Can CSX Successfully Increase Its Pricing?

On its fourth quarter earnings call, CSX Corporation (NYSE: CSX) announced that it expects to see a robust increase in its pricing of contracts for 2015. In 2014, pricing took a hit due to weak export coal volumes. The company believes that the current environment is conducive for pricing growth. CSX also stated that 20% of its contracts will renew in the first quarter and expects strong pricing in the first quarter and through the year. ^[1] In this article we take a look at factors that may impact CSX’s pricing power.

See our complete analysis of CSX here

Tight Trucking Capacity Helps Pricing

The primary reason why CSX expects to see solid growth in its pricing is the tightening trucking capacity. Declining fleet sizes and a lack of truck drivers have significantly tempered the freight transport capacity of the trucking industry. The Hours-of-Service safety regulation for commercial vehicle drivers has also put pressure on trucking capacity by limiting the number of working hours for truck drivers. The tight trucking capacity will lead to high volumes of freight shifting to railroads. As the demand for railroads’ services increase, so will their pricing power. Additionally, railroads command a significant cost advantage over trucks. To give some perspective, CSX’s domestic intermodal volumes are priced 10-15% below truck rates. ^[2] This difference allows for significant leg room to increase prices while maintaining a cost advantage.

Growing Demand To Drive Pricing

Declining crude oil prices have helped reduce the cost of fuel, leading to an increase in the disposable incomes of consumers in the U.S. Consumers are now more likely to increase their spending, and many consumer goods are transported across the U.S. by rail. As purchases of such products increase, the demand for rail services will rise, thereby increasing pricing power for railroads such as CSX.

Similarly, growth in housing and construction activity will also lead to an increase in railroads’ pricing power as housing and construction materials such as lumber, gravel and sand are also shipped by railroads. The NAHB forecasts a 16.4% year-on-year increase in housing starts for 2015, which will likely drive the demand for housing and construction materials. ^[3]

Coal and Service Levels May Present Headwinds

CSX’s service metrics were severely tempered by the harsh weather witnessed in the beginning of 2014. Of late, service metrics have also been under pressure due to the large volume of shipments. Service metrics such as on-time originations and arrivals, terminal dwell and network velocity help drive customer satisfaction. If customers are not satisfied with a railroad’s service, then they would be less likely to accept an increase in pricing. This presents CSX with significant risk, since its service metrics have been under pressure throughout the year. For example, its on-time origination have declined 39% and on-time arrivals fell 49%. ^[4]

Separately, weak coal volumes will likely continue to impact revenue per unit, tempering the overall impact of an increase in pricing. In 2014, CSX’s coal revenue per unit declined 7% as export coal tonnage declined 11%. ^[5] Strong competition, low demand from China and a weak Australian dollar will continue to make it difficult for U.S. coal to compete in the global market in 2015. Additionally, the threat of utilities shifting to low price natural gas may hamper domestic coal demand, which may further suppress coal revenue per unit. Natural gas for March delivery was $2.677 per million British thermal units on the New York Mercantile Exchange on Monday, a level at which utilities will seriously begin to consider moving to natural gas.

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1. CSX’s (CSX) CEO Michael Ward on Q4 2014 Results – Earnings Call Transcript, January 14, 2015, www.seekingalpha.com [↩]
2. CSX’s (CSX) CEO Clarence Gooden on Q3 2014 Results – Earnings Call Transcript, October 15, 2014, www.seekingalpha.com [↩]
3. NAHB Housing and Interest Rate Forecast, December 2014, www.nahb.org [↩]
4. CSX Q4 2014 Performance Measurements, www.csx.com [↩]
5. CSX Q4 2014 Financial Report, www.csx.com [↩]