KANSAS CITY, Mo. – Kansas City Southern’s revenue and volume surged in a second quarter that compared favorably to a year ago, when pandemic-related shutdowns resulted in historic traffic declines.
But the railroad’s $700 million merger breakup fee paid to Canadian Pacific sent KCS into the red for the quarter. Current merger partner Canadian National will reimburse KCS for the merger breakup fee, but not until after KCS shareholders vote on the proposed merger on Aug. 19.
KCS revenue increased 37% for the quarter, to $749.5 million, as overall volume surged 31%. Expenses, including the merger termination fee, were $1.18 billion, producing an operating loss of $431.7 million for the quarter. The loss per share was $4.17.
Adjusted for the impact of the merger-related costs, KCS earnings per share grew 79%, to $2.06. The adjusted operating ratio was 61.4%, a 3.8-point improvement over last year’s second quarter.
CEO Pat Ottensmeyer said that while the railroad was pleased with strong volume growth, KCS fell short of its customer service expectations. A combination of high volumes compared to last year and congestion at key yards in Mexico led to lower average train speeds and cars spending more time in yards. Network velocity slumped 29%, while terminal dwell increased 29%.
John Orr, executive vice president of operations, says the railroad has taken steps to improve dwell at yards in Monterrey and Nuevo Laredo, Mexico, and that velocity is nearly back to normal levels in the U.S.
Regulatory issues delayed some unit train exports of refined products to Mexico. Refined products volume has doubled in the past year, creating congestion at the Laredo gateway.
KCS revised its outlook for this year’s operating ratio. It now expects an operating ratio of around 60%, up from the previous forecast of 57.5%, due to a combination of the polar vortex, congestion in the second quarter, and lower automotive revenue due to the ongoing global computer chip shortage that has periodically shut down KCS-served assembly plants in Mexico.
The railroad also slightly revised its earnings per share outlook, to around $9 for the year, down from above $9.
I hope the STB forces CN to give up the Illinois Central to NO to CP as part of the merger. CN acts like it doesn’t exist most of the time anyway south of Memphis. Then we will have 2 major north-south operators instead of just one. If CN says they want to raise competition, let actions speak louder than words.