Class 1 railroads may make some cost-cutting measures permanent

A photograph of a train in a rail yard. There are electricity lines above the train and behind it.

The Class I railroads are considering retaining some of the measures they implemented to scale down operations as a result of the coronavirus pandemic, according to comments some executives have made at recent industry conferences.

“I’m very confident that as we do add back resources, we will not add them back on a one-to-one basis,” said CN (NYSE: CNI) Chief Financial Officer Ghislain Houle at the Deutsche Bank 11th Annual Virtual Global Industrials & Materials Summit on June 9.

Houle was explaining how CN would call back furloughed employees as the North American economy rebounds and demand for rail capacity grows. Given the uncertainties of how the economy and certain sectors, such as the automotive sector, might recover, CN would be “patient” in bringing people back from furlough, Houle said.

Union Pacific (NYSE: UNP) Chief Financial Officer Jennifer Hamann made similar remarks recently.

“As the volumes come back, we don’t expect that costs will come back at a one for one,” Hamann said at the UBS Virtual Global Industrials & Transportation Conference on June 2.

Some of the structural changes that Union Pacific (UP) made include rerouting some of UP’s train plans so that trains aren’t starting and stopping at certain terminals, Hamann said. This has improved UP’s locomotive productivity, according to Hamann. 

UP is also continuing to invest in sidings, which will enable longer trains, she said, in addition to examining how to create efficiencies at its local nodes on a terminal-by-terminal basis.

“As volumes come back, … can we just build those volumes into the existing train network, into the existing trains we’re running, and build that train length?” Hamann said.

The company also hopes to finalize the consolidation of its intermodal terminals in Chicago in the latter part of 2020, and it is looking at similar consolidation opportunities at the intermodal terminals in Houston and Los Angeles, Hamann said at the Deutsche Bank conference.

The idea of making some cost cuts permanent isn’t new. In April, Norfolk Southern (NYSE: NSC) executives said during their first-quarter earnings call that they could make some cuts permanent.

The railroad removed excess locomotives and reduced crew starts, with expectations to cut crew starts even further, executives said. Norfolk Southern (NS) is also examining which terminals and rail yards to close, including outlying smaller yards that “we can continue to live without,” FreightWaves reported NS Chief Operating Officer Mike Wheeler as saying.    

The railroads have also said in recent weeks that the pandemic has caused companies to focus on cutting costs in a way that addresses operational efficiency. For instance, Kansas City Southern (NYSE: KSU) said during its first-quarter earnings call in April that it had used the pandemic to implement precision scheduled railroading (PSR)  in a more traditional manner, resulting in fewer train starts, which in turn pares down the number of crew members needed.

Kansas City Southern (KCS) has “pivoted from a customized PSR model that we built for revenue … to the traditional, old-fashioned part of PSR … of eliminating costs and eliminating trains and reducing train starts and the like. [But] that does not mean we’re neglecting service,” said Sameh Fahmy, executive vice president of PSR, during the company’s first-quarter earnings call in April.

But as the railroads consider keeping some of the operational efficiencies they’ve made as a result of pandemic-related cost reductions, they will also have to ensure that their certified train and engine crews will be able to return quickly should rail demand surge. They will need to have locomotive and railcar fleets stored at strategically located terminals to respond to any demand upticks as well.

A number of railroads have said they’ve stored locomotives and railcars in locations where they can be easily retrieved should capacity demand rev up quickly.

(Click here for more FreightWaves articles by Joanna Marsh)