Content area
Full Text
An operating ratio is a strange thing. It is the only financial statistic that you can see in action every day. That's particularly been the case over the past decade, as railroads have taken easy-to-spot steps to boost efficiency.
Think of the spread of distributed power across the continent, simultaneously pulling and pushing monstrously long trains. Or fewer trains sitting in sidings awaiting costly re-crews. Or, from the cab of a big General Electric locomotive, watching Trip Optimizer at work, automatically controlling the throttle and dynamic brakes to reduce fuel consumption.
You also can see the push for low operating ratios in humps that now stand silent from Calgary, Alberta, to Cumberland, Md. And in lines of stored locomotives and furloughed crews, rendered surplus as tonnage moves in fewer but longer trains. All this has reduced costs and made North American railroads more efficient year after year.
The other side of the equation - and something you can't see firsthand - is the revenue each freight car and intermodal container produces for the railroad. Chief financial officers can see it, though, and they're smiling. Freight rates have outpaced rail inflation, a crucial measure because it allows railroads to sustainably reinvest in their networks, including adding the capacity that can help them grow.
These trends of lower expenses and rising revenues have combined to drive the industry's average operating ratio past new milestones: Below 80 percent (in 2005), then cracking 75 (in 2007), and sub-65 (in 2015). In other words, operating expenses ate up 77 cents of every dollar the Class I railroads took in back in 2005. Now it is just below 64 cents of every dollar.
Naturally, after this success, railroads tout their low operating ratios. Investors covet them. And Wall Street and the talking heads on CNBC champion every onepoint improvement.
The importance of a low operating ratio - combined with smart capital spending - cannot be overstated. Consider that last year the Class I railroad with the lowest operating ratio (Canadian National, 56 percent) was twice as profitable as the last-place railroad (CSX Transportation, 69 percent).
Yet not everyone is enamored with the industry's most...