Shippers from across the country appeared before the Surface Transportation Board (STB) in Washington, D.C. this week to lament the state of the U.S. freight rail industry. A diverse set of companies that rely on the freight rail network urged regulators to introduce more competition and to help incentivize investment in increased rail capacity. And while the hearing focused on freight issues, it also provided key insights into the underlying causes of Amtrak’s poor on-time performance over the past decade, as well as future challenges for adding new passenger services to the North American rail network.
The STB hearing focused specifically on the performance of Union Pacific (UP), which has seen surging delays and embargo orders across its network since 2018. The STB highlighted that UP has ordered its customers to remove their shipments from its rail network over 1,000 times in 2022, more than a sevenfold increase from the 140 embargo orders in 2018.
STB Chair Marty Oberman made a direct connection between the railroad’s poor performance and decisions made by executives to lay off thousands of workers in the past few years. The company went from around 18,000 employees in 2018 to roughly 13,000 this year (that figure includes the rehires and new hires following a post-pandemic restaffing effort).
Customers argued that the freight rail industry is employing monopolistic business practices, and that it is up to the STB to exercise its oversight powers to reintroduce competition into the system.
“There’s no negotiation," said Rob McRae, vice president of transportation at Univar Solutions, a chemicals distributor. “‘Here’s your number and you’ll get the service that we give you. [Class 1] railroads need to have some guardrails."
Many of the consequences of this monopoly pricing power are so diffuse as to be hidden from the public. Chemicals and bulk commodities cost more because of inefficiencies in the freight rail system, which drives up the cost American consumers pay at the register. But these price increases are far enough upstream that they are largely subsumed in a larger conversation over inflation and cost-of-living.
However, one shipper provided an example of a much more acute threat: UP service interruptions delayed shipments of water treatment chemicals to the City of Denver earlier this year, casting doubt on whether the city would be able to supply potable water to residents. The Denver water agency was ultimately able to secure the necessary chemicals and disaster was averted. But there are doubtless hundreds of similar stories of which the American public is blissfully unaware.
Amtrak as Canary in the Coalmine
Of course, Amtrak passengers have been aware of the problems brewing on the freight rail network for years. If you spend enough hours stuck on a siding watching a freight train inch by, you start to ask ‘why is this happening?’ And the answer, more often than not, is 'freight train interference.'
While the cause is clear, we’ve had difficulty getting regulators and lawmakers to act on this information. Rail Passengers volunteers and leadership have submitted testimony to the STB and visited with Congressional offices to talk about potential solutions. Amtrak has also been able to generate some media coverage of the issue through the introduction of a Host Railroad Report Card (UP and Norfolk Southern are the dunces of the Class of 2022, with both scoring a D-minus).
However, there may be relief on the horizon. With the introduction of Metrics and Standards — following years of delays due to freight railroad litigation — America’s passengers are finally getting a test case with teeth. In a December 8th complaint to the STB, Amtrak accuses UP of “routinely” prioritizing freight trains over passenger trains despite the legal requirement to give passenger trains preference, arguing “there is no indication that [Customer On-Time Performance] on the Sunset Limited trains will improve absent the Board’s intervention.”
[Read our full coverage of last week's Amtrak STB filing]
The recently averted freight rail workers strike also cast a spotlight on the slow-motion collapse of the U.S. freight rail industry. Congress ultimately imposed a deal to avert a general strike that would have risked grinding the supply chain to a halt during this holiday season, but there has been a swelling of public sympathy for rail workers subjected to grueling working conditions over the past decade. There is also a growing awareness of the main culprit: Precision Scheduled Railroading, the preferred freight railroad branding for moving longer trains more slowly with fewer workers. While this strategy has freed up money for Class 1s to pay out $196 billion in stock buybacks since 2010, it has also left the railroads short-handed, requiring the remaining workers constantly be on-call. That, combined with the introduction of a harsh points-based attendance system, has left workers afraid to take sick days lest they be fired.
“I don’t think there’s any way of overstating the fury of the workforce at the way they have been treated in the last [few] years,” Richard Edelman, a lawyer representing several rail unions, told the Board this week. “I don’t think you can even calculate the fury over the lack of personal time, the lack of sick time, the furloughs of their coworkers.”
Edelman predicted that many of the workers who are not already invested in the Railroad Retirement Program would simply migrate to other industries, further increasing staffing woes and delays.
Chokepoint for the U.S. Economy
There are larger implications of this failure to invest in workforce, infrastructure, and capacity by the Class 1s. The freights are right to point out that they are an essential part of a functioning economy — worth about $2 billion a day to the U.S. But this fact begs an important question: what is the cost to the U.S. economy of the decision by freight railroads to let their networks stagnate?
This was a point argued emphatically by UP customers which are trying to grow their businesses.
“To answer ‘do I think they’re fulfilling the common-carrier obligation with embargoes?’ No, I don’t think they are,” stated Don Boostra, business director at Chemtrade Logistics. “I don’t know the solution. I’m not going to try to tell them how to run their railroad, but it sure seems to me when we have industries like ours and others that are trying to grow and capacity’s going down, that no, I don’t believe they’re fulfilling their obligation.”
The rejoinder from UP leadership did not inspire confidence.
“Excess freight-car inventory disrupts the alignment of our network resources,” said UP chief executive officer Lance Fritz. “It requires us to use more crews and more locomotives to handle the same amount of business, and it produces congestion on our lines of road and in our terminals.”
Essentially, Fritz seems to be saying ‘the problem is our customers are clogging up our tracks with all these damn railcars.’ This is the kind of attitude that will see the freight railroads cede even greater market share to the highway trucking industry. That’s bad for safety and it’s bad for the environment.
It’s also bad for passenger rail in the U.S., which will need to use freight railroad track to introduce added frequencies and new corridors. If freight railroads are aggrieved about having to deliver railcars for its existing customer base, chances are dim for new passenger train services. Particularly since passenger trains require a more nimble operating environment than most Class 1s seem interested in providing (e.g. rail sidings long enough to accommodate passing movements).
While the presentation of the industry's problems was clear, the solutions on offer were markedly vague.
“We need to figure out a way to incentivize the railroads to expand their systems or their operations so that they can handle the traffic that’s fully available to them,” McRae said. Class 1s currently lack that incentive “because of the pricing power that they are afforded with captive customers who have no choice but to pay.”
Unfortunately, the clearest way to create a different set of incentives for the Class 1s involves restructuring the U.S. corporate tax code. That’s a heavy lift, and even UP’s most dissatisfied customers may balk at a solution that affects their own balance sheet.
That being said, the STB does have a clear mandate to provide industry oversight. And with the chorus of voices calling for freight rail reform growing louder, and more diverse, there’s never been a better time for the STB to take decisive action.