Railroad growth is being hindered by an excessive focus on financial profits, according to CSX CEO.
In the world of railroads, profit margins are under intense scrutiny, and CSX Corporation is no exception. Ancora Holdings Group has called on the CSX board to consider management changes, citing a decline in the railroad's operating ratio.
The operating ratio, a key performance indicator in the rail industry, measures a railroad's expenses as a percentage of its revenues. Over the past decade, the main focus for rail companies, including CSX, has been on restructuring the business for efficiency and better margins. The average Class I railroad operating ratio has fallen from 70.8% in 2012 to a record low 59.9% in 2021.
CSX's woes can be traced back to a sharp decline in export metallurgical coal prices, which are tied to global benchmarks. This decline resulted in a 2.5-point hit to CSX's operating ratio. Other rail giants, such as Union Pacific and Norfolk Southern, have not been immune to these challenges. However, they have responded by rolling out new domestic intermodal services.
CSX's CEO, Joe Hinrichs, acknowledges the stagnation in U.S. railroad traffic levels over the past 15 years. He believes that to boost profits and growth, railroads need to prove they can maintain profit margins and bring on new volume. One way to achieve this is through interline partnerships, which can tap new markets and provide better service for the traffic currently exchanged between railroads.
Hinrichs, who was appointed as CSX's CEO in September 2022, spoke at the Morgan Stanley Laguna Conference, expressing optimism about CSX's future. Despite a $1.2 billion decline in operating income over the 12 months ending June 30, CSX was the only Class I railroad whose volumes returned to pre-pandemic levels by the end of 2024, with growth in both intermodal and merchandise business.
The rail industry's focus on profit margins has been a consistent theme over the past decade-plus. Even the Trump administration got involved, with the nomination of rail consultant Kloster to the Surface Transportation Board. However, Hinrichs believes that a more collaborative approach is needed to grow the industry. He advocates for a mindset that motivates players to work together to grow the pie, rather than just focusing on reducing the operating ratio.
This article was penned by Stuart Chirls. As the rail industry continues to evolve, it will be interesting to see how CSX and other railroads navigate the challenges and opportunities that lie ahead.
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