CN Rail could cut 2017 spending by $400-million amid declining carloads
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Eric Atkins - RAILWAY INDUSTRY REPORTER
The Globe and Mail
Published Wednesday, Jun. 15, 2016 6:54PM EDT
Last updated Wednesday, Jun. 15, 2016 6:55PM ED
The incoming chief executive officer of Canadian National Railway Co. said the freight carrier could slash spending for a second year in a row as it faces a plunge in carloads.
Luc Jobin, currently CN’s chief financial officer, said the Montreal-based freight carrier might cut 2017 spending on locomotives and other equipment by as much as $400-million.
The company has more than 400 locomotives in storage, but this year will spend $500-million on 90 new locomotives, “which were on order and not cancellable, unfortunately,” Mr. Jobin said at an investors’ conference in Boston on Wednesday.
The company is continuing to invest in fail-safe train controls – $400-million in 2016 – mandated by U.S. regulators. These and other technology investments should help the company improve productivity and service, said Mr. Jobin, 57, who last week was named the next CEO of CN when Claude Mongeau retires for health reasons at the end of June.
In the current quarter, Mr. Jobin said carloads are down by 12 per cent, about one-quarter of which is because of a decrease in iron ore shipments. Revenue per ton-mile is down by 10 per cent, he said.
“Clearly, this is the most difficult quarter of the year for us,” Mr. Jobin said.
In the first quarter, CN cited weak freight markets and the stronger dollar when it reduced its forecast for 2016 profit growth to flat from an increase of about 5 per cent. CN cut the 2016 capital expenditure budget to $2.75-billion from $2.9-billion and forecast carloads would fall by about 5 per cent.
The company has laid off about 2,400 people – 10 per cent of its work force – including 1,200 train operators. “We hope to call back some of those conductors as attrition moves through our system,” Mr. Jobin said.
CN’s “disciplined” spending, a share buyback worth $2-billion and a dividend that has risen by an average of 17 per cent a year are signs the company is “mindful” of returning capital to shareholders, said Christian Wetherbee, an analyst at Citi Research.
Mr. Wetherbee said the big North American railways have too many locomotives and reducing their fleets is an obvious way to slash expenses. With the exceptions of Canadian Pacific Railway Ltd. and Kansas City Southern Railway Co., all the large carriers have been boosting the size of their fleets, he said.
“The Class 1 locomotive fleet [excluding BNSF Railway Co.] has increased by 5 per cent since 2006, in spite of slightly negative volumes, and currently roughly 11 per cent of this fleet is in storage,” Mr. Wetherbee said.
CP has idled 665 locomotives, laid off 1,300 people and warned more could be out of work. CP has slashed 2016 capital expenditures by $400-million to $1.1-billion but is standing by a forecast of “double-digit” profit growth in 2016, a prediction that is threatened by weak demand for shipments of bulk commodities.
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