UNDER SCRUTINY

Written by William C. Vantuono, Editor-in-Chief
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All photos: Bruce Kelly

MIDYEAR REPORT, RAILWAY AGE JULY 2022 ISSUE: Compared with the intense examination to which Class I freight railroads have been subjected by the Surface Transportation Board and other industry stakeholders, dealing with the global COVID-19 pandemic was a relatively calm stroll in the park on a warm spring day. (With Contributing Editors Frank N. Wilner and Jason Seidl)

So far, 2022 has been a perfect storm for the freight rail industry. In the eye of the storm, rolled into a giant clump of overcooked spaghetti suspended in a spider’s web coated with super glue, are no fewer than 10 pain points:

1. Continuing supply chain problems over which the railroads have a limited amount of control.

2. Dissatisfied shippers represented in many cases by hostile trade associations painting a bleak picture of service problems and price gouging perpetrated by railroad senior management they say has a 19th-century robber baron-era mentality.

3. A labor shortage that some say is the industry’s fault, due to poor planning for a post-COVID recovery.

4. Possible Surface Transportation Board (STB) regulatory action on provisions like reciprocal switching, which the railroads say is akin to having a cut spike driven into one’s skull with a sledge hammer.

5. Intense criticism of Precision Scheduled Railroading (PSR, Wall Street’s favorite acronym), which detractors say has resulted in nothing more than excessively long, unsafe trains and too few crews to operate them.

6. Similar criticism on the part of STB, led by activist Chairman Martin Oberman, of Wall Street-friendly practices like stock buybacks, headcount reductions and cuts in capital investment programs.

7. A Federal Railroad Administration (FRA) that, at least on the surface, appears to be beholden to politicians and the labor unions who contribute big bucks to their campaign coffers, unduly influencing the agency to apply the brakes on waivers to test beneficial, artificial-intelligencebased technology like ATI (Automated Track Inspection). Hearings on rail safety and service conducted by the Democratic-controlled, union-favorable U.S. House Transportation & Infrastructure Committee, Subcommittee on Railroads appear to be in lock-step with the FRA rollbacks, and with an attempt to legislate two-person crews. Many observers see the hearings as little more than political theater.

8. Combat-like national labor negotiations with unions that refuse to budge even a centimeter from demands on compensation, benefits and work rules. A nationwide rail labor strike—which hasn’t occurred in more than 30 years—is looming.

9. A significant STB ramp-up of the performance metrics that railroads are required to report, coupled to a new demand for service recovery plans. These beefed-up regulations apply mainly to the “Big 4” Class I’s—BNSF, CSX, Norfolk Southern and Union Pacific.

10. Freight traffic that, for most categories, is flat or declining.

A closer look at STB regulations governing performance metrics and service recovery plans—and Oberman’s excoriation of initial railroad responses—gives, in a broader context, a snapshot of this perfect storm.

On April 26 and April 27, 2022, STB held a public hearing, “Urgent Issues in Freight Rail Service,” on what it’s calling the “recent significant performance deterioration of the freight rail industry.” At the hearing, the agency heard “compelling testimony from shipper and labor witnesses about the severity and dire impacts of substandard rail performance,” in addition to insights presented by U.S. Secretary of Transportation Pete Buttigieg and U.S. Deputy Secretary of Agriculture Jewel H. Bronaugh. The STB also heard testimony from BNSF, CSX, NS, and UP about “the causes, extent and likely duration of service disruptions, and their remedial initiatives.”

Many observers say the hearing was an opportunity for shipper and labor interests to turn up the heat on the railroads and fan the blame-game fire with tornado-velocity hot air.

The hearing triggered a rapid response from STB. On May 6, the energized agency issued an order, “Urgent Issues in Freight Rail Service—Railroad Reporting,” requiring the Big 4 to file service recovery plans addressing the “severe service deficits presently permeating their rail networks.” The plans “would specifically describe their key remedial initiatives and promote a clearer vantage point into operating conditions on the rail network.”  But for Oberman, these plans were “woefully inadequate.” “Unfortunately, these four carriers submitted plans that were perfunctory and lacked the level of detail that was mandated by the Board’s order,” Oberman said. “The plans generally omitted important information needed to assure the Board and rail industry stakeholders that the largest railroads are addressing their deficiencies and have a clear and measurable trajectory for doing so. Of particular concern was the fact that UP and NS flatly refused to provide the six-month targets for achieving their performance goals explicitly required by the Board’s order. Because of the plans’ shortcomings, the Board finds it necessary to require the railroads to supplement their plans and provides explicit further instruction on the critical information they must include.”

