CSX (CSX) and the Norfolk Southern (NSC) released their 2009 1st quarter earnings. CSX reported that they had “a better-than-expected first-quarter net profit, due in part to continued strong pricing”, while the NS said it was “aggressively cutting costs in order to offset the drop in freight volumes." Better than expected, according to CSX, is a 23% drop from 2008 (I would hate to see what they thought a bad quarter would be). Today, Burlington Northern Sante Fe (BNI) and the Union Pacific (UP) will release their 1st quarter earnings, but will Wall Street continue to celebrate their lackluster performance?

Follow up:

It is apparent that the Class 1 railroad network had a dismal 1st quarter, however who is really to blame for their sluggish start? Union Pacific, CSX, BNSF, and the NS rolled the dice a few years ago in an attempt to eliminate what they saw as a drain on their budget — their manpower. They experimented with their investors money in an experiment that has failed miserably over the past 3 to 5 years. They threw billions of dollars in the Remote Control Locomotives industry that not only slowed their car count to a crawl, but spent more in technology than they did in a human being with full benefits.

The theory of the Remote Control Locomotive (RCL) was good, but the execution and reality was a complete failure. The railroads wanted to eliminate the cost of a locomotive engineer by eliminating the cost of a benefit package, as well as the threat of personal injury lawsuits. However, the investment to eliminate those costs proved to be grossly underestimated.

To eliminate the human factor, the railroads poured money into satellites, receivers, on board computers, radio repeaters, RCL boxes (GE, Cattron and Canac), speed pucks, stop pucks, new timetables, switching zones, retro-fitted safety equipment, and countless hours of specialized training. This investment resulted in the estimated cost of $6-8 million per locomotive and had a life span of only 5 to 6 years. When you do the math, the human being that was replaced was actually much cheaper than the sluggish remote control project.

Another problem with the RCL project is that the bean counters failed to realize that reducing the size of a crew would actually result in fewer car counts. CSX, the first Class 1 railroad to release their 2009 1st quarter results, stated that their volume was down across all segments, as construction and consumer-related markets remained weak. We expect that BNSF and the Union Pacific Railroad will say the same. The railroads have become reactive by furloughing employees and taking locomotives out of service. As of today, there is no definite word on the Remote Control Locomotive experiment and the billions of dollars wasted on the failed project.

The first quarter of 2009 is dismal, but Wall Street still doesn’t understand that the problem with the railroad industry is the poor decision making from the executive offices. When the executives finally realized that there are customers who would like to ship via rail, the car counts will increase. When they invest into their workers instead of trying to replace them with a failed RCL program, then their productivity will increase. The executive bean counters need to be replaced by people who actually know how to run a railroad.

Disclosure: Author holds positions in BNI, CSX, UNP, NSC