Why CSX Could Remain Dominant in Freight Transportation

Over the past 10 years, the rail operator CSXit is (CSX 0.58%) annualized total returns outperformed those of the S&P 500 (16.1% versus 9.8% per year). But the railways’ performance looks less certain going forward, amid worries about inflation and falling shipment volumes as economic growth slows, and the threat that increasingly freight transport more efficient corners business. Recent acquisitions hint at how CSX intends to drive growth in the face of these challenges.

Expand operations to combat slowing growth

So far, the railways have appeared resilient in the face of rising fuel prices and supply chain disruptions. Although shipping volume declined, CSX still managed to increase first quarter revenue by 21%, with price gains and fuel surcharges offsetting higher costs. Reflecting confidence in future prospects, CSX has increased its workforce to avoid shipping disruptions caused by labor shortages. CSX is also looking to expand its presence in New England with the acquisition of regional rail line Pan Am Railways, which is expected to close in June.

Notably, the income statement also included trucking revenue for the first time. Last summer, CSX acquired Quality Carriers, a leading trucking company in the transportation of bulk liquid chemicals. Trucking accounted for about 7% of CSX’s total revenue, but also about 10% of its expenses. Overall, this hurt operating efficiency for the quarter, with CSX’s operating ratio – where smaller is better – falling from 60.9% to 62.4%. However, had Quality Carriers’ trucking contributions been removed, the operating ratio would have dropped to an impressive 59.9%. Trucking expenses and operating ratio are expected to decline over time as CSX streamlines its process.

Image source: Getty Images.

Integrated rail-motorway transport offer

CSX believes that the full service transportation will expand its network in the chemical transportation industry. While the main competitor South Norfolk (NSC -0.09%) maintains trucking partnerships, it does not offer the same integrated road-rail option. This multimodal service combines the reach of trucking with the cost advantage of rail.

Rail undeniably offers greater efficiency than trucking over long distances. Its fuel efficiency is four times that of trucking, its greenhouse gas emissions are 75% lower, and its capacity to move bulk cargo and carloads is significantly higher. Rail travel also avoids the safety hazards and delays of congested roads. Yet the advantages of railroads may erode with advances in trucking.

Trucking technology is gaining ground

Even though electric and driverless trucks are still years away from widespread adoption, the freight industry seems to be heading in that direction. Rapidly falling electric battery prices, expanding charging infrastructure, and improving battery energy density have increased driving range to the point that electric freight trucking is starting to look viable. At the same time, Autonomous Trucking is expanding its operations in the South and West, which offer good weather and long stretches of uncongested highways.

These advancements in the trucking industry will reduce fuel and labor costs, closing the gap between rail and freight trucking. Intermodal customers such as J.B. Hunt (JBHT 1.04%), Hub group (HUBG 0.63%) and UPS (UPS -0.01%) could shift much of their business to trucking, removing the rail ride entirely from the transportation process. Carload and bulk transportation is profitable enough to sustain railroads, but the loss of intermodal traffic to trucks would certainly reduce prospects for railroad inventory growth.

The geographic advantage CSX enjoys in the eastern half of the United States will help fend off competition as trucking efficiency improves. However, an integrated rail-highway offering could ultimately allow CSX to take advantage of the traditional advantages of rail transportation while benefiting from advances in the trucking industry. In the meantime, CSX must find a way to integrate quality carriers in a way that improves operational efficiency.

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