STB Chairman Oberman assesses freight rail conditions and service at RailTrends

In assessing the current state of the freight railroad market, at this week’s RailTrends conference in New York hosted by Progressive Railroading and independent railroad analyst Tony Hatch, Martin Oberman, Chairman of the Washington, D.C.-based Surface Transportation Board (STB), an independent adjudicatory and economic-regulatory agency charged by Congress with resolving railroad rate and service disputes and reviewing proposed railroad mergers, clearly did not pull any punches in a wide-ranging speech.

A key theme of Oberman’s comments and observations centered on the lead-up to where things stand in the freight railroad sector today, from his perspective.

Oberman described 2022 as a “demanding year” for the STB, due to the pending Canadian Pacific-Kansas City Southern merger, as well as he termed a “service meltdown” by Class I railroad carriers, which he said had been brewing long before the onset of the pandemic.

“It really came to a head this year and has not been close to being resolved,” he said. “To be fair, this year’s failures have been focused on what we call ‘the Big Four’—Union Pacific, BNSF, CSX, and NS—the other three have not presented anywhere near these types of problems, if at all.”

He explained that the obvious reason for why the public interest requires the existence of the railroads is that unlike many other parts of the private sector, the country’s economy cannot thrive without the railroads functioning at a robust level, or what he called an optimal level.

Taking that a step further, he highlighted a September 2021 Association of American Railroads (AAR) report that showed in great detail how central the railroads are to the very existence of the national economy. The report provided analysis of how crucial the railroad industry is to the well-being of the U.S. and details the enormous list of commodities moved by rail.

“If railroads are as crucial as the AAR tells us, then their failure to live up to their potential is costing us,” he said. “And the obvious reason the STB exists is that these railroads have become effective monopolies or, at best, duopolies. Monopolists cannot be expected to serve the best interests of the economy and the public as distinguished from serving solely the profit interests of their owners without oversight by a public agency whose job it is to ensure that the public interest is protected.”

At a time when a potential labor stoppage is top of mind for industry stakeholders, Oberman said that the industry has been suffering the equivalent of a partial lockout by the carriers by their own collective choice to drop 10% of their workforce since the onset of the pandemic in March 2020, a choice, which he said has caused significant damage to the economy.

What’s more, prior to the pandemic, between January 2016 and February 2020, Class I railroads had reduced their workforce by 29,000 workers, from 156,000 to 127,000, for an 18% reduction.

“Those reductions put the railroads in the position of having lost most, if not all, of their cushion…to respond to the inevitable disruptions, which occur in the form of natural disaster or other forces,” he said. “When railroads try to excuse their failures by pointing to labor shortages suffered by other businesses during the pandemic, they are wrong on two counts. Other businesses did not enter the pandemic having stripped themselves of nearly 20% of their workers in prior years.”

And he added that other sectors, like major grain producers, chemical companies, and food processors, made the very careful decision to play the long game and retain all of their employees, so they would be there when demand returns, even if it meant a temporary hit to their profits.

“In stark contrast, the very profitable railroads made the opposite decision, to the detriment of the entire U.S. rail network,” he said. “Precipitously and dangerously, they chose to continue the massive reduction in workforce they had undertaken in the previous few years.”

And he said between March 2020 and August 2020, Class I railroads cut another 10,000 jobs, dropping the employment level to 117,000, which tops current staffing levels.

“The workforce reduction did not stop there,” he said. “Despite the significant economic recovery and increased demand for freight, beginning in mid-2020, the railroads continued to bleed employees, another 3,270 were gone by the end of 2021. The already dangerously low employee headcount continued to drop by more than 13,000 for the next 21 months, for a reduction of another 10%. There is no question that by mid-2021 the Class Is were falling further behind for the quality and quantity of their service, with service really falling off the cliff in the fourth quarter 2021 and the first quarter of this year.”  

Those service problems were front and center in hearings the STB conducted last April, with Oberman making the case that the service problems were the direct result of the railroads’ intentional reduction in workforces.

