Watch Now

Kansas City Southern eyes lower operating ratio

Third phase to focus on increasing network velocity, reducing train starts and lengthening trains

Kansas City Southern eyes a mid-50s OR in 2022. (Photo: Jim Allen/FreightWaves)

Kansas City Southern (NYSE: KSU) expects to execute the third phase of its version of precision scheduled railroading (PSR) this year in a bid to lower the company’s operating ratio (OR) to the mid-50s by 2022.

PSR is an operational tool that almost all of the Class I railroads deployed to streamline operations. Kansas City Southern (KCS) adopted PSR in 2019. Investors use OR to gauge the financial health of a company, with a lower OR implying improved health. OR is a company’s operating expenses as a percentage of its revenue. 

The first phase of KCS’ PSR was to increase network velocity in 2019, while the second phase sought to reduce train starts and lengthen trains. The third phase is to do a combination of both, according to Sameh Fahmy, executive vice president for PSR. 

These efforts, along with keeping a close eye on employee headcount and investing in capital infrastructure in 2021 and 2022, will enable KCS to work toward its goal of around 57.5% in 2021 and 55%-56% in 2022. KCS’ OR for 2020 as reported was 61.9%.

“We want to maintain the trains’ lengths. We want to even increase it by probably another 5%. And at the same time, we want to regain the velocity that we have seen in Phase 1,” Fahmy told investors during KCS’ fourth-quarter earnings call Friday. “And the way to do that is to remove the limitations that we have been facing in Q4 in particular because we have been essentially testing the limits and hitting the constraints.” 

To do this, KCS will be adding sidings to accommodate longer trains, and it will look at yard configurations, Fahmy said. 

In Mexico, KCS is conducting infrastructure work at its Sanchez terminal in the greater Monterrey area so that it can improve efficiency for arriving and departing cross-border trains, and it is adding intermodal cranes and reconfiguring the yard lease in and out of the Salinas Victoria intermodal terminal, according to KCS Chief Operating Officer Jeff Songer. The railroad is also modifying its infrastructure to improve network flow at its mainline in the Monterrey and San Luis Potosi areas.

KCS grappled with a number of headwinds in the fourth quarter, which impacted fourth-quarter results. A 59-day teachers’ protest blocked trains from moving from the Port of Lázaro Cárdenas to the interior. 

KCS also grappled with rising numbers of employees who’ve contracted the coronavirus. The railroad has seen about 650 cases of COVID-19, with about 5% of crews unavailable on a typical day because of COVID, Fahmy said.

In addition to employees who are sick or in quarantine, KCS has needed to adjust operations in Mexico. To combat the outbreak there, the Mexican government has created work restrictions, which have reduced the maximum time on duty for crews. KCS worked with local unions to adjust to the new mandate. 

Other factors that influenced KCS’ operations in the fourth quarter included two hurricanes in October and a derailment in the Houston area that stopped the line there for two days.

As a result of all these factors, average train speeds fell to 13.8 mph from 15.2 mph in the fourth quarter of 2019, while average dwell time rose to 25 hours from 19.9 hours over that same period.

To keep costs low, KCS reduced train starts by 14% and lengthened trains by 14%, which in turn increased fuel efficiency by 5%, Fahmy said.

“We want to keep these to the gains that we made during the pandemic, and at the same time absorb the revenue growth,” Fahmy told investors Friday. Other ways to improve OR are to increase network velocity and invest in infrastructure that will eventually make KCS operations more efficient, according to Fahmy. 

KCS’ fourth-quarter financial results

KCS’ net profit for the fourth quarter of 2020 rose 30% over a year ago despite a 5% decline in revenue.

Fourth-quarter 2020 net income was $165.7 million, or $1.80 per diluted share, compared with $127.2 million, or $1.30 per diluted share, for the fourth quarter of 2019. 

For more fourth-quarter earnings results, go here.

Kansas City Southern2020 Value2019 ValueY/Y Gross ChangeY/Y % Change
Freight revenue (in millions)$693.4$729.5($36.1)-4.9%
Carloads (in thousands) (includes intermodal)567583-16-2.7%
Revenue per carload$1,169$1,184-$15-1.3%
Intermodal shipments235254-19-7.4%
Intermodal revenue per carload$331$383-$52-13.6%
Gross ton miles (in millions)25,37425,745-371-1.4%
Train velocity (mph)13.815.2-1-9.2%
Dwell time (hours)2519.9525.6%
Adjusted OR%60.2%62.4%-2.2%-3.5%
Diluted EPS$1.80$1.30$0.5038.5%

KCS to develop logistics park in Wylie, Texas

Prior to releasing its fourth-quarter results on Friday, KCS announced a business development opportunity in Texas.

The railroad said Thursday that it has entered into a joint agreement with NorthPoint Development to develop the Wylie Logistics Park in Wylie, Texas. The property is adjacent to KCS’ David L. Starling Wylie Intermodal Terminal. 

The park offers 2.4 million square feet of potential building capacity for traditional warehousing and distribution; industrial grade amenities; dual feed electrical system with redundant power; as well as a heavy-haul road network comprising direct access to Highway 78 and the interstate system, air and seaports, and a state-of-the-art intermodal terminal, KCS said. 

“Wylie is part of the Dallas metro area, the fourth fastest growing industrial market in the U.S., and Wylie offers a business-friendly environment, low taxes and a double free port exemption,” said Ginger Adamiak, KCS vice president for chemical and energy products. Adamiak also leads the company’s industrial development team. 

Rodrigo Flores, KCS vice president for intermodal and automotive, said, “The Wylie Logistics Park is ideal for customers looking to combine logistics and real estate in one location. Locating in the park will provide tenants and customers significant cost savings by reducing drayage from ramp to facility and providing quick access to the regional interstate network. Customers will also enjoy the environmental benefits of intermodal transportation and connectivity to other intermodal and port facilities on KCS’ U.S. and Mexico rail network.”

The site is attractive from an e-commerce perspective, and its location has a competitive labor pool, NorthPoint said.

KCS’ adjacent Wylie Intermodal Terminal has track capacity of 19,000 feet and an annual lift capacity of 342,000. 

The terminal opened in 2015 and was expanded in 2018.

Subscribe to FreightWaves’ e-newsletters and get the latest insights on freight right in your inbox.

Click here for more FreightWaves articles by Joanna Marsh.

Related articles:

Kansas City Southern’s Q4 net income rises 30%

KCS commits to setting more stringent emission reduction target

COVID-19 uncertainties, PSR part II: What’s on the minds of rail execs

Kansas City Southern sees opportunities ahead amid lingering headwinds

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.