Railways adjust to bearish economic signals

A drop in shipping demand has sparked layoffs and capital spending reductions among major rail companies

Canada’s major railways are reducing workforces, downsizing fleets and altering spending plans in response to reduced growth prospects in the North American economy and lower demand for rail services.

Canadian National Railway has issued layoffs to 600 train conductors and parked 200 locomotives, executive vice-president Luc Jobin told a recent investors conference in Boston.

It is also adjusting capital spending programs and dedicating fewer resources to capacity expansion and more to maintenance of its existing network.

“We’ve really just tried to be very nimble in terms of adjusting to the reality we see for the remainder of the year,” Jobin said.

Fleet renewal plans will not be affected, he added.

CN has received 75 new locomotives this year from an order of 90. Another 90 new locomotives are on order for 2016.

Canadian Pacific Railway has also adjusted operations in response to muted demand.

CP president Keith Creel said his company is operating with fewer people, fewer cars and fewer locomotives. He said CP will have less Canadian grain to move this year because of reduced carryout stocks and an average to slightly above average harvest.

Crude oil shipments are also down, a result of low crude prices and reduced margins in the oil and gas industry.

“We’ve got more locomotives stored … we’ve got fewer cars out on the railway and we’re using fewer crews to move the existing business, so we’ve adjusted our assets based on the demand,” Creel said during a recent investors conference in Montreal.

He did not say how many workers have been laid off at CP.

The companies described workforce reductions and operational adjustments as short-term measures, adding that workers, cars and locomotives could be redeployed quickly in response to increased demand.

Both railways expect Canadian grain demand to be lower for the remainder of the 2015-16 crop year than it was 12 months earlier.

Creel said CP expects Canadian yields to be slightly higher than what was initially predicted.

“We think it’s going to be about an average crop, maybe a little bit more,” he said.

“I think Statistics Canada is (estimating) somewhere around 58 million metric tonnes, (but) we wouldn’t be surprised to see that creep up to 59 or 60 (based on) some of the intelligence from some of the grain companies that we do business with.”

Creel said his company will benefit from a large, high quality harvest in Manitoba, which could result in more grain cars shipped across the Prairies to west coast ports.

U.S. farmers are anticipating a large harvest, but early movements have been slow.

American producers delivered old crop supplies in August to make room for the 2015 harvest, but as of mid-September, U.S. grain deliveries were behind their normal pace, influenced by a strong U.S. dollar, ample grain supplies and weaker global demand for U.S. grains.

“The (U.S.) farmers are doing what you would expect the farmers to do: they’re sitting on that harvest,” Creel told investors.

“Our intel says they’ve moved about 10 percent of what (normally) would be about 25 percent of the crop at this point. It’s going to move, we just don’t know exactly when.”

Jobin predicted that the Canadian crop will be 10 percent below the five-year average.

He said carry-in stocks were likely 12.5 million tonnes as of Aug. 1 and could drop to as low as 9.5 million tonnes at the beginning of the 2016-17 crop year based on current harvest estimates.

Jobin said CN’s success at clearing a large backlog of Canadian grain from the 2014-15 crop year has reduced “a lot of the noise in terms of regulatory intervention” in Canada.

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