Resilient, Resourceful, Focused, Strong

Bruce Kelly photo

RAILWAY AGE, APRIL 2020 COVER STORY: In crisis mode, America’s railroads appear sufficiently solvent, focused and managerially prepared to navigate through the unprecedented COVID-19 pandemic, other economic shocks, and whatever Congress and regulators may decide.

It is said, quite incorrectly, that little of consequence occurs in election years. Actually, in Official Washington, there is much affecting railroads; while universally, there is sufficient gloom to make a preacher cuss and keep a railroad CEO bedridden.

Looking on the bright side of life, Class I railroads appear on sound financial footing—resilient, resourceful, focused and strong. Assets are long-lived. Mergers eliminated overhead-cost redundancies, pared the track network, and accelerated operating and marketing efficiencies. And labor productivity is up by one-third since 2000. 

Further evidence of financial strength are railroad decisions to invest in themselves. CSX, Norfolk Southern (NS) and Union Pacific (UP) collectively have repurchased almost $30 billion of their stock, while BNSF has been providing substantial dividends to its Berkshire-Hathaway parent.

Understandably, there exist challenges to be answered. Shippers question whether the rail response to a south-headed economy will be prioritizing protection of the stock price, with cost cutting adversely affecting service quality.

Also questioned is the long-term success of Precision Scheduled Railroading (PSR), a driving force in pummeling down operating ratio. PSR, after all, is in its infancy, and the lone major railroad untethered from its operating-ratio-loving Wall Street masters is BNSF, whose sole owner Berkshire Hathaway (B-H) is legendary for focusing instead on long-term efficiency. Said B-H Chairman Warren Buffett of PSR, “It makes the customer adapt to the railroad more than the railroad to the customers.” Publicly traded railroads may be holding the wolf of lower operating ratio by the ear—neither able safely to hold on, nor to let go.

An additional challenge going forward is preparedness for a post-recession traffic resurgence. With reduced capital spending, sufficient capacity could suffer when demand returns. Although substantial railcar and motive power assets are in storage, the longer they are parked, the longer and more costly the task of readying them for return to service.

There also is attention to private-equity infrastructure investment funds, perhaps poised to scoop up a Class I for its future cash-flow stream, as Brookfield Infrastructure Partners acquired small-railroad holding company Genesee & Wyoming for $6.5 billion. If propping up stock price becomes a takeover defense, shippers may wave before lawmakers and regulators the Oct. 8, 1882, unfortunate “public be damned” response of railroad baron William Henry Vanderbilt when asked, “Are you working for the public or for your stockholders?”

Traffic By The Numbers

Historically, the most important rail-hauled commodity has been coal. “Coal made the railroads necessary, and the railroads made the use of coal possible,” wrote historian Albro Martin.

But coal carloads are down 23% since the 1980s, displaced for electricity generation by shale-produced natural gas and wind energy. Where 45% of America’s electricity was generated by coal in 2010, it’s now 24%. Since 2010, 289 coal-fired generating plants have closed, leaving 241 in operation. Estimates are that the price of natural gas can double and still remain competitive with coal.

Other bedrock traffic includes chemicals and automotive, but with a global economic slowdown and continued tariff-accelerated trade wars, those carloadings could stagnate at low levels.

The pathway forward includes intermodal, with the number of trailers and containers hauled annually now at 14 million—up from but 3 million in 1980. Post-recession future growth depends on 1) the railroads’ ability to compete with non-union truckers and the lower fuel prices favoring them; 2) whether Congress liberalizes truck size and weight ceilings without imposing full-recovery user charges for the pavement and bridge damage they cause; and 3) rail labor’s willingness to negotiate one-person crew agreements for the most competitive traffic. Also creeping up on railroads are battery-operated heavy-duty trucks with dramatically reduced operating costs, and whose current maximum 500-mile range for 80,000-pound loads is expected to increase sooner than later.

Also, expect e-commerce to define, even more forcefully, retail supply chains, as even before the COVID-19 crisis, some 20,000 brick-and-mortar stores closed.

Short Lines and Regionals

Although Class II and III railroads are successful collectively, owing in part to a variety of federal and state programs intended to preserve a rail service option, some small railroads may require additional assistance depending on the severity of the economic downturn.

First among the long-term regulatory priorities of the American Short Line and Regional Railroad Association (ASLRRA) is for the Federal Railroad Administration (FRA) to adjust the Title 49 Code of Federal Regulations Part 243 Minimum Training Standards rule to allow performance-based operational testing—identifying employees requiring refresher training rather than mandating blanket training every three years. “The cost savings could go toward investments in safety, where they are needed,” says ASLRRA President Chuck Baker.

Although a 2019 legislative victory extended through 2022 the short line investment tax credit (Section 45-G of the Internal Revenue Code), Baker says ASLRRA “has a puncher’s chance” of making it permanent in an infrastructure bill, as “more than half of Congress, on a bipartisan and bicameral basis, is on record in support.” That 50% tax credit spurs some $200 million annually in new small-railroad infrastructure investment.

Amtrak

Amtrak’s projected revenue loss through Sept. 30 is $1 billion, as passenger traffic evaporated with the spread of COVID-19.

Absent knowledge of the length and depth of this health crisis and no assurance Congress can provide long-term financial aid, but with Amtrak designated by the federal government as a “critical infrastructure asset,” Amtrak implemented a strategy to conserve cash by curtailing empty-train operation, and to keep as many employees on the payroll as feasible in exchange for wage and benefits givebacks and dramatic spending cuts—but with no impact on normalized maintenance or safe operation.

