Union Pacific Chief Executive Officer Lance Fritz said more layoffs are possible as the railroad confronts sharply lower freight volumes.
The plummeting demand for freight hauling is cutting into the sales, profits and share price of the major Omaha employer.
“What I would communicate to our employees is that right now volumes are down and we have to get our costs in line,” Fritz told The World-Herald on Thursday after the company reported a 7.7 percent decline in second-quarter profit from last year.
The Omaha-based company said Thursday it already has temporarily laid off 1,200 employees who work in what the industry terms “train, engine and yard.” That’s an increase from 900 furloughs announced earlier this year for those occupations.
About 85 percent of the company’s 48,000 workers are represented by unions made up of members who perform on-the-ground work, such as operating trains, maintaining track and repairing locomotives.
That leaves about 8,000 workers in management, salaried and office positions. Many of those workers are in the company’s downtown Omaha headquarters. Fritz said Thursday he hoped that normal attrition, such as retirements and other routine separations, will suffice when it comes to getting payrolls aligned with lower freight-hauling demand.
Still, “if we have to, we will do whatever else we need to,” Fritz said about possible job reductions.
Fritz said the company’s normal attrition level is about 7 percent per year, suggesting about 3,360 people leave each year under circumstances other than layoffs.
The new chief executive and longtime Union Pacific executive, who took office this year when predecessor Jack Koraleski moved to executive chairman, said neither he nor the company takes it lightly when the subject is payroll reductions. He said the company is being “fair, sensitive and transparent” in reducing the payroll.
The determination to cut costs comes amid a serious drop in cargo. Union Pacific, employer of about 8,000 Nebraskans, reported second-quarter earnings that beat Wall Street expectations by three cents a share on results that included an 8 cent-per-share gain on one-time asset sales. Sales fell 10 percent to $5.4 billion, lower than Wall Street analyst forecasts of $5.6 billion.
Perhaps more worrisome, freight volumes slumped 6 percent. Shares fell about 5.7 percent Thursday to $92.12 on the New York Stock Exchange, following a 17 percent drop so far this year leading up to the earnings announcement.
The biggest falloff in second-quarter shipments came in coal. Union Pacific is a major transporter of coal used to power electric utility plants. But demand is falling as utilities that can burn either coal or natural gas choose natural gas, which is now cheaper.
Union Pacific marketing chief Eric Butler told investors and analysts on a conference call Thursday that coal accounted for 32 percent of U.S. electricity generation in the second quarter, down from 39 percent a year earlier.
All told, Union Pacific’s coal volumes fell 26 percent. Crude oil shipments dropped 29 percent as lower oil prices reduced production from the shale fields served by Union Pacific’s 32,000 miles of track in 23 Western states. Ag-product cargo declined 7 percent on lower global demand for U.S. grain, while shipments of industrial products dropped 13 percent.
The company said it expects weakness in some of those main cargo categories to persist throughout 2015. Chief Financial Officer Rob Knight said the company does not expect to meet or exceed last year’s record earnings of $5.75 a share. The second-quarter earnings included a $113 million one-time gain from selling some real estate in California.
On the earnings, “for the most part there were no real surprises up or down,” said Logan Purk, a transportation industry analyst for wealth adviser Edward Jones. But they looked better on paper than in reality, Purk said, because they included the one-time gain from the real-estate sale.
As the company faces the cargo slump, it also is dealing with sizable regulatory costs. One is called Positive Train Control, a system of sensors, controls and central oversight that can stop or slow a train remotely if danger is detected on the rails.
PTC was mandated by federal law after a fatal collision in 2008 of a Southern California commuter train and a Union Pacific train; Union Pacific was not found to be at fault.
The whole system of wireless sensors, software and other equipment is expected to cost the industry about $20 billion, by some estimates.
CEO Fritz said Thursday that none of the seven Class I freight railroads operating in the United States is even close to meeting the 2015 deadline for implementing PTC across wide swaths of the rail network. He said getting a congressional extension on the timetable is the company’s biggest regulatory priority. Union Pacific budgeted almost $400 million for PTC implementation in its 2015 capital budget.
On Thursday, S&P Capital IQ cut its 12-month price target on Union Pacific shares to $112 from $137. Analyst Jim Corridore said he didn’t expect demand in key freight categories to rebound in the near-term for Union Pacific, the second-largest U.S. freight railroad by ton-miles.
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