A Burlington Northern Santa Fe (BNSF) train moves through Cajon Pass near San Bernardino, Calif. The railway owned by Warren Buffett’s Berkshire Hathaway Inc., has made cuts this year to adjust to lower cargo volumes.Jonathan Alcorn/Bloomberg
Additional railway 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 per cent in the three months ended June 30, according to Bloomberg data based on Association of American Railroads (AAR) statistics.
The cargo decline reverses the patterns of 2014, when railways hired as fast as possible to handle a record grain harvest, oil gushing at $100 (U.S.) 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 could start getting a glimpse of the new reality as soon as Tuesday, when CSX Corp. reports second-quarter earnings. It will be the first of the major North American carriers to release results. "Selective furloughing" was part of the railway's strategy, chief financial officer Fredrik Eliasson said in a May 14 presentation.
More than 1,000 workers likely will be furloughed at Union Pacific, the largest U.S. railway by sales, Mr. Seidl said. In May, CN said it had laid off 400 people and Kansas City Southern cut 110 jobs.
BNSF Railway Co., the railway 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 railways 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," Mr. 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."
The railway 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 Mr. Seidl said. That probably means the largest layoffs already have been made in the second quarter. The railways 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. railway employment rose by 3,385 workers to 166,204 in 2014, the highest level since 2007, according to AAR and U.S. Census Bureau data.
Railway stocks entered a bear market, sinking 22 per cent through the end of June from a November peak, while the Standard & Poor's 500 index increased 0.5 per cent in that time. The rail index rose 0.5 percent at 11:49 a.m. in New York trading, pointing toward a third gain in four days.
In the past four weeks, analysts have lowered their railway earnings estimates more than 4 per cent. Earnings for companies on the S&P 500 are forecast to fall 6.4 per cent over all, according to data compiled by Bloomberg.