Two months ago, the owners of CSX Corporation (NASDAQ:CSX) stock were cheering. Despite tepid demand for rail-freight service, what the company described as a “broad-based” pricing increase led to a respectable 5% year-over-year increase in its top line in the first quarter. CSX stock price jumped 4% in one day, reaching new record highs in the process.
Not all of CSX’s apparent pricing power, however, may actually be pricing power. Indeed, it may not be sustainable. Its customers are not only balking, but they’re slowly abandoning CSX and turning to the trucking industry instead, despite its rising cost.
More than anything though, rail customers are turning to regulators, who so far have been seemingly sympathetic to the complaints about the railroad industry’s rising fees.
Customers Subsidizing Railroads’ PSR Work
The acronym “PSR,” short for precision-scheduled railroading, sounds like a brilliant cost-culling idea. And, with the advent of wireless communications, PSR is now a very real possibility that the owners of CSX stock as well as Union Pacific (NYSE:UNP) and Norfolk Southern (NYSE:NSC) shareholders have understandably cheered.
Rail customers aren’t cheering though, as much of the burden of adopting PSR has fallen, some say unfairly, on them.
Case in point: Customers of many PSR-guided railroads are now charged fees if their freight isn’t unloaded immediately after its arrival, rather than after the customer has had a reasonable amount of time to remove it. In some cases the customer may lack the necessary capacity to immediately unload its freight. In other cases, the rail yard itself may be the source of the bottleneck.
Regardless of the reason, many rail-freight users feel unfairly rushed by the system.
Moreover, at a two-day hearing that took place in late May, several railroad customers lodged official complaints about the issue with the Surface Transportation Board.
The STB has the authority to step in, if need be. It can’t outright control market shipping rates, but it does wield a great deal of influence on pricing, and it can put in place new rules that give rail customers the right to charge railroads fees when they are the source of the tie-up.
Perhaps more alarming is the fact that the usually-aloof Surface Transportation Board has already become notably vocal on this particular matter. STB board member Martin Oberman commented at the recent meeting “What we’re being told is it’s an incentive to make you move faster. What it sounds like is it’s an incentive for you to stop using the railroad.”
He added “You cannot be incentivized to roll time backwards.”
Waning Rail Demand
If the owners of CSX stock aren’t concerned, they should be. These added fees are a key reason the carrier has been able to grow its top and bottom lines so well of late.
Demand for rail services to-date this year is better than it was at this point a year ago, but that’s a dubious victory. Usage of railroads last year in the United States was well below the levels of 2016 and 2017′, and this year’s demand is also weaker than at the same time in 2016 and 2017.
There’s been no place to hide in the railroad sector. Demand for intermodal as well as for railcars is slumping, and total demand for rail-freight services is just as weak in Canada and Mexico.
And the PSR-driven fees – high margin fees at that – aren’t insignificant. Last year, fees accounted for more than 40% of CSX’s 7.5% top-line growth.
If the STB pushes back, the impact could prove to be problematic.
The Bottom Line on CSX Stock
It’s certainly possible, of course, that the Surface Transportation Board is offering more lip service than planned relief for railroad customers.
It’s not an agency to be toyed with, however. It’s got teeth, and it’s not afraid to use them.
And it may about to do just that. In a report provided to the STB in April by a task force charged with reviewing rail-rate oversight, the direction that pricing matters are going is clear. That is, major changes in pricing methods are being recommended to the board.
It remains to be seen just how much the Surface Transportation Board will intercede, or if it will recognize that unreasonable fees are just a means of charging higher rates without labeling them a “rate increase,”
As Palmer Logistics President Brett Mears noted last month, though, “I do think that the STB will continue with the investigation phase and ultimately will invoke rule making to relieve the burden to industry after overwhelming response to this hearing.”
That should at least concern anyone who owns CSX stock.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.