America’s first commercial railroads were built almost two centuries ago. Freight rail has been a symbol of the nation’s economic might and ingenuity ever since.
In recent years, some of the biggest names on Wall Street have made significant investments in railroads, reaping big stock gains as railroads reported higher profits. But the underlying strategies that strengthened railroads’ bottom lines have caused friction with customers, regulators and particularly workers — giving rise to a contract dispute that threatened a nationwide shutdown of the railway system.
After losing ground to trucking in the mid-20th century, the rail industry managed to recover through decades of consolidation and a push for efficiency. Critics say those same dynamics created a system with thin staffing and minimal competition, making it particularly vulnerable to shocks like the coronavirus pandemic.
“It’s a trend that’s been going on for years,” said Martin J. Oberman, the chairman of the Surface Transportation Board, the federal agency charged with regulating freight railways. “The pendulum swung pretty far and it allowed these people to exercise tremendous power over their customers and over their labor force.”
The efficiency drive began in the 1990s. It spread slowly before reaching most of the major American railroads over the past five years.
“They all are doing the same thing roughly at this point, but they started at different times,” said Colin Scarola, an analyst at the research firm CFRA who covers railway stocks. “Once this success started coming through, the copycat effect really took hold.” The strategy is evident in head count, which has fallen at nearly all of the major railway companies in the United States and Canada. At CSX, for example, the number of employees plunged by a third over the past decade. This helped expand the company’s profit margins, and its stock is up over 300 percent since the end of 2011, far exceeding gains in the wider stock market.
Last year, the seven major railways based in the United States and Canada — which include CSX — had combined net income of $27 billion, up from $15 billion a decade earlier. Over the past decade, the six of those seven railways that were publicly traded paid out $146 billion in stock buybacks and dividends, which is over $30 billion more cash than they invested in their businesses.
For the employees who remain, pay has risen. At the four biggest U.S. railways, pay and benefits per employee rose by 26 percent over the past decade, slightly ahead of inflation, according to an analysis of the companies’ financial filings.
But employees say the reductions in staffing have resulted in more punishing schedules. Restrictive policies have kept them from seeking routine medical care, spending time with their families and otherwise living their lives, they say.
Those complaints were at the center of the contract impasse that left tens of thousands of workers prepared to walk off the job last week. A strike could have been economically devastating, paralyzing shipments of grain, chemicals and other cargo.
It was averted with less than a day to go when the Biden administration helped to broker a tentative agreement that addresses some of those issues and will be put to a vote of the rail unions’ members in the coming weeks.
The freight rail industry says it has worked hard to adapt to rapid changes — including the pandemic and, before that, a decline in demand for coal, a critical source of business.
“The industry has had to continually evolve to grow its other services,” said Ian Jefferies, the president of the Association of American Railroads, an industry group. To make up for the decline in coal, freight shippers have tried to transport more grain, truck trailers, shipping containers and other goods, he said.
The industry’s need for reinvention is nothing new. In the 1950s, the nation began building interstate highways, allowing trucks to move goods at faster speeds, at the expense of rail.
By 1980, railroads were struggling. That year, Congress passed the Staggers Act, deregulating the industry, freeing railroads from price controls and paving the way for mergers. By 2000, there were only seven major railroads, down from dozens two decades earlier.
Today, those seven carriers employ 88 percent of all freight rail workers and earn 94 percent of industry revenues, according to Mr. Jefferies’s group. Two carriers, BNSF Railway and Union Pacific, are pre-eminent in the Western United States, while Norfolk Southern Railway and CSX Transportation hold sway in the East. The others — Canadian Pacific, Canadian National and Kansas City Southern — serve the middle of the country. (A proposed $31 billion merger between Canadian Pacific and Kansas City Southern is under federal review.)
The early years of deregulation were good for the industry.
“The railroads turned around really quickly and started to sign contracts with big shippers,” said Gerard McCullough, a retired economics professor at the University of Minnesota and expert on the industry. “Some of that money enabled them to still provide service to smaller shippers and pretty much everybody benefited.”
As they consolidated, freight carriers became more productive and benefited from the ability to add more traffic on existing networks. Customers, too, saw benefits: From 1985 to 2004, rail rates — measured as revenue per ton per mile — fell more than 40 percent, after adjusting for inflation, according to the Surface Transportation Board, which monitors and regulates rates.
