(The following story by John D. Boyd appeared on the Pacific Shipper website on February 9, 2009.)
Even as they roll in profits, North America’s railroads are slashing capacity. Major carriers are laying off thousands of workers, laying up thousands of locomotives and storing tens of thousands of idle freight cars. And they’re cutting hundreds of millions of dollars from annual capital spending programs, mainly by curbing investments for new capacity.
After revealing that Canadian National Railway’s capital budget will be down about 13 to 15 percent this year, President and Chief Executive E. Hunter Harrison told analysts he is also ready in case he needs to make more cuts.
“I can’t imagine,” Harrison said, “but if things got worse, do we have a Plan B to look at that further? Absolutely.”
At Union Pacific Railroad, Dennis Duffy, executive vice president for operations, said the carrier’s fleet of power units has shrunk by 1,500 locomotives, with 1,200 of them stored. UP also has 48,000 railcars in storage.
UP has furloughed 3,100 train and engine workers so far and lost 3,900 in all. “It is our intention to get these folks back to work in the near future, but that will be driven by volume, demand and attrition,” Duffy said.
With all that, you’d think railroads were doing poorly. But in their earnings reports and conference call remarks, rail executives again reported strong earnings driven by price hikes and the lift from slow-unwinding fuel surcharges that stayed higher than average fourth-quarter fuel costs. They expect strong pricing to continue, with several carriers seeing 5 to 6 percent gains in rates this year.
But traffic counts are falling so fast they could overwhelm the still-rising rates. UP’s chief financial officer, Robert M. Knight Jr., said as much when he told analysts on Jan. 22 that with freight volume so low at the start of 2009, it’s unlikely that we will be able to reach last year’s first-quarter earnings.
Amid that gloomier outlook, UP plans to spend $2.8 billion on capital projects, down from $3.1 billion last year. It will make some long-term investments, officials said, and buy 125 new locomotives to wrap up a three-year program, but 80 percent of its budget will go to things such as track rehabs and facility upgrades that replace or improve existing assets.
Rival BNSF Railway plans capital expenditures of $2.7 billion this year, $150 million below the 2008 level. Matthew K. Rose, BNSF’s chairman, president and chief executive, said the program “is almost exclusively replacement capital and locomotives.”
The company will spend $1.9 billion on capital projects such as tracks, signals, railcars and technology upgrades, and $675 million to get 350 new locomotives that will burn about 15 percent less fuel than current engines.
Meanwhile, it is still cutting elsewhere. Rose said his railroad has laid up 700 locomotives and 35,000 railcars, furloughed 2,000 workers with 500 more layoffs coming soon, and frozen pay for salaried staff.
In the East, CSX Transportation is planning $1.6 billion in capital expenditures this year, down from $1.74 billion last year.
Its capacity cuts include storing 400 locomotives, and laying off 1,600 workers from train crews and maintenance operations just since Dec. 1.
For the fourth quarter, the railroads found that solid pricing power, timely cost cutting and those slow-to-adjust fuel surcharges were a winning formula.
BNSF saw three-month revenue rise 3 percent to $4.37 billion while net income jumped 19 percent to $615 million even as traffic volume fell 7.3 percent.
That railroad also ended the year as the largest in sales, with its $18.02 billion revenue topping UP’s $17.97 billion.
For the quarter, UP boosted revenue 2 percent to $4.29 billion, but its profit soared 35 percent to $661 million while traffic fell 12 percent.
CN, the largest of two big Canadian carriers and with extensive U.S. lines, did better on its top line, as revenue jumped 13 percent to about $1.8 billion. But its bottom line sagged as traffic fell 11 percent with declines in every major cargo group except coal.
Net income of $469 million was about 31 percent below the same quarter of 2007, and Harrison said it would have been worse except for the fuel fees and a foreign exchange benefit from translating its U.S. dollar profits into Canadian currency.
CSX gained 4 percent in revenue to $2.7 billion for the quarter, and rail operating profit gained 16 percent to $692 million. But a profit of $247 million was down 32 percent from a write-off of its resort hotel business.