The U.S. railway that spent 18 months fighting a hedge fund demanding that it cut investment is spending $1.6 billion this year to prepare for a post-recession rebound, says its chief executive, according to the Financial Times.
The comments by Michael Ward, of CSX Corporation, are the latest bullish sign from the U.S. rail sector, where improved returns and profitability of recent years have held up surprisingly well in the recession's slump in traffic.
It is a sign of renewed confidence from CSX, which was one of the worst-performing large U.S. railroads for many years. This followed its botched integration in 1999 of parts of Conrail and Norfolk Southern.
Between October 2007 and April this year, The Children's Investment Fund, a London-based hedge fund, tried to push CSX to raise borrowing, hand cash back to investors and reduce capital spending. TCI, which, with 3G, another hedge fund, had appointed several directors to CSX's board, sold its stake suddenly in April.
CSX is now "on a par with or better than" other large U.S. railways, says Ward. In this year's second quarter CSX had an operating ratio - the proportion of revenue taken up by operating costs - of 73 percent. This is better for example than the 74.8 percent of the Norfolk Southern or the 75.2 percent of the Burlington Northern Santa Fe, which had both performed better in recent years.
"One of the big questions everybody has had is, 'How do [railroads] fare during a recession?'" says Mr Ward. "Quite frankly, I think we're doing quite well, all things considered. The market is starting to say, 'Gee, this railroad industry can withstand a recession.'"
The company is investing in track upgrades and terminals to receive and distribute goods to be ready for the recovery. "We're still finding $1.6 billion this year for further investments," says Ward.
Traffic fell less sharply in the second quarter of the year than in the first , he says. Unusually, the third quarter was so far producing higher traffic levels than the second. But some forms of traffic, including automotive parts and intermodal traffic - goods moved in shipping containers - were down sharply from their peak.
CSX has responded by parking 600 of its 3,600 locomotives and 30,000 of its 93,000 railcars, while putting 2,400 employees on extended leave. "What we've been able to do is resize the network," says Ward. "We said, 'We have much lower volumes here. How do we still serve the customers well and do it with a lot fewer trains and a lot fewer people?'"
But long-term factors that fuelled recent years' rail-traffic growth are still at work, he insists. They include a growing tendency for trucking companies to use trains for long-haul moves of containers to save on expensive fuel and labor, though rate cuts from desperate small trucking lines masked the trend.
"We think long term, so we don't overreact to some of these short-term aberrations," he says.
Factors favouring rail will re-emerge particularly strongly when consumer spending rebounds, Ward says. He expects this to happen, in spite of recent increases in saving by U.S. consumers.
"We think the highways in the U.S. are going to get more and more congested," he says.
"I think there's going to be a real position for us going forward and we're investing accordingly."
(This item appeared in The Financial Times Sept. 21, 2009.)
