Union Pacific and CSX vie for operating ratio bragging rights

Posted by Bill Stephens
on Tuesday, June 9, 2020

Who is in the lead? Union Pacific and CSX Transportation locomotives power an intermodal train out of the Port of Long Beach, Calif., in 2017. TRAINS: David Lassen
Lately Union Pacific executives have been touting the railroad’s industry-leading 59% first quarter operating ratio. CSX Transportation, meanwhile, noted that its 58.7% operating ratio set a Class I first quarter record.

Wait, you say. How can UP’s operating ratio be an industry best when CSX’s is lower?

Well it turns out that the Class I railroads don’t calculate their operating ratios in exactly the same way. So it’s an apples vs. oranges comparison.

The operating ratio, a key measure of railroad efficiency, is determined by dividing operating expenses by operating revenue. Where the railroads diverge is on whether their calculations also include gains from things like real estate sales.

UP, BNSF Railway, and Canadian National calculate their operating ratios using purely the cash generated from operating their railroads. CSX, Canadian Pacific, and Norfolk Southern, on the other hand, also include gains from selling off property. 

The railroads are upfront about this in their financial statements. They’re also consistent about the way they report it. And there’s nothing improper about including the impact of real estate gains. In fact, the Wall Street analysts I’ve spoken with don’t even bat an eye over the different ways of calculating the industry’s single most-watched financial metric.

“Real estate sales are lumpy but a regular part of business,” independent analyst Anthony B. Hatch points out. “And remember if they include them when they happen they don’t include them when they don’t.”

True enough. But this is a bit like if the National League calculated batting average one way and the American League used a slightly different formula. How would you crown the batting champ? This is why you can have two Class I railroads saying they have the industry’s best operating ratio.

When you crunch CSX’s numbers without the impact of real estate gains, its first quarter operating ratio rises to 59.3%. And, on an apples-to-apples basis, that’s enough to give bragging rights to UP.

But I wouldn’t put much weight on a quarterly operating ratio – or a quarterly anything, for that matter. A three-month look at a railroad is merely a snapshot in time. It’s longer-term trends that are important, and the operating ratio should be just one figure among many used to compare railroads.

You can reach Bill Stephens at bybillstephens@gmail.com and follow him on twitter @bybillstephens

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