(UNP) Railroads Avert Labor Strike

An anticipated labor strike looming over the U.S. freight railroad industry has been finally forestalled after the intervention of U.S. Republican House leaders. The alarming possibility of a 90-day labor strike came to a halt when U.S. legislative authorities intervened to restrict any service disruption.

The National Railway Labor Conference, representing 30 U.S. railroads including Union Pacific Corp. (UNP), CSX Corp. (CSX), Kansas City Southern (KSU) and Norfolk Southern (NSC) on collective bargaining and negotiations has already settled upon a tentative agreement with 10 labor unions and recently inked deals with two others: Brotherhood of Locomotive Engineers and Trainmen, and American Train Dispatchers Association. The regulatory body also expects to finalize an agreement by February 8, 2012 with the remaining union: Brotherhood of Maintenance of Way Employees, which represents 25,000 rail employees.

In October, U.S. government had set up a special Presidential Emergency Board to resolve issues troubling rail workers, represented by 13 labor unions covering over 60% of 132,000 rail employees. Now the government is planning to implement a legislative bill that would entail a 3-year agreement with the labor unions if the National Railway Labor Conference is unable to settle terms with the 13 unions.

The rail industry has been struggling over the past one year to negotiate with the unions demanding an over 20% raise over the next six years, way above the union agreements in other industries.

This creates a serious cause of concern for the rail industry that already remains challenged by a high operating cost given soaring fuel prices and difficult operating environment due to inclement weather conditions. Further, freight volumes have also registered modest growth given the economic volatilities and seasonal impacts in some of the product lines.

While agreeing upon such demand can have serious impacts on the cost structure, the railroads cannot risk any labor strike in the peak holiday season that may cost around $2 billion per day, according to Association of American Railroads.

Hence, we believe the present scenario remains critical to the fate of rail freight industry and the final deal terms with the unions and impacts of government intervention to safeguard the railroads will be something to watch out for in the coming days.

We maintain our long-term recommendation on Union Pacific Corp, CSX Corp, Kansas City Southern and Norfolk Southern.

CSX CORP (CSX): Free Stock Analysis Report

KANSAS CITY SOU (KSU): Free Stock Analysis Report

NORFOLK SOUTHRN (NSC): Free Stock Analysis Report

UNION PAC CORP (UNP): Free Stock Analysis Report

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