CSX Corp., one of the two major eastern U.S. railroads, today unveiled a series of steps designed to accelerate the pace of operating cost reductions amid what its chairman, president, and CEO called precipitous and permanent declines in some of its traditional businesses, notably coal.
In a letter to employees obtained by DC Velocity, Michael J. Ward said the railroad plans by year's end to implement a one-time voluntary separation program to cut 300 employees mostly from its Jacksonville, Fla., headquarters. However, Ward said the company might be forced to lay off personnel starting in January if the voluntary program fails to meet its targets.
CSX also plans to cut so-called nonessential costs by 10 percent, according to the letter. The cuts, which will also be implemented by the end of 2014, will come from CSX's general and administrative budgets, Ward said. CSX will more carefully scrutinize travel, training, and materials costs to ensure they meet "core business objectives," Ward wrote. All 2015 merit increases will be delayed until July 1, and no merit increases will be paid next year to executives at and above the level of assistant vice president, according to the letter.
The communiquÃ© comes three weeks after Canadian Pacific Railway (CP) announced that it had dropped plans to discuss a possible merger with CSX. CSX had rebuffed CP's preliminary advances, and no further talks were planned as of that time. It is unclear as to whether CSX's cost reduction plans were in place before it was approached by CP. Melanie Cost, a CSX spokeswoman, said the moves are "part of the company's long-term planning. The decision has been made to streamline the management organization to better reflect the realities of the company's current and future markets."*
It also comes less than a month after CSX reported record third-quarter results in revenue, operating income, earnings per share, and net earnings. Operating ratio, the percent of each revenue dollar used to run the railroad, declined to 69.7 percent, a drop of more than 2 percentage points from a year ago. A deeper look inside CSX's operating metrics, however, revealed some problems. Trains departed on schedule only 54 percent of the time in the quarter, while on-time arrivals occurred only 43 percent of the time. Train velocity fell 13 percent year over year, while terminal dwell times rose 21 percent.
John G. Larkin, transport analyst at Stifel, Nicolaus & Co., said in a research note that CSX's operating levels "remain dreadful" despite the headline operating ratio number that "looked fabulous" in the face of continued problems with network congestion that have plagued the industry all year.
In its earnings release, CSX said it "continued to target a mid-60s operating ratio longer term." However, the tenor of Ward's letter indicated that the time window to reach that goal has dramatically narrowed.
"To remain competitive, CSX must reduce operating ratio more quickly to the mid-60s while remaining focused on growing faster than the economy, pricing above inflation, and becoming ever more efficient," he wrote.
The sense of urgency is being driven by what Ward called "major and permanent reductions in the levels of some of CSX's most profitable shipments-particularly coal." In the nine months ending Sept. 30, CSX's coal revenue dropped 4 percent year-over-year to $2.13 billion, while volumes rose 4 percent. Third-quarter coal revenue was essentially flat over the year-earlier period, while volume rose 7 percent year-over-year.
Coal transportation volumes across the industry have been in a multiyear decline due to increased competition from cheap and abundant natural gas and federal environmental rules that have made it unprofitable for users to build or maintain coal-fired plants.
Editor's note: This article was updated at 1: 42 pm ET on Nov. 11, 2014 to include a statement from CSX spokeswoman Melanie Cost.