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Kansas City Southern eyes cost control measures

The railroad will be keeping tabs on operational costs as a way to hedge against the economic uncertainty brought about by the COVID-19 pandemic.

Kansas City Southern (NYSE: KSU) hopes to weather the coronavirus pandemic by shifting its operating plan to cut costs even further as a means to counter an anticipated steep downturn in second quarter volumes. This information was provided by company executives during Kansas City Southern’s (KCS) earnings call for the first quartet of 2020.

“Aggressively managing what we can control is our goal right now,” said KCS Chief Financial Officer Mike Upchurch.

The company has created a number of planning assumptions, including one that anticipates a 15% decline in second-quarter revenue, followed by declines of 5% and 10% for the third and fourth quarters of 2020, respectively. The percentage changes are compared to the same quarters of 2019.

Another planning assumption is a 30% decline in second-quarter revenue, followed by third- and fourth-quarter revenue declines of 5% and 10%. The 30% decline approximates the worst quarter KCS experienced during the Great Recession in 2009.

“We just simply can’t accurately predict or control what happens with volumes and revenues at this point during the COVID-19 crisis,” Upchurch said.

KCS is “rightsizing” the company to match the volume assumptions, according to Upchurch. About 60% of KCS’ cost structure consists of variable or variable costs, which can be reduced even further through measures such as consolidating trains on the network. Reducing the number of trains running on the network also trims crew and yard labor costs, and it also targets fuel costs and encourages fuel efficiency savings, he said.

But should the rail demand ramp up suddenly later this year, KCS wants its crews and its assets to be “close” by, KCS President and CEO Pat Ottensmeyer said.

“As we grow and ramp up, we will try to do so more intelligently,” Ottensmeyer said.

To reduce costs, KCS is “pivoting” towards a more traditional definition of precision scheduled railroading (PSR), according to Sameh Fahmy, executive vice president of PSR. KCS had been focused on eliminating delays and mechanical failures and improving network velocity as part of its PSR efforts.

KCS has “pivoted from a customized PSR model that we built for revenue… to the traditional, old-fashioned part of PSR… of eliminating costs and eliminating trains and reducing train starts and the like. [But] that does not mean we’re neglecting service,” Fahmy said. 

The company started transitioning to this approach in mid-March, when some of the plants it serves started to close amid the COVID-19 pandemic.

KCS had already been reducing costs in January and February ahead of the pandemic through continued deployment of PSR, according to Fahmy. In those months, the company took roughly 20% of its locomotives and 10% of its railcars offline, and it returned about 300 leased grain hopper cars and 400 leased railcars for automotive shipments, Fahmy said. KCS also parked about 700 grain cars even though grain volumes increased, he said. 

KCS also saw fuel efficiency gains because of greater network fluidity and better service design resulting from PSR, which in turn helped to reduce the number of times the train crew changes over the course of a trip, Fahmy said. And KCS was also running longer and heavier trains in the first quarter, he said.

“The more fluidity you have in the network, the more equipment you can take out. And so, we have taken a lot of locomotives out of the fleet,” Fahmy said.

Fahmy and Ottensmeyer said KCS would be taking notes during this PSR pivot to help guide the company when rail demand eventually returns.

KCS earlier today said it saw record revenue of $731.7 million in the first quarter of 2020, a 7% increase from the first quarter of 2019 amid revenue gains for its chemicals and petroleum segments as well as for its intermodal segment.

The revenue increase helped KCS’ first-quarter net profits jump to $152.3 million, a 47.6% increase from $103.2 million in the first quarter of 2019. 

Adjusted net income, which the company stated is a “meaningful” reflection of KCS’ performance because it takes into account changes in currency foreign exchange rates and other items, was $188.2 million, or $1.96/diluted earnings per share. For the first quarter of 2019, adjusted net income was $152 million, or $1.51/diluted earnings per share. 

First-quarter operating ratio was 60.5%, or 59.7% on an adjusted basis. First-quarter 2019’s operating ratio was 66.2% on an adjusted basis.

Kansas City Southern2020 Value2019 ValueY/Y Gross ChangeY/Y % Change
Freight revenue (in millions)$731.7$674.8$56.98.4%
Carloads (000s)5861-3-5.3%
Revenue per carload (excludes automotive)$977$1,063-$86-8.1%
Intermodal shipments234221135.7%
Intermodal revenue per carload$380$362$185.0%
Gross ton miles (in millions)25,364.024,340.01,0244.2%
Train velocity (mph)19.821.8-2-9.2%
Dwell time (hours)15.912.6326.2%
Adjusted OR%59.7%66.2%-6.5%-9.8%
Diluted EPS$1.58$1.02$0.5654.9%

More first-quarter results can be found here.

Joanna Marsh

Joanna is a Washington, DC-based writer covering the freight railroad industry. She has worked for Argus Media as a contributing reporter for Argus Rail Business and as a market reporter for Argus Coal Daily.