A Railroad's Earnings Win Isn't an All-Clear

(Bloomberg Opinion) -- CSX Corp.’s results were better than many feared they would be, but they came at the expense of several hundred jobs.The railroad on Wednesday said third-quarter revenue declined 5% as the the uncertainty wrought by the trade war and a slump in coal shipments weighed on cargo volumes. Even so, CSX’s earnings per share for the period beat analysts’ estimates and its operating ratio – a measure of profitability in which a lower number is better – fell to 56.8%, compared with 58.7% a year earlier and 57.4% in the second quarter. That reflected in part a $145 million decline in expenses from a drop in fuel prices and operating costs, as well as the reduced headcount.

CSX has been aggressively trying to improve its efficiency via the sometimes controversial methodology of “precision scheduled railroading,” which is designed to reduce the amount of cars, manpower and capital needed to run a railroad. This cost-cutting push has become more important as the macroeconomic backdrop has weakened. Overall volume fell 5% in the third quarter at CSX, led by slumps in cargo-container and coal traffic. Shipments of metals, chemicals and cars also declined. The company reiterated its expectation for sales to decrease as much as 2% in 2019, a sign that the guidance cut it announced in July wasn’t the cautious approach management billed it as but an accurate assessment of a gloomier reality. Along those lines, United Rentals Inc. on Wednesday the high end of its revenue guidance for the year, with CEO Matthew Flannery noting that “lingering economic uncertainty could impact construction and industrial activity.”

The ways in which industrial companies respond to the deepening slowdown in manufacturing sectors can be politically fraught, particularly when it comes to job cuts. CSX had 21,158 employees at the end of the third quarter, according to the company’s estimates. That’s down about 380 from June and down more than 5,000 from the count at the end of 2016, before activist investor Mantle Ridge LP recruited efficiency champion Hunter Harrison to push a more rigorous cost-management strategy at the company. Harrison died later that year and his protege, Jim Foote, took over as CEO.

West Coast railroad Union Pacific Corp. is implementing its own version of this efficiency push and will report earnings on Thursday morning. It’s likely to reveal a similar dynamic of slumping sales being offset by cost and job cuts. Fox 4 Kansas City, citing labor union officials, reported on Wednesday that Union Pacific is laying off 200 people – with just two days notice – as it closes down the local Neff Yard. Union Pacific said some of the workers will be able to be reassigned to operations in other areas.

At a time when striking General Motors Co. workers have shut down the company’s 34 U.S. plants for more than a month over demands for better job security and garnered support from leading Democratic candidates for president, it’s fair to wonder whether railroads and other industrial companies may face blowback of their own.

To contact the author of this story: Brooke Sutherland at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

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