CSX Corporation (NYSE:CSX) is one of the nation's leading transportation companies. CSX's 30,000 employees operate a rail network comprised of more than 21,000 miles of track, 4,100 locomotives, 216,000 freight cars, and nearly 33,000 intermodal units. The company transports everything from chemicals to automotive parts. Its main divisions are Merchandise, coal , Intermodal (a combination of rail and truck transportation), and Automotive. The company earned $9 billion in revenue and $1.1 billion in net income in 2009.
Like its counterparts in the railroad industry, CSX is subject to economic cycles. When the economy is doing well, more goods tend to be shipped, and when the economy is doing poorly, fewer goods tend to be shipped. Moreover, the volume of goods being shipped by a particular industry tends to vary directly in proportion to the health of that industry. For instance as housing markets have declined, the demand for the transportation of housing related goods has also decreased. As the price for a barrel of crude oil rises, diesel fuel and trucking becomes much more expensive. Rail prices are much less sensitive to fuel costs, and a massive movement to rail-based transport developed. Volume has exploded the last two quarters for this sector.
Although CSX has made progress in some areas, it still lags its competitors in key performance areas such as train speeds, on-time arrivals and departures, accidents, and re-crews. This is largely due to the complexity of CSX's rail road system. The company's current incarnation is the result of a merger of two separate railroads. CSX also acquired a significant interest in Conrail in 1997; the integration of these three networks results in more operational difficulties than its competitors. As a result of these operational lags to its competitors, hedge funds TCI and 3g Partners acquired large stakes in the company and launched a proxy battle to secure seats on the board of directors.
As with all transportation industries, the price of oil and other fuels have a tremendous impact on CSX's bottom line. A decrease in fuel hedge benefits, coupled with higher diesel prices directly increase CSX's expenses. According to CSX, approximately 85% of its revenue is subject to fuel surcharges or price increases.
Derailments are a common expense for railroads but the magnitude of the accident can have a significant impact. In addition, because railroads are required by law to transport hazardous materials, there is a possibility of future derailments of this magnitude.
Railroads are subject to various regulations from multiple government departments, all of which could significantly impact business should they choose to change any of the current regulations. Railroads, and the domestic transportation infrastructure in general, are vulnerable to terrorist attacks and as such, federal, state, and local governments are adopting legislation that will strengthen security. In conforming to new regulations, CSX would undoubtedly incur extensive expenses.
CSX is the product of a merger of two separate railroads and has also acquired a 42% economic interest in Conrail. Ensuring the compatibility of these three networks is a difficult task and a constant hindrance to improving train speeds and other operating metrics. The network is also subject to natural disasters, such as Hurricane Katrina, which resulted in more than $170 million in insurance claims. CSX currently spends an average 13%-14% of annual revenue on capital projects, primarily on track maintenance as opposed to expansion.
Most of the 30,000 employees belong to labor unions, making CSX's relationship with the unions of utmost importance. The rail industry has been fortunate in the past, almost always reaching an agreement during negotiations before a strike becomes necessary. In the last thirty years, there were only six days of work stoppage due to labor negotiations.
Like other rail lines, CSX directly competes with the trucking and shipping industries. Trains are three times more fuel-efficient than their trucking competitors, but have less short-haul flexibility. As shipping imports from Asia continue to increase, analysts expect increased volume at many East Coast ports because West Coast ports already experience heavy congestion. Higher volumes flowing through the Suez and Panama canals also seem to support this assumption. In the rail industry, CSX's main competitor is Norfolk Southern (NSC), another East Coast rail line. CSX maintains a larger rail network, but Norfolk Southern consistently tops CSX in two of the three the main operating metrics: Train speed and average dwell time (the average time a car resides at the specified terminal location); CSX consistently has more cars online. Norfolk Southern also has a significantly better operating ratio (operating expenses / operating revenue) than CSX - 72.8% vs. 77.8%.