NEW YORK – The chairman of the Federal Surface Transportation Board stood before a room full of railroad executives, analysts and customers on Wednesday and tore the industry to pieces.
At the RailTrends conference sponsored by Progressive Railroading, after hearing presentations on days one and two on the need for growth, Martin Oberman offered his verdict on why that growth isn’t there: The industry has been shedding too much of the workforce and it is now desperately trying to hire more.
“I’ve heard from truckers that they have traffic to offer and they can’t get a salesperson on the phone,” Oberman said during a post-speech question-and-answer session.
The STB is the main regulatory body for doing business on the railways. It is an independent authority, in contrast to the Federal Railway Administration, which is part of the Ministry of Transport.
Right at the beginning of his speech, Oberman spoke of the “Class I Service Meltdown”, which he then referred to as a “Service Crisis”. The service problems prompted STB hearings last spring.
He said it “was brewing long before the pandemic, but it really came to a head” during the COVID crisis “and it’s nowhere near resolved.”
Oberman also got specific: The problems come from “the big four” — Union Pacific (NYSE:UNP), BNSF (owned by Berkshire Hathaway (NYSE:BRK.A), Norfolk Southern (NYSE:NSC), and CSX (NYSE:NSC). CSX) The other Class I railroads in North America – CN (NYSE: CNI), Canadian Pacific (NYSE: CP) and Kansas City Southern, which is now part of CP but is awaiting final STB approval for the merger to be complete – “haven’t even come close to showing these kinds of problems,” he said.
Oberman cited estimates by the Association of American Railroads that a strike or lockout of railroad workers, which is still possible as ratification of a September labor agreement proceeds, would cost the US economy $2 billion a day. But he said the industry itself has implemented a “partial lockout” by reducing its workforce by more than 10% since the pandemic began.
And it didn’t start with the pandemic, Oberman said. Between January 2016 and February 2020, Class I railroads reduced their workforce by 29,000 workers, according to STB data cited by Oberman.
With that reduction, Oberman said, “railroads have lost most, if not all, of their cushion and resilience to respond to the inevitable disruptions.”
After providing those numbers, Oberman got to the heart of his problem with railroad business practices in recent years. “When railroads try to excuse their failures by citing labor shortages at other companies, those other companies have not entered the pandemic, having shed nearly 20% of the workforce in recent years,” he said.
Oberman also said that some large railroad users, like grain producers, “have made the very difficult decision to play the long game and keep their employees, even if it means a temporary drop in their profits.”
“Very profitable railroads made the opposite decision, to the detriment of their network,” Oberman said.
He cited other numbers that measure the decline in workforce size, “and I have a hard time distinguishing that behavior from what effectively locks out 10% of their employees,” Oberman added, coming back to the comparison of downsizing and a partial Industry lockout, which he believes has actually already happened due to the decline in workforce size.
The result, according to Oberman, is that by mid-2021, Class I railroads “would continue to lag behind in terms of the quantity and quality of their service.” That service “really fell off the cliff” in the fourth quarter of 2021 and the first quarter of 2022, he said.
“There is no question that the service issues were the result of intentional downsizing,” Oberman said.
The railroads now face “huge hurdles” in trying to find new workers. And the result of the cut is “not abstract. Customers feel that every day,” he said.
Oberman cited specific losses in economic productivity as a result of the embargoes. One customer had to euthanize “millions” of chickens because it couldn’t get them to market, and ethanol plants reported numerous short-term shutdowns to the STB because there were no railcars to get the product to market.
“How much has this country lost by deciding to implement a 10% walkout?” Obermann asked.
One result of the cuts, according to Oberman, is that embargoes are being applied with greater regularity. They’re now “routine,” he said, pointing to a total of 140 Class I embargoes in 2019, rising to 631 last year and 1,115 embargoes this year.
“They’re usually associated with traffic jams, but they’re really a euphemism for ‘we don’t have enough crews,'” Oberman said.
Growth was the message of this year’s RailTrends general meeting. That was the message last year too.
Oberman took notice. “Last year all we heard was one fulcrum for growth,” he said. “Is there growth? It’s not growth. It keeps going down.”
He struck a populist tone at times, referring to “highly paid CEOs” because one of them, CN’s Tracy Robinson, sat at the front after delivering her own speech on the need for growth.
He said cutting costs by laying off employees saved less than $5 billion in labor costs, while the Class I railroads returned nearly 12 times that in stock buybacks and dividends to shareholders. Reducing those payouts by the roughly $5 billion in cost savings from the payroll cut “would be a drop in the bucket,” Oberman said.
“Today, the railroads are telling us they still have a hard time recruiting and retaining workers and are trying to blame it on the ‘great resignation,'” Oberman said. “The fact is, railroad staffing practices have made these jobs much less desirable.”
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