Another Amtrak challenge is the Association of Independent Passenger Rail Operators—whose members include commuter operators Herzog, Keolis and Veolia—seeking legislation promoting private sector competition on state passenger routes now exclusive to Amtrak.

Divining Congress

While anticipated for priority passage, but equally likely to be extended at current spending levels another year, is the soon-to-expire Fixing America’s Surface Transportation (FAST) Act. Since 2015, it allocated some $305 billion in taxpayer funds primarily for highways ($226 billion) and public transit ($18 billion), but also included dollars for grade crossing safety ($1.2 billion) and other transportation safety programs.

From a renewed FAST Act, railroads seek additional dollars to help states install new active warning devices and improve road surfaces at grade crossings, where the railroad almost always preceded the highway. Also sought are federal incentive payments to states to close more crossings, and funding for testing new rail safety technology (as is spent testing new highway safety technology).

Of equally pressing concern in a FAST Act renewal is eliminating the substantial underpayment by rail-competitive heavy trucks of their highway cost responsibility.

While most of the FAST Act expires this fall, one provision froze federal fuels taxes through late 2023 at their 1993 level—an enormous subsidy boost for rail-competitive truckers. In fact, the FAST Act transferred more than $51 billion into the insolvent Highway Trust Fund (HTF) to fill the gap between user fee collections and highway expenditures made for the users’ benefit. Heavy trucks are estimated to be paying but 80% of the costs they inflict on pavement and bridges.

Yet, while trucking interests seek billions more for highway reconstruction largely made necessary by their heavy vehicles, they oppose higher user fees. Economists and professional engineers say a more equitable user charge than the existing per-gallon fuel tax would be to charge for actual vehicle-miles traveled (VMT), as heavy trucks inflict damage every mile. Its support in Congress is tepid.

While this avoidance by truckers of equitable user charges is of legitimate concern to railroads, which construct, maintain, signal, police and pay taxes on their privately owned rights-of-way without public subsidy, an adequate highway system also is important to railroads. Indeed, the 14 million trailer and container loads hauled annually by rail travel in part by highway.

In fact, two-thirds of the nation’s freight emanates from rural areas comprising 68% of all road miles, with many said by experts to be “crumbling.” The American Society of Civil Engineers gives the nation’s roads but a grade of “D.”

Despite the insolvency of the HTF, a 27-year refusal on the part of lawmakers to increase heavy-truck user charges, and the deteriorating condition of the nation’s highways, there are efforts—led by Rep. John Katko (R-N.Y.)—to increase the existing 80,000-pound weight limit to 91,000 pounds. While Katko says adding axles mitigates pavement damage, it is gross weight that affects highway bridges, with some 25% reportedly structurally deficient or functionally obsolete because of heavy truck passage.

Also notable is the lame-duck status of House Rail Subcommittee Chairman Daniel Lipinski (D-Ill.), defeated in a primary election. His father, William, who previously held that seat, has been on the lobbying payroll of the AAR and BNSF.

STB

While the 2015 Surface Transportation Board (STB) Reauthorization Act is up for renewal in 2020, it won’t occur. Agencies often go more than a decade without being reauthorized, dependent only on annual appropriations. In fact, many of the instructions of the 2015 law remain unfulfilled, such as the STB having been told to simplify its Stand-Alone Cost (SAC) test for determining rate reasonableness, and considering revisions in how it calculates revenue adequacy.

Attendant to the decisional delay is delay by the President to nominate a Democrat to fill one of two vacant STB seats. While the three-member board can make decisions, a recent inability of the three to form a majority and rule on setting standards for recovering fuel surcharges harked to a reason the 2015 law added two new seats. A five-person board avoids a Government in Sunshine Act prohibition preventing a majority (just two when only three members) from communicating privately. One-on-one private meetings are often essential paths to compromise.

Moving on, in furtherance of the status-quo rulemaking siesta, railroads have enlisted free-market think tanks to write opinion articles suggesting STB action would be reregulation. Shippers are befuddled.

Shelly Sahling-Zart, president of the Freight Rail Customer Alliance, says, “Shippers are not looking for special treatment. [Congress instructed the STB] to address all stakeholder problems and concerns, not just those advanced by the railroads.” Emily Regis, president of the National Coal Transportation Association, says her members seek only “an effective and affordable process that can fairly resolve rate reasonableness and service disputes.”

FRA

Prescriptive elements of PTC installation are nearing completion—the next objective being to encourage further technological development through artificial intelligence that FRA Administrator Ronald L. Batory says can “build a foundation for autonomous operation where warranted.”

Batory also seeks to use waivers and pilot projects to generate sufficient data leading to performance-based safety regulations, and to accelerate other fact-based research associated with human behavior, physical assets and cyber systems. “I want to lead in implementing advanced technology in our industry,” Batory says.

And while the FRA is still some eight months out from finalizing a study on safe rail movement of liquified natural gas (LNG), the Trump Administration—over objections from the National Transportation Safety Board—wants restrictions loosened by early May. LNG would be carried in cryogenic tankers to East Coast ports for export.

Bottom Line

America’s railroads appear sufficiently solvent, focused and managerially prepared to navigate through this unprecedented COVID-19 pandemic, other economic shocks, and whatever is decided—or not—by Congress and regulators.

Full recovery, however, will require cooperation from labor. Headcount reductions already are significant, but if the industry is to compete successfully going forward, productivity-enhancing collaboration is essential—beginning with fact-driven decisions as to crew size.