So, on June 13, STB issued yet another order directing the Big 4 to correct what it says are “deficiencies in their rail service recovery plans” filed in response to the May 6 order. STB also ordered these railroads “to provide additional information on their actions to improve service and communications with their customers as well as additional detailed information to demonstrate their monthly progress in increasing the size of their work forces to levels needed to provide reliable rail service. The service recovery plans, together with the additional requested information, are crucial components of the Board’s active monitoring of the nation’s freight rail industry and particularly the Board’s focused efforts to ensure that the large carriers overcome the significant service problems affecting many rail users and the public.”

“Freight rail is critical to our nation’s economy, and we must ensure the railroads are doing everything within their means to transport commodities that are crucial to the public welfare, such as animal feed, food ingredients, fuel products and fertilizers, and critical chemicals,” said Oberman. “We are in the middle of a rail service crisis, and the Board continues to receive reports about persistent, acute and dramatic problems in rail transportation, disrupting critical supply chains and shutting down companies. The freight rail industry is currently struggling to provide adequate rail service, yet the service recovery plans we received are woefully deficient and do not comport with the spirit or the letter of the Board’s order. The plans simply failed to instill confidence that the carriers have a serious approach to fixing a problem caused by their own lack of preparedness to respond to external shocks and fluctuations in demand, including especially short-sighted management of labor forces and other resources.”

“While the railroads must always comply with Board orders, it is particularly disturbing that they failed to comply with the order requiring them to file adequate service recovery plans,” Oberman continued. “Under circumstances where service is not meeting customers’ needs, this is not too much to ask from highly sophisticated companies with important public responsibilities. I had expected a better response from the carriers to the Board’s previous order, and now with more explicit instructions, which should not have been needed, there will be no excuse for continued lack of compliance. UP’s May 20 response to the Board’s May 6 Order was by far the worst of all the carriers and reflected an attitude of indifference to the documented effects of its service deficiencies on its customers and of disregard for the Board’s statutory oversight of the freight rail industry.”

Oberman’s strongly worded condemnation is unlike anything that has ever been seen from STB, which for the longest time had appeared as an agency “under the radar,” buried in paperwork, crunching numbers produced by a small army of attorneys and clerks, largely out of the public’s eye. The agency’s newfound activism—driven in part, some observers say, by the Administration of U.S. President Joe Biden—has increased almost exponentially.

The Big 4 late last month responded with revised plans. Whether they will meet STB’s stringent standards remains to be seen. There is a major STB decision looming: saying yes or no to the merger of Canadian Pacific and Kansas City Southern to create CPKC (Canadian Pacific Kansas City), North America’s first transnational railway, uniting Canada, the U.S. and Mexico. Though up to this point things have gone smoothly for the two Class I’s—approval of a voting trust, and the end-to-end, zero-overlap transaction occurring under the STB’s pre-2001 merger rules—approval is not a regulatory slam dunk. True, the chances are heavily in favor of the deal’s approval in early 2023, but to borrow the famous malaprop from legendary New York Yankees player and manager Yogi Berra, “It ain’t over ’till it’s over.”

Seidl: Trying Not to Miss an Opportunity

Following is Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl’s analysis of where things stood at midyear 2022:

In 2021, shippers were plagued with congestion across their entire supply chain. Ports were clogged, trucks were in scarce supply, labor challenges abounded at warehouses, and new equipment was scarce. Truck pricing soared and intermodal would have been the logical choice to pivot to for some shippers. However, congestion issues limited the railroads’ ability to take freight onto their networks. We saw many railroads limit gate access at intermodal ramps, frustrating shippers and IMCs alike.

As we turned the corner into the new year, increased capacity in the trucking sector (particularly among smaller carriers and owner-operators) started to significantly drive down spot truckload prices from their record high levels. However, any celebrations by shippers were short-lived as diesel fuel prices were on the rise and jumped to record highs after Russia started a war with Ukraine and inventory supplies dipped down in certain regions of the U.S.

