White House executive order ‘encourages’ freight rail and ocean sectors to make changes

The freight railroad and ocean shipping sectors are both very much in the crosshairs of an executive order (EO) issued by the White House this week, which is focused on promoting competition within the American Economy.

A main driver for this EO, according to the White House, is that in more than 75% of U.S.-based industries, a smaller number of large companies now control more of the business than they did 20 years ago, adding that a lack of competition has increased consumer prices and also driven down wages for workers.

“President Biden is taking decisive action to reduce the trend of corporate consolidation, increase competition, and deliver concrete benefits to America’s consumers, workers, farmers, and small businesses,” the White House said. “Today’s historic Executive Order established a whole-of-government effort to promote competition in the American economy. The Order includes 72 initiatives by more than a dozen federal agencies to promptly tackle some of the most pressing competition problems across our economy. Once implemented, these initiatives will result in concrete improvements.”

For the freight railroad sector, the EO is encouraging the 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, to require railroad track owners to provide rights of way to passenger rail and to also strengthen their obligations to treat other freight companies fairly.”

It added that going back to 1980, there were 33 Class I railroads, whereas now there are seven, with four major rail companies that it said now dominate their respective geographic regions.

“Freight railroads that own the tracks can privilege their own freight traffic—making it harder for passengers to have on-time services—and can overcharge other companies’ freight cars,” it said.

That sentiment is closely aligned with the STB’s proposed reciprocal switching legislation offered up in 2016, which would allow a rail shipper to gain access to another railroad if the shipper makes certain showings. As defined by the STB, reciprocal switching is a situation in which a railroad that has physical access to a specific shipper facility switches rail traffic to the facility for another railroad that does not have physical access. And the second railroad compensates that railroad that has physical access in the form of a per car switching charge, with the shipper facility gaining access to an additional railroad.

Todd Tranausky, FTR vice president of rail and intermodal, told LM that many times in Washington, the bark is louder than the actual bite, observing how this EO is closer to a statement of administration policy than it is an actual executive order.

“The STB is an independent federal agency so it is not as beholden to announcements such as this the way, say, DOT would be, but they are also not immune to the political winds either,” he said. “The important thing is to focus on the exact wording of what comes out. Is it directing an agency or is it ‘encouraging an agency to consider?’ The later wording is a suggestion and would be tough for the [STB] to defend if it used that as a reason to stop a merger proceeding. Longer term, it certainly gives some more backing to proceedings like EP 711 [competitive or reciprocal switching] that have languished at the board for a decade now, especially given there is now a board with relatively recent tenures and new eyes to examine rail-shipper disputes through where this could help sway them one way or the other.”  

Association of American Railroads President and CEO Ian Jefferies said in a statement that competition is alive and well in the rapidly changing freight transportation market, with nearly three quarters of all U.S. freight shipments moving by a mode of transportation besides rail.

“With the logistics chain already challenged by the recovery from COVID, this executive order throws an unnecessary wrench into freight rail’s critical role in providing the service that American families and businesses rely on every day,” he said. “Any STB action mandating forced switching would put railroads at a severe disadvantage to freight transportation providers that depend upon tax-payer funded infrastructure. Such a rule would degrade rail’s significant benefits to both customers and the public by throttling network fluidity, disincentivizing investment, increasing costs to shippers and consumers, and ultimately diverting traffic onto trucks and the nation’s already troubled highways.”

Tony Hatch, principal of New York-based ABH Consulting, observed in a research note that with the STB being an independent body, the EO has no real impact, calling it a “statement of attitude and not a directive; the key word is ‘encourage.’”

On the ocean shipping side, the EO is encouraging the Federal Maritime Commission (FMC) to ensure vigorous enforcement against shippers charging American exporters exorbitant charges.

And it pointed to how the global shipping market has rapidly consolidated, citing how in 2000 the ten largest ocean shipping companies controlled 12% of the market, and fast-forwarding to 2021, that figure has jumped to more than 80% of the market. This has, in turn, let “powerful container shippers charge exporters exorbitant fees for time their freight was sitting waiting to be loaded or unloaded. These fees called ‘detention and demurrage charges’ can add up to hundreds of thousands of dollars.”

This EO comes at a time when container shipping rates are at an all-time high, driven by the various impacts of the container shipping market related to increased consumer demand for goods and products originating overseas, capacity shortages, labor issues, port congestion, and throughput challenges, among other factors.  

“The ocean industry has been consolidating for the last 10-plus years because of historical price wars between shipping lines that put them in a fragile financial state, leading to many bankruptcies and collapses such as the Korean firm, Hanjin,” said Glenn Koepke, SVP of Customer Success at FourKites. “With 90% of the ocean trade relying on the top-10 carriers and the major alliances, having more oversight and involvement from the government will not bring immediate relief. This is a supply and demand-driven market, and it’s forcing companies to rethink their sourcing strategy. If ocean is a major issue now, looking at your global suppliers from a total cost to serve standpoint is critical. Manufacturing in the U.S. or nearshoring in Mexico may have higher initial costs but logistics, risk and duties can offset the risk of sourcing product from overseas.”

Evan Armstrong president of Milwaukee-based supply chain consultancy Armstrong & Associates, said that the driver for the EO targeting Class I railroads is related to how Class 1 railroads have been an oligopoly for some time, controlling major traffic lanes, coupled with Canadian Pacific and CN’s battle for the KSU expected to further limit competition in cross border lanes.

“The railroads have been less customer service oriented than their brethren in more competitive over-the-road transportation modes and should receive more scrutiny to see if service levels can be improved and if there is a way to increase competitiveness,” he said. “This could reduce consolidation in the space.”

On the ocean carrier side, Armstrong noted that recent steep pricing increases have been due to market conditions as the economy has rebounded from the depths of the pandemic.

“It is a very different market, and the competitive situation is much different with many competitors to choose from,” he said. “Our opinion is that there is little more regulation would do to help the current situation where we went from overcapacity not much before the pandemic, to the current tight-capacity situation. The market will correct itself as we head back toward equilibrium as more capacity comes online.”