Rail Layoffs Seen Rising as N. America Cargo Slump Saps Profits

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Additional railroad layoffs loom on top of more than 1,000 job cuts this year as North American carriers including Union Pacific Corp. and Canadian National Railway Co. try to cushion a second-quarter earnings slump.

The reason: Shipments of grain and energy products are weakening, with carloads in North America falling 2.3 percent in the three months ended June 30, according to Bloomberg data based on Association of American Railroads statistics.

The cargo decline reverses the patterns of 2014 when railroads hired as fast as possible to handle a record grain harvest, oil gushing at $100 a barrel and a surprise rebound in coal. The companies may have been too slow to adjust when times turned bad -- putting jobs on the line now.

“They probably sharpened their pencils a little bit and got more conservative on the volume outlook,” said Jason Seidl, an analyst with Cowen and Co. in New York. “You’re going to see the effect of that in the headcount.”

Rail analysts and investors got a glimpse of the new reality after CSX Corp. on Tuesday reported net income rose 4.5 percent as cost cuts helped make up for a 5.5 percent decline in revenue. CSX, the first of the major North American carriers to release results, reduced its average workforce by 570 people from March to June.

Refresher Course

More than 1,000 workers likely will be furloughed at Union Pacific, the largest U.S. railroad by sales, Seidl said. In May, Canadian National said it had laid off 400 people and Kansas City Southern cut 110 jobs.

BNSF Railway Co., the railroad owned by Warren Buffett’s Berkshire Hathaway Inc., has made cuts this year to adjust to lower cargo volumes, said Mike Trevino, a spokesman. He declined to provide numbers.

Furloughs, in which employees are laid off temporarily without pay, allow the railroads to rehire train engineers and yard workers with only a few days of refresher courses instead of training programs that can last six to nine months, said Keith Schoonmaker, an analyst with Morningstar Inc. in Chicago.

“The whole market is surprised at the rapid plunge, especially in coal volumes,” Schoonmaker said in a July 10 telephone interview. “The challenge is trying to align the size of the network in real time with demand that’s shifting in surprising ways.”

Further Weakness

The railroad association’s weekly cargo report showed further softness in the second quarter as low natural gas prices sap coal demand, oil drilling slows and harvests return to normal after a record crop.

The declines in cargo should reach a bottom later this year, Cowen’s Seidl said. That probably means the largest layoffs already have been made in the second quarter. The railroads now need to be on guard not to cut too much.

“When they’re looking into their crystal ball, they have to balance the ability to provide good service with bringing costs in line,” said Lee Klaskow, an analyst with Bloomberg Intelligence.

After reducing employees in 2013, the rails struggled to keep up with grain shipments last year. U.S. railroad employment rose by 3,385 workers to 166,204 in 2014, the highest level since 2007, according to AAR and Census Bureau data.

Railroad stocks entered a bear market, sinking 22 percent through the end of June from a November peak, while the Standard & Poor’s 500 Index increased 0.5 percent in that time. The rail index rose slightly today, giving it a third gain in four days.

In the last four weeks, analysts have lowered their railroad earnings estimates more than 4 percent. Earnings for companies on the Standard & Poor’s 500 Index are forecast to fall 6.4 percent overall, according to data compiled by Bloomberg.

Uneven Cargo

Union Pacific, which saw carloads drop 5.4 percent in the quarter, will post lower profit compared with a year ago for the first time since the end of 2009, according to analysts’ estimates compiled by Bloomberg. Earnings per share are projected to be $1.36, down from $1.43 a year ago.

Earnings per share for Kansas City Southern and Norfolk Southern Corp. are estimated to drop 15 percent and 20 percent, respectively.

Uneven cargo growth may require railroads to cut workers in one area where demand is weak and hire in others where it’s strong -- such as general merchandise and automobile shipments - - since engineers build skills by operating with the same terrain and cargo types, according to Larry Gross, a partner at transportation consultant FTR Associates.

Profit may suffer “because of some caution about future demand and not wanting to give bad service to their customers,” Morningstar’s Schoonmaker said. “That may require a short-term sacrifice of having a little extra labor.”

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