With Coal Volumes Down, Intermodal Business Will Drive Growth For CSX

In order to mitigate the effects of a decline in coal volume, CSX (NYSE:CSX) has shifted focus to its intermodal business. CSX has reported that coal volumes accounted for around 20% of their overall volumes in 2012 and it continues to follow a declining trend. ^[1] This has primarily been because of recent mild summers and the availability of cheaper and cleaner natural gas. Currently there is excess coal inventory in the national supply chain, which shall present headwinds for the company’s coal transport business as it enters 2014.

The intermodal business accounted for around 40% of the overall volume and generated close to 25% of the total revenue for the nine months ended September 30, 2013. ^[1] It combines two different modes of transport, such as rail to truck or rail to ship, to mostly carry manufactured consumer goods in containers. CSX believes that domestic intermodal offers long term growth opportunity by combining cost effectiveness of rail-based solutions for long hauls with the flexibility of trucks in short hauls.

See our complete analysis of CSX here

Expanding Terminal Capacity And Building New Ones To Cater To Increasing Demand

Estimating a growth of more than 500,000 units this year in its demand for intermodal business, CSX plans to expand capacity and build new terminals to cater to this growth. ^[1] It has invested in building new terminals in Winter Haven and Montreal, with long term plans to build terminals in Baltimore and Pittsburgh. The terminal in Montreal will help CSX benefit from the growing North American Free Trade Agreement (NAFTA) trade. CSX already has 45 terminals which help cater to regions east of the Mississippi River. It has also undertaken expansion projects for its existing terminals in Atlanta, Columbus, Boston, Detroit, Louisville and Charlotte.

Shift From Corridor Strategy To Hub And Spoke Strategy Will Prove Advantageous

Instead of following the traditional railroad strategy of developing corridors between two points, CSX is following a ‘hub and spoke’ strategy with its northwest Ohio terminal. This terminal forms a central ‘hub’ in CSX’s network which can connect to various ‘spokes,’ and cater to new and smaller markets in a more cost-effective manner, thereby increasing profitability.  Since its inception in 2011, the Ohio terminal has contributed 20% to the overall volume growth and has also managed to free capacity at CSX’s Chicago terminal by allowing the transcontinental traffic to flow through the northwest Ohio terminal. ^[1]

National Gateway Will Help Increase Volumes Through Double Stacked Lanes

CSX is one of the partners in the National Gateway project, a public-private partnership which aims to increase the use of double stacked trains by developing double stack cleared rail corridors which will help improve rail traffic. ^[2] Double stacked trains have the advantage of better fuel efficiency and therefore, are a preferred method of transporting intermodal freight. The offer both economic and environmental benefits.  Currently, 90% of CSX’s intermodal volume moves through double-stacked cleared lanes and after the completion of the National Gateway in 2015, this volume is expected to increase to 95%. ^[1]

The National Gateway coalition completed its first phase in September 2013. The first phase involved a double stacked cleared rail service between CSX’s Chambersburg and northwest Ohio terminals. ^[3]

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Fredrik Eliasson Addresses Credit Suisse Global Industrials Conference, December 4 2013, www.csx.com [↩] [↩] [↩] [↩] [↩]
2. The National Gateway background, www.nationalgateway.org [↩]
3. National Gateway Completes Phase One Clearance, September 5 2013, www.csx.com [↩]