“Not only shippers and labor representatives, but the Class I executives themselves publicly testified that the service crisis resulted from major crew shortages, continuing significant worker attrition and what they described as the huge hurdles they face in trying to hire workers to replace others they had laid off,” he said. “This reduction in work force is felt every day by rail-dependent customers.”

Over the course of the last year, he said that for the Big Four U.S. railroads, trains holding for crews, and, in many cases, holding for power, reached record levels compared to recent years.

“How does a train not moving because the railroad does not employ enough people to drive it differ from a train not moving because the workers are locked out or on strike?” he said. “More disturbingly, the number of embargoes has skyrocketed in recent years. It used to be that railroads implemented embargoes for unforeseen natural disasters—grid washouts, forest fires, and polar vortex’s—but no more. For some Class Is, embargoes now are being used as a routine part of their operating plans.”

As an example, he observed that in 2017, there were a total of 140 embargoes across the entire seven Class I railroad carrier network. In 2019, that number rose to 631, an increase of more than 350%. And in 2022, he said that through September, there have been 1,115 embargoes, with the expectation that the tally will see rise over the balance of the year.

He said that more than 80% of these embargoes are the result of what the railroads call congestion, or what he called a railroad euphemism for not having enough crews to move their trains to keep their networks fluid.

“These embargoes are not just metrics reported to the STB,” said Oberman. “Each embargo means the railroad always virtually has no notice and have told a customer they will not be served for a number of days, often a week or more. These [impacted] industries cannot function without regular, and most importantly, reliable rail service. How can we expect these businesses to function if they cannot plan and cannot serve their customers? Persistent use of embargoes to manage fluidity as a regular operating strategy strikes me as fundamentally implicating the common carrier. As a result, we have seen a downward spiral in productivity.”

With the AAR’s estimate of a complete freight rail work stoppage costing the U.S. economy $2 billion per day, Oberman said the impact of a 10% work stoppage over the last 2.5 years represents a vivid drop-off in productivity.

“In 2021 and 2022, railroad output is far below our reasonable trendline, 12.9% below in 2021 and an astonishing 15% below the trendline this year,” he said. “Just pro-rating the AAR’s assumptions, the cost of a shutdown means our economy is losing roughly $300 million a day in economic activity. That amounts to losses this year of $109 billion compared to a similar loss last year of $88 billion. Even when cutting that number in half, the harm to our country has been extraordinarily painful.”

This batch of data led to Oberman pointing out how a common refrain among Class I leadership is that they have “gotten the message” and are talking about the need for growth.

“Last year, at this conference, all we heard from the railroads was that it was time for a pivot to growth,” he said. “Since that time, has there been any growth? Clearly, the answer has been not only no growth but continuing a drastic decline. It was not as if after last year’s conference that the railroads were actually ready to move ahead and solve the worker shortage crisis on their own. Instead, over the next few months, service declined so disastrously that the STB initiated those urgent hearings last April. If you look at the employment numbers, you will see no real discernible change started until we issued our order in May, requiring each of the “Big Four” to provide us with service recovery plans and started reporting regularly on their hiring and training progress among other metrics. As a result, railroads did promise to increase their hiring, while continuing to complain bitterly that hiring is hard in this [environment].”

That was a key reason as to why so many industries did not let their workers go when the pandemic began, he explained. And in a nod to the “highly-paid railroad CEOs [some of whom attended or spoke at RailTrends] he posted the question of “what did these shortsighted Covid furloughs actually save the carriers?”

“Class I’s over the past 2.5 years saved roughly $4.8 billion in payroll, but could they have afforded to pay those 13,000 workers so they could support our economy as it quickly began to recover?” he said. “During the same 2.5 years, the Class Is have returned nearly $60 billion to stockholders in stock buybacks and dividends, more than 12 times what they saved in payroll. Might the shareholders have been satisfied with only $55 billion in buybacks and dividends? Apparently not. The $4.8 billion in saved payroll would have been a drop in the bucket, but the operating ratio had to be met.”