The Year 2016 In Review: Top Line Pressure The Story Of The Year With 2017 To Offer Better Business Conditions For CSX

December 19th, 2016 by Trefis Team
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The year 2016 was a challenging one for CSX, with a decline in shipments and fuel surcharge revenue weighing on the company’s bottom line. Like its peers in the railroad industry, CSX focused on cost reduction in order to counter the impact of a decline in revenue on its operations. While this year has been a fairly tough one for CSX, the new year is likely to bring some cheer for the company with the policies of the incoming President expected to produce a more conducive business environment going forward.

Decline In Top Line

CSX’s shipment volumes declined roughly 8% over the course of the first nine months of the year, which is expected to be the story for the full year as well. [1] The decline in shipments was largely due to a decline in coal and metals shipments, as illustrated by the table shown below.

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CSX Decline in Shipments 9M 2016

A decline in demand for coal by utilities in the backdrop of a shift towards natural gas based electricity generation in the U.S. negatively impacted U.S. rail shipments of coal and consequently, CSX’s coal shipments.

Challenging business conditions facing the domestic steel industry negatively impacted CSX’s shipments of metals. Competition from unfairly traded steel imports negatively impacted the production and shipments of domestic steelmakers for a considerable part of the year. The imposition of antidumping duties on steel imports from a number of countries by U.S. authorities during the course of 2016 is expected to alleviate the situation in the future.

Apart from the decline in shipments, lower oil prices in 2016 translated into lower fuel prices and fuel surcharge revenue for CSX. This was evident in the decline in the average revenue per carload for the company in the first nine months of the year.

CSX Decline In Average Revenue Per Carload 9M 2016

Cost Reduction Partially Counters Impact Of Lower Revenue On Profits

In order to deal with a business environment characterized by top line pressure, CSX focused on cost reduction throughout the year. In addition to volume related declines in costs and the impact of lower fuel prices, the company instituted several measures to lower operating costs. The combination of volume related cost reductions and the company’s efforts to lower operational costs partially offset the impact of lower revenue on the company’s operating ratio, as shown below.

CSX 9M 2016 Operating Ratio

Improved Business Prospects Going Forward

After riding out a rough 2016, the coming year is expected to provide reasons for optimism for CSX. The President-elect has outlined a range of plans to kickstart economic growth in the U.S., which is expected to boost the company’s shipments. A $1 trillion ten-year plan for revamping domestic infrastructure is expected to boost the demand for steel and the company’s metals shipments over the next few years. [2] In addition, the President-elect’s tough stance against unfairly traded steel imports is expected to further improve the business environment for domestic steel producers, which will also benefit company’s involved in transportation of the commodity such as CSX. In addition, the President-elect has promised to engineer a revival of the coal industry. [3] While low gas prices are a significant stumbling block to any revival of coal mining, any measures taken by the incoming administration that boost coal production would also brighten the prospects of companies involved in coal transportation such as CSX. Lastly, the President-elect has also promised a reduction in corporate taxes, which would benefit all U.S. companies including CSX. [4] Thus, considering the range of measures proposed by the incoming administration, the coming year is likely to be a much better one for CSX.

Have more questions about CSX? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for CSX

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Notes:
  1. CSX’s Q3 2016 10-Q, SEC [↩]
  2. Trump’s $1 Trillion Promise vs. Congress, Wall Street Journal [↩]
  3. Trump’s big plan for the coal industry just got even harder, CNBC [↩]
  4. S&P 500 companies would save $87.1 billion if Trump passes his tax plan, Marketwatch [↩]