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Cost-Cutting Initiatives Boosted Railroads’ Operating Ratio

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Cost-cutting initiatives

Most US railroad companies registered an improvement in their operating ratio—a key metric to measure operational progress. The rate is calculated by dividing the total operating expenses by the revenues. A lower ratio indicates higher operational efficiency.

These companies have adopted cost-cutting initiatives including lay-offs, using fewer but larger and heavier trains, and reducing delays. The efforts have helped railroad companies improve the operating ratio.

Railroads’ improved efficiency

A headcount reduction of 4% by Union Pacific (UNP) during the first quarter produced a 5% decrease in labor costs. The company’s cost-cutting and productivity enhancement initiatives led to an improvement in the operating ratio. In the first quarter, the operating ratio fell by 100 basis points YoY (year-over-year) to 63.6%.

Norfolk Southern (NSC) intends to save $650 million in annual costs by 2020. Under the company’s cost-cutting initiatives, it’s shedding unproductive assets, reducing employee counts, and running fewer but longer trains. The strategy helped the railroad company lower its operating ratio by 330 basis points to 66% in the first quarter.

During CSX’s (CSX) first-quarter earnings conference call, it revealed that a 5% reduction in the workforce produced a 3% decrease in labor costs. The company’s total operating expenses fell 2% YoY, which led to a contraction by 420 basis points in the operating ratio. The first-quarter operating ratio was 59.5% compared to 63.7% in the first quarter of 2018.

The smallest of all the Class I railroad companies, Kansas City Southern (KSU) saw cost reductions through hiring less cars and fuel efficiency improvement. The company’s operating ratio fell by 160 basis points YoY to 64.2%.

To gain exposure to the US railroad industry, investors could consider the First Trust NASDAQ Transportation ETF (FTXR). FTXR, which has allocated 31.5% of its fund in the ground freight and logistics industry, has gained 8.9% in 2019.

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