Heavy rail operator Aurizon Holdings (ASX: AZJ) has reported a 19 per cent drop in net profits after tax for the half-year ending December 2018.

The $227 million result declined from $282 million a year earlier, reflecting headwinds cited by management in its August full year results.

These include the Queensland Competition Authority's finding in December, which has increased maintenance costs and slashed the amount Aurizon can earn from its coal network business in the state – though the decision is subject to a judicial review.

The company's earnings from coal haulage fell 5 per cent to $210 million, as volumes dropped in response to supply chain constraints, weather events and industrial action.

Earnings in Aurizon's rail network also fell, in response to the QCA finding, which Morningstar analyst Adrian Atkins describes as "very ungenerous". Atkins doesn't expect any change to the government's slashing of tariffs from the judicial review.

"We knew this was coming, we just didn't know when exactly," he says, indicating his challenging outlook for this business has been in place for some time.

The above-rail haulage and network businesses divisions contributed $224 million and $200 million in EBIT, respectively, for the half. Both saw declines during the period, particularly the rail network business.

Atkins notes Aurizon's ongoing cost-cutting initiatives – including divestment of its Intermodal Queensland operation to Linfox in October 2018, and the planned sale of its Acacia Ridge terminal.

Management refers to it’s the turnaround plan in its bulk business, where it is securing new contracts, "reducing inefficiencies" and focusing on growth opportunities. This includes a three-year freighter service for miner Glencore in North Queensland, and an east coast contract renewal with Linfox, which started this month.

Train

Above-rail haulage and rail network businesses of Aurizon have both suffered

Atkins says that despite Aurizon's continuing cost-out program, primarily within its above-rail business, much of the savings are being eroded by lower tariffs within its rail network.
"They're stripping out costs, but you've got to think that any savings are being passed through to the customer through tariffs," he says.

Aurizon's 11.4 cents a share interim dividend was down from 14 cents a year earlier.

The company's shares were trading flat, just 0.2 per cent higher at $4.44 at 2pm, down from $4.69 a year ago, and about 20 per cent below a three-and-a-half year peak of $5.50 in May 2017.