These conditions have caused total landed freight costs for shippers to rise considerably as fuel surcharges marched higher throughout 2022. When we compare trucking and rail freight, we can see shippers (on the margin) shift freight to the railroads when fuel prices tick up. This modal shift has occurred because railroads are notably more fuel efficient (nearly four times, according to the Association of American Railroads) than their trucking counterparts. In fact, we recently compared total landed costs in a typical intermodal lane to trucking and found that the trucking lane was 33% more expensive than the intermodal option.

Unfortunately for railroad investors, the Class I carriers have not been able to take full advantage of such a good intermodal market. While equipment shortages (particularly on the chassis side) are negatively impacting the intermodal market, the shortage of labor at the Class I carriers appears to be the main cause behind the railroad industry’s inability to meet all the demand. Clearly, several carriers either cut headcount too aggressively and/or misjudged the labor market. Thus far, carriers have been on a hiring binge in 2022, but are still tracking below where many would like them to be. Indeed, it typically takes a new-hire four to six months of training before they are productively working out on the railroad. It should also be noted that this hiring process has come at increased costs to the railroads, with some offering sign-on bonuses for the first time in decades.

The fear some investors have is that the railroads have already missed a good part of what should have been one of the strongest intermodal markets in recent memory. Indeed, many people are fearing a recession, and we believe we may already be in one at the time we are writing this article in late June. The U.S. consumer is feeling the pressure of the highest inflation seen in roughly 40 years, while at the same time changing buying habits from mostly purchasing goods to now purchasing more services (travel, entertainment and dining out). This shift will likely be a negative for freight flows as the goods industry requires more transportation services then the services industry.

While we will continue to monitor the macroeconomic situation closely, we are also keeping our eye on the trucking industry. As previously mentioned, the bulk of the carriers that entered the market over the past 12 months have either been owner-operators or small carriers. They jumped back into a marketplace with record-level spot pricing but higher entrance costs for used equipment. In fact, several large carriers indicated that they are currently selling four-year-old Class 8 trucks for essentially the same amount as they paid for them initially. Unfortunately, the smaller carriers/owner-operators compete primarily in the spot market (which has been falling nearly every week) and are unable to recover all of their fuel costs via surcharges. This was highlighted in our recent proprietary Cowen Carrier Survey, which revealed that more than 50% of the respondents were still absorbing 10% or more of the increased cost of fuel. If fuel stays high and consumer demand destruction places further pressure on spot pricing, we would not be surprised to see these recent entrants leave the market. This could lead to an eventual bottoming of spot pricing later this year.

All that said, the railroads have no control over economic or geo-political winds. Hence, we hope they continue to focus on the supply chain issues they can have an impact on. We continue to believe the carriers will keep the proverbial foot on the hiring pedal. This, coupled with the surge in hiring earlier this year, should begin to yield more positive results in second-half 2022 than it did earlier in the year. Add these anticipated throughput improvements to the growing demand to move more freight to the railroads due to ESG benefits (several players in the intermodal space believe that benefits from ESG are already taking hold), and second-half 2022 should look better than the first half for intermodal business.

Wilner: Dissecting Failed Rail Labor Talks

Will the U.S. see the first national railroad strike in more than three decades? Who is fanning the flames? Railway Age Capitol Hill Contributing Editor Frank N. Wilner weighs in:

It has been more than two years since the rail industry’s 12 labor unions and management (representing most Class I railroads and some smaller ones) commenced bargaining to amend contracts defining wages, benefits and work rules.

Although ratified agreements are retroactive to the Jan. 1, 2020 start of negotiations, labor’s rank-and-file are feeling the pinch of almost 9% price inflation over the past 12 months. Labor negotiators, however, rejected a cash advance to tide members over during the pendency of negotiations and are demanding nothing less than a 47% wage boost over five years. Rail employee compensation, including employer-paid healthcare insurance and retirement plan contributions, already exceeds that of 94% of American workers.

Management, while acknowledging recent price inflation, points to the previous two 12-month periods when price inflation was but 2.6% and 1.5%, with expectations it will again retreat in response to the Federal Reserve Board’s aggressive economy-cooling interest rate hikes. Also affecting the generosity of management’s offer are dramatic reductions in coal traffic and a growing threat to intermodal from advances in self-driving trucks and legislation allowing longer and heavier trucks.

Does the fault for failed contract talks lie with the Railway Labor Act (RLA), the National Mediation Board (NMB), labor negotiators or management? Let’s consider each.

