Brendan Murray for finance.yahoo.com
Long before talk of driverless trucks, 3-D printing and drone delivery, old-school economic oracles from Warren Buffett to Alan Greenspan watched the railways for early signs of an oncoming U.S. recession. This freight train, however, arrived with little warning.
According to data from the Association of American Railroads, carloads of commodities have slumped for the past seven straight weeks, reaching their lowest level in records going back to 1999 when you exclude the usual year-end dropoffs in demand.
The fallout from the coronavirus is shredding not just the obvious consumer sectors like hotels, shops and restaurants that are closed during extended lockdowns. It’s hitting America’s industrial economy with equal force and similar uncertainty about what’s around the bend.
“We’re just doing everything in our power to adjust to this dramatic decline in volume,” Lance Fritz, chief executive of Union Pacific Railroad, said Thursday in a Bloomberg TV interview. “Right now it’s all about getting the business right-sized for our current volume environment and trying to get an understanding for how deep and how long this downturn is going to last.”
Fritz described the damage and company’s response:
Carloads have dropped 22-23% from a year ago and could be as much as 25% lower through this quarter. All discretionary spending is postponed and capital spending plans were cut $150 million to $200 million. The workforce is down 15% from a year earlier, and managers were asked to take a week of unpaid leave each month for the next four months. All executives and board members are taking a 25% pay cut through that same period. A “fair amount” of those jobs that are furloughed or idled will come back when things return to normal, Fritz said.
Exactly when normal returns is anyone’s guess.
“It is too soon to say when we can expect the economy to return to a more normal state,” AAR President and CEO Ian Jefferies said. “However, freight railroads are in frequent communication with their customers to anticipate what their needs will be when demand returns.”
Customers aren’t sounding too optimistic. Alcoa, the top U.S. aluminum producer, said this week that the extent and duration of the pandemic is unknown and suspended its market outlook. The metal, found in everything from jets to iPhones, has been among the worst-performing commodities during the lockdowns.
Such uncertainty leaves U.S. railroads casting around for clairvoyance. Earlier this week Jim Foote, chief executive of CSX, said, “I wish I had a crystal ball in terms of future volumes.”
A week ago Kansas City Southern reported a 4% gain in first-quarter volumes, but CEO Patrick Ottensmeyer described a “rapidly changing’’ environment and said, “we are focusing intently on rightsizing our resources in the face of declining volumes, while remaining prepared for a return to volume growth.”
Norfolk Southern, with a track network stretching from the hard-hit industrial cities on the East Coast to Chicago and New Orleans, announces its first-quarter results next Wednesday.