August employment level reaches new low at U.S. railroads

The sizeable declines between August 2018 and August 2019 are largely attributable to the adoption of precision scheduled railroading (PSR), an operating model that seeks to streamline operations through shedding assets and optimizing schedules. All of the Class I railroads except BNSF (NYSE: BRK) deploy PSR, with Union Pacific (NYSE: UNP), Norfolk Southern (NYSE: NSC) and Kansas City Southern (NYSE: KSU) being the latest to deploy the operating model in some iteration.

One of the effects of PSR is to trim employee levels because of changes in how the railroads manage their networks. Earlier in September, NSC reportedly furloughed nearly 300 employees in Virginia and Pennsylvania. UNP also laid off employees at facilities in the Pacific Northwest earlier this year as it began to implement its version of PSR.

NSC has not responded to a FreightWaves request for comment on the reported layoffs as of publication time. 

Reducing headcount levels has also been a strategy that the railroads have used to respond to persistently lower rail volumes or downturns in rail demand. 

“As we move closer to 3Q19 earnings season, we will continue to monitor sequentialheadcount trends as a read through for incremental margins and cost controls as the Big 4 U.S. rails look to combat weaker than anticipated volumes with operational efficiencies, led by headcount reductions,” said transportation analyst Bascome Majors with investment firm Susquehanna Financial Group in a Sept. 18 research note.

In spite of volume-related headcount reductions, some executives have said that such a strategy might not benefit companies long term because the railroads invest significant hours in training employees, only to lose them if they don’t return after being furloughed.

“The place we have to be careful [in rightsizing] is for crews” because it can be hard to hire workers in some locations, Canadian National (NYSE: CNI) chief financial officer Ghislain Houle said at an investor conference recently. But CNI can be more aggressive in cutting costs through using fewer railcars, he said.

“We can cut costs, but we have to be careful and mindful that cycles come and go,” Houle said.