WATCHING WASHINGTON, JUNE 2020 ISSUE: This question should be at the forefront of the Surface Transportation Board’s agenda: What is the future of rail freight transportation? The STB should put all its other discretionary regulatory work to the side and call in the railroads and key stakeholders and facilitate a discussion of how the industry can recover to serve the future American economy. All internecine sniping and conflict should be pushed aside.
As we deal with the current COVID-19 shutdown and watch the economic carnage, I am pondering what the end result might be for railroads. They were already facing some problems with their coal franchise shrinking, but what might the COVID-19 economic collapse do, incrementally or fundamentally to industry prospects?
There is no denying that the COVID-19 situation has crushed the economy. GDP fell 4.8% in the first quarter. After a few years of remarkably low unemployment (it was 3.5% just a couple months ago), unemployment spiked to 14.7%. Both these numbers will get worse, much worse, before they improve.
For perspective, I went to my files and looked at April 2009, which was a time when my STB colleagues and I observed that rail traffic numbers were “cliff diving” because of the Great Recession.
First-quarter 2009 GDP fell 6.1% and employment had reached 8.9%. Those numbers were near the bottom of the Great Recession, so we have already exceeded that unemployment rate and will no doubt breach the GDP low in the second quarter.
In April 2009, railroad traffic really was still cliff diving after starting steep declines in November 2008. Carloads fell 23% and intermodal fell 17% when compared to April 2008. But remember, coal was still providing some ballast in 2009. Coal was almost 50% of carload traffic in April 2009. Now it is only about 25%.
Railroads reported horrible April 2020 traffic numbers. Cliff diving has resumed. Carload traffic was 25% below April 2019. Coal was down 38%. Without coal, carloads were still down almost 20%. Intermodal traffic was down 17%.
Railroads were already cautious entering 2020 before COVID-19. In 2019, of the big four Class I’s (BNSF, Union Pacific, Norfolk Southern and CSX), only NS invested enough to keep pace with inflation. In fact, CSX’s investment base (capital including network, facilities, yards, equipment and other fixed assets) shrank in nominal terms without adjusting for inflation (GDP inflation index was 1.7% in 2019; NS’s investment base grew 1.8% before inflation).
The competitive environment will also be challenging. The recent trucker protests around the White House evidence how low highway rates have fallen. The rate environment for intermodal and other truck competitive traffic will pressure profit rates. Moreover, with fuel prices so low, the railroads’ fuel efficiency advantage vs. trucks is sharply reduced.
Another challenge for rail is the ongoing labor negotiations. It is hard to negotiate with the economy tanking, which exacerbates the industry’s secular decline. Railroads will have to get as productive as possible to adapt to any future opportunities. This will require a partnership with rail labor, which will not be easy. It will require trust on both sides to make the necessary shared sacrifices.
Similarly, railroad executives need to begin discussions with their customers about how they both can adapt to the new economy. Maybe STB can facilitate this discussion.
STB should not plunge ahead and change the existing regulatory regime. Put those rulemakings aside. Instead, STB should look at traffic the American economy requires railroads to haul, and of that traffic, what will require a regulation because of weak competitive forces. To take this reading, STB should summon a rail summit with rail management, labor and shippers to discuss how rail stays healthy and best serves the future economy.
It has always struck me how transportation issues rarely divide along party lines. As such, maybe there is an opportunity for a bipartisan solution, which could serve as a model for other problems in these highly partisan times.
But to achieve that, the parties will have to put aside narrow interests and think about what is best for the U.S. Maybe STB can show the way.
Dr. William Huneke is the former Director and Chief Economist at the Surface Transportation Board. He has more than 40 years’ experience in economics, transportation, railroad regulatory policy, management consulting, business analysis and teaching in the commercial and government sectors. He provides economic consulting on regulatory and arbitration matters. At the STB, Dr. Huneke led the Board’s analytical work and oversaw the collection of economic and financial data. Since leaving the STB, he has provided economic and litigation support to Class I railroads and other private-sector clients.