CSX: One Small Win for Inflation Fighting

The battle against inflation took an intriguing step forward yesterday. The Surface Transportation Board [STB] issued a decree stating that:

The Board found that CSX Transportation, Inc. (CSX) was charging unreasonably high rail rates and ordered CSX to reduce rates and to pay reparations on six of the seven movements challenged by DuPont." This marks the resolution of a complaint where DuPont challenged "...CSX rate increases of 30% to 176% on seven routes.

Furthermore, the STB declared:

Today's unanimous decisions demonstrate the Board's dedication to resolving disputes between railroads and their customers in an accessible, affordable, and expeditious manner. Freight-rail customers can rest assured that the Board would take effective action to strike down unreasonably high rail rates.

You cannot get much clearer than that. This government agency has positioned itself squarely on the side of the consumers of rail transportation and has positioned itself as an inflation fighter. This case is particularly interesting because years of de-regulation and industry consolidation have provided railroad companies with enormous pricing power that they have lacked for decades. For example, ABC News quotes the American Chemistry Council as claiming, "two-thirds of U.S. chemical plants that rely on railroads are served by one carrier."

In my last piece, I asked what government intervention could help prop up the market this time. I pointed the finger at oil since high prices have provided us the latest crisis to battle. Perhaps we should be thinking more broadly at the range of powers the government might bring to force market participants to cap prices.

The funny thing about fighting inflation is that it will create winners and losers. For every consumer that suffers from increased price burdens are a producer and/or supplier who breathe a sigh of relief at the bottom line. Price increases also often help pay for much needed investments in new machinery, infrastructure, etc. This, in turn, sustains profits in the future.

Over the years, the Federal Reserve often noted that inflation had remained tame partly because of a lack of pricing power across a wide range of industries (for example, see "Price squeeze ahead" from Oct 18, 2005). That balance of power has been gradually shifting against the consumer, and we can hear it on the quarterly earnings conference calls. Analysts often ask about pricing because it says a lot about the health of a company's profits.

In April, I talked about a market of rags and riches, and I pointed to CSX's conference call:

...I see this nugget from CSX's earnings call on Wednesday (from briefing.com): 'Higher pricing more than offset weakness in volumes. Co says most of its markets had strong revenue growth. Co expects pricing momentum to continue. Higher exports are helping drive traffic, although imports have slowed. Co says it was able to achieve continued pricing gains due to overall cost and service advantages that rail provides versus other modes of transportation.' So, how in the world is CSX able to command higher prices with weakening volumes? Why are their customers willing to pay up? Is CSX relying on a smaller and smaller base of the few industries that are doing well?

I now have some of the answer to my question. Rail customers have been compelled to pay up because railroads operate monopolies in many markets. These customers fighting mad, and have taken their complaints to the government (A good summary can be found in "Freight railroad customers complain about prices, service.") CSX saw its stock price plummet into Monday's close when this rate decision was announced.  It will be interesting to see whether this marks the beginning of the end for the rails' incredible run. Since breaking out at the beginning of 2005, CSX is up 210%. It carries a trailing P/E of 19, and forward P/E of 15 and has a PEG ratio of 1.

Be careful out there!

Full disclosure: No positions in CSX or DD.

Comments

[jarcom]

If you think government control over rail pricing is a good thing, then why is the US rail system the most outmoded and underused in the developed world? And why is gasoline usage per capita the highest? Our fancy highway system is heavily supported by government because it is a much better vehicle (no pun intended) for pushing political buttons.

[jegan ;-)]

Also compare Government financial support of the airlines (for all the good it seems to do!!) .. If I remember correctly, the air business is supported at 100 times that of the rails, which are supposed to be approaching self-sufficiency (sic)... It's a shame really..

Thx jegan

[User 214551]

Government meandering in rails is a joke. Why do you think the PA railroad went bankrupt in the first place? The Surface Transportation Board ought to be given Waterboard torture at Guantanamo for this decision, or disbanded-- whichever is quicker. Republicrats and Demublicans are both retarded parties, vote for 3rd party candidates or Libertarians.