Prices started to increase in the early 2000s, driven by rising costs for labor, fuel, materials and supplies as well as a growing focus on profitability. From 2002 to 2019, long-distance trucking rates increased by 40 percent, according to a Transportation Department report published this year, while rail rates grew by 96 percent, though they are still well below historical levels, adjusted for inflation.
Many industries saw their shipping options dwindle, although regulators had been careful to try to limit the concentration of power by imposing conditions on mergers that would have reduced competition, or rejecting them outright. “No merger has allowed a shipper to go from two railroads to one,” the railroad industry group said in a statement.
As the industry strove for efficiency, one approach in particular attracted anger from customers and workers and praise and attention from Wall Street.
That system, known as precision scheduled railroading, focused on running rigid, consistent schedules, streamlining processes and routes, and cutting back on equipment and employees. Like lean manufacturing reforms in other industries, P.S.R. allowed railroads to do more with less, improving efficiency and operating margins. The system was pioneered by a longtime rail industry executive, Hunter Harrison.
Mr. Harrison instituted the practice first at Illinois Central Railroad in the 1990s and then at the company to which it was later sold, Canadian National. His success attracted the attention of Bill Ackman, the activist investor, who won a proxy battle for Canadian Pacific in 2012 and installed Mr. Harrison to lead the company.
Mr. Harrison brought his approach to Canadian Pacific, then to CSX in 2017, before his death that year. Other freight carriers and Wall Street increasingly took notice, and the practice has spread throughout the industry.
Many freight rail experts say P.S.R. brought necessary reforms to the industry, but they also say some practices, which can differ greatly among carriers, went too far or were poorly executed. Unions say the system has created miserable working conditions.
At CSX, Mr. Harrison imposed the practice “too quickly, too violently and too undiplomatically,” said Tony Hatch, a longtime rail industry analyst. “Part of that is he had seen it work three times, so he sort of knew what the outcome was going to be.”
From Wall Street’s perspective, however, the railways were ripe for an overhaul, and the changes ended up being straightforward and easy to put in place. At its core, precision scheduled railroading focused on having fixed schedules for shipments rather than waiting for a certain amount of coal to be loaded before moving. Another reform included switching from a system in which locomotives typically pulled one type of freight to one in which they might pull a mixture of grain, coal or other goods in intermodal cars — which can switch among trains, trucks and ships — allowing for longer trains and fewer employees.
“Really, that’s how simple the changes have been,” said Mr. Scarola of CFRA. “And they’re hugely effective.”
Some customers say those changes resulted in worse service. Before the pandemic, many complained that they were having trouble reaching freight sales representatives to sign up and ship more by rail. When they did get through, the shippers complained that the terms they were offered were unacceptable.
Traffic plummeted when the pandemic arrived. Like other industries, freight railroads reacted to the uncertainty of the crisis by laying off and furloughing workers, but demand bounced back quickly as consumers started buying goods in great numbers. When railroads invited furloughed workers back, many had decided to leave the industry altogether. Railroads tried to hire replacements, but have faced a tight labor market. Even when they have hired workers, training new employees takes months.
That contributed to a decline in service, frustrating freight customers even more. Last year and early this year, ethanol plants halted production as they struggled to bring corn in and get ethanol out, and cars full of grain languished for weeks at production facilities.
“I had logistics managers telling me last year, that in their corporations when they go to locate a new facility it used to be they had to locate it on a rail line,” Mr. Oberman of the Surface Transportation Board said. “They said: ‘We don’t do that anymore. We locate on highways.’”
But switching to trucking isn’t possible for many shippers, he said. A single train with 100 cars of coal or grain would require hundreds of trucks to replace it. Rail is also much more fuel-efficient. The trucking industry is facing a driver shortage, and many goods, such as hazardous materials, are best suited to trains.
The rail industry has improved service somewhat since earlier in the pandemic, as it has hired workers, but shippers are still worried, especially with harvest season ramping up.
For all of the turbulence, industry experts are confident about the long-term outlook. Freight railroading has survived for nearly two centuries through constant reinvention. That’s part of what made BNSF an attractive investment for Berkshire Hathaway, as the holding company’s chairman, Warren Buffett, noted in his most recent letter to shareholders.
“I’ll venture a rare prediction,” he wrote in February. “BNSF will be a key asset for Berkshire and our country a century from now.”
This article originally appeared on New York Times