RLA: Passed by Congress in 1926 as the first law guaranteeing workers the right to organize, join unions and elect bargaining representatives, the RLA was intended as a manual of peace—that labor and management “jaw, jaw” rather than “war, war.” Additionally, that rail labor contracts continue in force until periodically amended avoids the “no contract, no work” trap facing negotiators in other industries, and keeps paychecks flowing and trains operating. If one grades the RLA on its ability to prevent economy-jolting rail work stoppages, it is an unmitigated success. Since World War II, just 12 days have been lost to nationwide rail stoppages, and none the past three decades.

A jolly wonderful reason is the RLA provides for compulsory and open-ended mediation to assure attentive and thorough consideration of issues; and, if necessary, non-binding settlement recommendations by experienced arbitrators serving on Presidential Emergency Boards (PEB). Should work stoppages still occur and Congress chooses to act with backto- work legislation that determines contract amendments with finality, it has in hand advice from PEBs.

NMB: The RLA defines the NMB’s role, whose effectiveness—and that of PEBs— depends on stakeholder and public perceptions of processes and actions being neutral and unbiased.

A 2010 NMB-led conference of stakeholders, studying why positive perceptions were eroding, concluded that while mediation sometimes seemed “virtually endless”—as the Supreme Court observed in 1987—and demoralizing to the rank-and-file, the “variations and distinctions between the multiplicity of bargaining disputes” makes it impractical to establish hard time lines. What makes mediation effective is the NMB’s ability to accelerate or decelerate the process in response to good or bad faith bargaining by the parties.

The NMB early last month seemingly abandoned attentive and thorough consideration of issues, truncating to fewer than two months mediation involving 10 of the 12 rail unions representing a multiplicity of crafts and issues. Those unions didn’t seek NMB-guided mediation until January 2022, with the first session not held until mid-March.

Mediation had barely begun when an assigned and highly respected NMB staff mediator was shunted aside by the three Board members who took charge of mediation. Two weeks later and over remonstrances of management and the Republican member, the NMB’s two Democratic members voted to declare, in record time, a bargaining impasse leading to a now-expected creation of a PEB.

If the NMB’s two Democrats, each with labor union backgrounds, cozied up to rail labor, or were encouraged to do so by the Biden White House, it would be a troubling blemish on the NMB’s cherished image of neutrality, as the NMB is an independent (from the Executive Branch) regulatory agency. Its appropriate communication with the White House should be limited to formal updates on the status of negotiations and the naming of a PEB.

Another most notable recommendation of that 2010 NMB-led conference was that “Board-member involvement [in mediation] be managed in a way to avoid undermining of the authority of the mediator at the bargaining table or creating the perception of ‘deals’ being made by a party going directly to a Board member.”

Labor: It is myth that collective bargaining in the rail industry is conducted by labor negotiators concerned only with their members’ self-interest. Often, internal conflicts exist. Consider the two largest rail unions, which have a history of behaving as scorpions in a bottle. Representing 54% of the 115,000 rail workers affected by this round of bargaining, the two are the Transportation Division of the International Association of Sheet Metal, Air, Rail and Transportation Workers (SMART-TD)— formerly United Transportation Union (UTU), which represents conductors and other ground service workers—and the Brotherhood of Locomotive Engineers and Trainmen (BLET).

On seven occasions in past decades, the two unions failed in attempts to merge into a single union representing train and engine workers. The UTU finally affiliated with a sheet metal workers union, while the BLE affiliated with the Teamsters, added “Trainmen” to its name to become BLET, and commenced poaching conductors from its rival, playing on anticipation of their promotion to engineer.

The BLET also signed an agreement with BNSF acknowledging a future of one-person train crews with a higher-paid engineer. Some BLET senior officers even advocated that where two crew members are required, the second be a BLET-represented “assistant engineer” rather than a SMART-TD-represented conductor. As for SMART-TD, its predecessor UTU signed a national agreement embracing, for use in switch yards, job-saving remote-control technology that cost thousands of rival engineer jobs.

The UTU also cajoled UTU-friendly lawmakers to insert, sub rosa, in a non-transportation- related military aid bill, a legislative rider requiring the NMB to classify engineers and conductors as a single craft. The UTU objective was a winner-take-all representation election as the UTU had the greater number of members. The plot unraveled when the engineers’ union’s legislative department discovered the rider’s existence.

