP's investments and market share growth, despite challenges in specific sectors, highlight the competitive edge gained in a consolidated market.

"We saw volumes increase year-over-year with many of our shipping partners as we gained from new contracts, new lanes, and a comparison with last year's weak market conditions." --- (CSX, earning call, 2024/Q1)

"And because of the alignment between marketing and operations, they're looking for every opportunity to secure additional revenue and additional margin we were able pick up spot opportunities in weak coal markets and weak agriculture markets because of the great product we're delivering and the capacity dividend that John has created." --- (NSC, earning call, 2024/Q2)

"You've seen the amount investments that's there. We've got a strong commercial presence that's there, and you look at the overall rail, I'm talking the rail industry market share into and out of Mexico is still relatively low, if you put it in the mid-teens or so." --- (UNP, earning call, 2024/Q1)

"We're also dealing with a really weak truck market, particularly that impacts our domestic intermodal franchise." --- (NSC, Fireside Chat, 2024/04/10)

"However, if you exclude coal, Bulk revenue for the quarter was up 4% year-over-year and volume grew by 6%. Coal volume was down 23% in the quarter due to ongoing secular decline of the market along with continued challenges from lower natural gas prices and higher inventory levels." --- (UNP, earning call, 2024/Q2)

Competitive Strategies and Market Positioning

Class I Railroads employ diverse competitive strategies, including CSX's alignment with key partners and focus on supply chain advantages, UNP's high-speed services and operational excellence, and NSC's strategic improvements and commitment to competitive margins. These approaches enhance their market positioning and drive shareholder value.

"We're aligned with the right partners, and we benefited from that. So you've seen double-digit growth on our international side, while our domestic was slightly up this past quarter and the domestic market is a lot more truck competitive, as we all know." --- (CSX, earning call, 2024/Q1)

"We can go from and we're out there selling it. So, in the high-speed market to market, we have a service that operates very speak, 2,000 miles in less than two days that makes us competitive against other modes of transportation." --- (UNP, earning call, 2024/Q1)

"So we're making improvements. We've got the right leadership in place, got the right plan in place, got the right strategy in place. We know our commitment is to deliver industry competitive margins." --- (NSC, Fireside Chat, 2024/04/10)

"And we talked about this before, but a supply -- their supply chains are being viewed as competitive advantages and being closer to your end consumer, which we have the most valuable consumers in our network in the world, it's becoming a priority, and we're seeing those investments take place to really happen." --- (CSX, earning call, 2024/Q1)

"strategy and the momentum that is building. The actions we're taking to improve safety, service and operational excellence are reflected in our financials, and continuing on with this strategy will drive shareholder value in 2024 and into the future." --- (UNP, earning call, 2024/Q1)

Regulatory Environment and Compliance

Class I railroads face regulatory uncertainties, with potential shifts towards public power models and risks of regulatory compacts not being respected. Companies like BNSF and Norfolk Southern emphasize collaboration with regulatory agencies and improving plan compliance to enhance operational performance and manage these challenges effectively.

"Recognizing that investors are worried about climate change related expenses and that new uncertainties cloud the regulatory environment, the chairman suggested that some jurisdictions may adopt the public power model." --- (BRK.B, event transcript, 2024/05/04)

"And I would say, as far as capacity is concerned, we’re improving execution and plan compliance and that facilitates blocking deeper into our network, which ultimately increases car velocity, train speed and really drives performance." --- (NSC, earning call, 2024/Q1)

"And that's and that's done in conjunction with our with the state, representatives and our regulatory agencies to make sure we can serve those customers every day and every minute." --- (BRK.B, event transcript, 2024/05/04)

"And I would say, as far as capacity is concerned, we’re improving execution and plan compliance and that facilitates blocking deeper into our network, which ultimately increases car velocity, train speed and really drives performance." --- (NSC, earning call, 2024/Q1)

"The risk of regulatory compacts not being respected is a much broader one that will always evaluate and be careful how we deploy our capital.But both Pacific Corp will manage through it and I see other very good and significant opportunities in Pacific Corp. I mean in Berkshire Hathaway Energy." --- (BRK.B, event transcript, 2024/05/04)

Customer Satisfaction and Service Quality

Class I railroads like Norfolk Southern and CSX emphasize their commitment to excellent service, on-time delivery, and customer satisfaction. Both companies highlight the importance of quality carriers, market understanding, and consistent customer interactions, which have led to high customer satisfaction and industry growth.

"This recognition reflects our commitment to providing excellent service to our customers, including on-time delivery, ease of doing business, shipment integrity, sustainability, and more." --- (NSC, Twitter post, 2024/05/20)

"And, I think it’s all of the above that you mentioned. We obviously have quality carriers and, that alignment with them, that understanding of the market has helped us in our conversations with customers." --- (CSX, earning call, 2024/Q2)

"Alan Shaw: And I think that's why our approach customer service facing is better, and we're still getting productivity, reducing resources, reducing capacity -- creating capacity without impacting service." --- (NSC, earning call, 2024/Q2)

"And what we're hearing from customers, they're very happy with the service CSX is providing, and they're very pleased with the continuity and the consistency of our messaging, but also our results, interactions." --- (CSX, earning call, 2024/Q1)

"So we can grow as industry if and when we all get better at customer service and working together." --- (CSX, earning call, 2024/Q1)

Future Outlook and Market Predictions

Class I Railroads, particularly Norfolk Southern and CSX, anticipate a resilient future despite current revenue drops. They focus on productivity and infrastructure improvements to handle expected traffic growth as the economy rebounds, reaffirming confidence in their full-year guidance and market outlook for 2024.

"Turning to Slide 13, let’s go over our market outlook for the remainder of ’24." --- (NSC, earning call, 2024/Q1)

"• future economic, industry or market conditions or performance and their effect on the Company's financial condition, results of operations or liquidity." --- (CSX, sec filing, 2024/Q1)

"And no one has made more progress in building a resilient railroad than NS, so that it will be able to handle the growth in traffic as the economy returns, which is inevitable in the foreseeable future..."To me, the best predictor of what a person will do in the future is what he has done in the past."" --- (NSC, press release, 2024/05/06)

"And you heard from John and Mark that we're overcoming the revenue drop with a focus on the significant productivity opportunities in front of us, which gives us the confidence in reaffirming our full year OR guidance, despite the lower revenue outlook." --- (NSC, earning call, 2024/Q2)