Corporate America’s appetite for greater productivity hit home Wednesday, when Fortune 500 member Union Pacific said it would cut about 750 jobs, most of them at the Omaha headquarters.
The nation’s second-largest freight railroad said the cuts include about 500 management and administrative jobs and about 250 hourly positions; the ax will fall by mid-September to reduce costs at the company, which is in the midst of a self-described efficiency drive.
Union Pacific echoes other large blue chip American firms, which, despite solid profitability, have determined that more shall be done with fewer.
In recent months, sporting goods maker Nike, carmaker General Motors, and food manufacturer Kraft Heinz have announced significant job cuts. None are in danger of losing money.
In the case of Union Pacific, which had net income through the first six months of 2017 of $2.2 billion, up 14 percent from a year earlier, it came down to not enough people leaving on their own accord, according to a statement by Chief Executive Lance Fritz.
“Union Pacific for some time has leveraged employee attrition and technology to reduce general and administrative costs,” said Fritz, who declined to be interviewed Wednesday. “Unfortunately, attrition alone will not keep pace with our need and ability to reduce these costs.”
The cuts will eliminate about 8 percent of the company’s salaried employees and reduce annual costs by about $110 million. Putting the plan into effect will cost about $90 million, the company said, including $15 million for severance pay plus pension benefits and other expenses.
Wall Street approved, with Union Pacific shares up about 1 percent Wednesday in New York Stock Exchange trading, to close at about $106 a share. The shares have risen about 15 percent in the past year, outpacing the gains in the broader stock market.
Part of Union Pacific’s appeal to investors has been the company’s efficiency moves. The company, which trails only western freight train rival BNSF Railway in size among the seven big cargo-carrying railroads, has been a proponent of linking more and more cars together into longer trains. Such maneuvers reduce costs and manpower requirements.
Union Pacific executives have been explicit in recent years about their goal of reducing a benchmark called the operating ratio. That is an expression of how much of a dollar in revenue is spent on expenses, so the lower the better. Last quarter, Union Pacific turned in an operating ratio of 61.8. The company is aiming for an operating ratio of 55 percent.
“There is quite a way to go,” said Daniel Sherman, a transportation industry analyst for St. Louis-based wealth adviser Edward Jones. “They obviously made a recent assessment of things, and the result is this.”
Part of the equation, Sherman said, is the increasing amount of communications gear being packed onto trains, some of it mandated by a federal safety program that can remotely stop or slow trains. Railroads, Sherman said, are using some of that wireless communications technology to automate tasks once done by people.
“You can replace some people in management doing the monitoring of the network,” Sherman said.
Union Pacific, which employs about 8,000 people in Nebraska at the Omaha office and in the field, isn’t alone among railroads searching for ways to lower expenses. CSX Railway announced 2,300 job cuts earlier this year, and Norfolk Southern said it would cut costs by $650 million by 2020.
Other industries have instances of profitable companies cutting jobs. Nike had a $2.1 billion profit this year through June, when it said it planned to eliminate 1,400 jobs. GM tallied $4.3 billion of profit through June, and $9.4 billion last year, but has eliminated 5,000 jobs since November. Kraft Heinz, a large stock holding of Warren Buffett-led Berkshire Hathaway, has a company goal of cutting 5,150 jobs in coming years; the company last year had a profit of $3.6 billion.
For those facing unemployment next month in Omaha, the job picture is promising, said Nebraska Labor Commissioner John Albin, with the economy “in a good position to absorb” the coming wave of to-be-departed U.P. employees.
“Everywhere we look there is a shortage, or employers tell us they’re having trouble finding qualified people,” Albin said. “These people with a long track record with U.P. are obviously good performers, so I think the Omaha market could absorb them pretty easily.”
Albin said his office plans to contact affected U.P. workers with details on job fairs and re-employment programs.
Salaried employees in Omaha already sustained a round of cuts in late 2015, when in August of that year U.P. announced that it would eliminate “several hundred” of those jobs. On Wednesday, the company said it would first offer early retirements or buyouts to certain salaried employees to achieve the number of cuts planned; if the total number doesn’t reach the goal, then job terminations will follow.
Union Pacific has been rebounding from a tough two years, when freight demand slumped and volumes of coal cratered as utility plants switched to cleaner and cheaper natural gas. But last quarter, volumes rose in four of the six freight categories. The railroad hauls almost everything related to raw materials and finished goods, and net income rose 19 percent to $1.2 billion.
As for what’s next, greater efficiency seems to be the watchword. Rob Knight, Union Pacific’s chief financial officer, spoke at an industry conference early this month in New York about the company’s goal of a 55 percent operating ratio.
“Our organization is focused on getting to 55,” Knight said. “That is kind of how we wake up every morning.”
World-Herald staff writers Steve Jordon and Cole Epley contributed to this report.
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