Although BLET and SMART-TD now sit side-by-side at the bargaining table with eight smaller unions, the harmony has more to do with mutual distrust and concern as to who might agree to what if they bargained individually.

Then there is internal union tension of preserving dues revenue while simultaneously representing member interests that might be better served through job-reducing agreements providing career-long income protection. As railroads consolidated, improved productivity and reduced headcounts, rail labor unions—even when merging with larger non-rail labor organizations—retained a topheavy administrative structure little changed from when they represented two- and threetimes as many rail workers. What is best for the union is not always best for the union member, and vice versa.

In 2014, for example, BNSF offered conductors a deal seeming to check every self-interest box—a collaboration by management and a forward-looking SMART-TD general committee of adjustment.

In exchange for allowing BNSF to operate trains on Positive Train Control (PTC) equipped routes—those of legacy railroads Chicago, Burlington & Quincy, Great Northern, Northern Pacific, and St. Louis-San Francisco— conductors would be reassigned to ground service with more predictable hours and contract language memorializing, for the first time, that they are in charge of train operation. (PTC is a $15 billion investment to eliminate human-factor-caused train accidents.) Also included were wage hikes and income protection until retirement.

Top officers of SMART-TD lobbied the 6,000 affected members employed by BNSF to reject the agreement negotiated by their general committee of adjustment, concerned with losing dues revenue when protected conductors retired and were not replaced. Members did reject the offer, with many now expressing second thoughts when discussing how working conditions—by far the most significant complaint of train and engine workers—could have improved. Management also has internal conflicts hindering efficient bargaining outcomes. As major railroads consolidated into two duopolies separated roughly by the Mississippi River, differences defined them. Those in the West operated longer-haul trains with fewer yard operations—consistent with market geography—versus shorter-haul, yard-prolific railroads in the East. One-size-fits-all national agreements with standardized wages and work rules became problematic.

During this round of bargaining, for example, CSX broke from national handling to negotiate wages and work rules separately with BLET and SMART-TD. Conflicts also exist between railroads and their investors, whose priority is short-term profits. Former BNSF CEO Matt Rose often said that because BNSF is not publicly traded— it being 100% owned by conglomerate holding company Berkshire Hathaway (B-H)—BNSF is able to focus more on meeting customer wants than fulfilling Wall Street demands. B-H Chairman Warren Buffett said earlier in June that B-H selects acquisitions based on “long-term business performance and not because we view them as vehicles for timely market moves.”

As for publicly traded railroads, optics are troubling when management seeks to cap employee compensation while buying back billions of dollars in stock to improve share price. An example was offered recently by New York Times economics writer David Leonhardt in a critique of General Electric (GE) and its former CEO Jack Welch.

“For decades after World War II,” wrote Leonhardt, “big American companies bent over backward to distribute their profits widely,” with GE “proudly” talking about “how much it was paying its workers.” But under Welch, GE “unleashed a wave of mass layoffs and factory closures that other companies followed. Profits began flowing not back to workers in the form of higher wages, but to big investors in the form of stock buybacks. But in the long run, that approach doomed GE to failure. So, while Welchism can increase profits in the short term, the long-term consequences are almost always disastrous for workers, investors and the company itself,” wrote Leonhardt.

Former Association of American Railroads Economist and retired STB Chief Economist William F. Huneke told Railway Age, “American companies need to shift from financial manipulation for short-term stock market gains and focus on building a company franchise. Railroads should relearn the lessons taught by J. Edgar Thompson, who built Pennsylvania Railroad into America’s premier managerial and technology innovator during America’s Industrial Revolution.”

The NMB ordered negotiators back to Washington July 12 for a “public interest” session in a final effort to extract concessions leading to a voluntary agreement. Failing that, the NMB will recommend President Biden appoint a PEB. While the NMB provides a list of qualified neutral arbitrators, the White House is under no obligation to name those recommended. Failure to do so would be a red flag—indeed, a bloody shirt of distrust that would only further erode confidence in NMB and PEB neutrality.

Once a PEB is in place, labor and management destinies belong to a third-party, with the 1991 words of former NMB member, and then neutral arbitrator, Robert O. Harris still resonating: When PEBs and Congress are chosen to settle rail labor contract disputes, “welcome to the oldest established craps game in Washington. Like the suckers in Guys and Dolls, you are risking your futures on the roll of the dice.”

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