· Can’t We Just Talk? Not Anymore. NMB Ends Mediation in Rail Labor Dispute
· Rail to the Chief: Labor Dispute Seems Headed for the White House
· Trainsaw Marty: STB and its Chair Accuse Big Four of Disobeying Orders
· Railboats: Moving Railcars by Ship
· Railroad History: Robert Krebs and the Creation of BNSF
Track Talk
“There will be no excuse for continued lack of compliance.”
-STB chair Martin Oberman
The Latest
· The movie’s not over yet. But the labor drama between U.S. railroads and their unions is getting closer to the end. Last week, the federal labor board charged with overseeing railroad industry contract talks declared an end to mediated talks, convinced they weren’t helping the two sides get closer to a deal. It now seems increasingly likely that the White House will be involved (see more below).
· Elsewhere in Washington, the STB continues to hound the U.S. Big Four on their service sins. The board last week ordered UP, BNSF, CSX and NS to “correct deficiencies” in their rail service recovery plans—plans they were ordered to submit for review last month. It wants more information—specific information—on what the companies are doing. Pulling no punches, the STB called their submissions “perfunctory” and lacking “the level of detail that was mandated by the Board’s order.” UP and NS got an extra lashing for “flatly” refusing to provide six-month targets for achieving their performance goals. “We are in the middle of a rail service crisis,” the STB said in a statement, “and the Board continues to receive reports about persistent, acute, and dramatic problems in rail transportation, disrupting critical supply chains and shutting down companies. The freight rail industry is currently struggling to provide adequate rail service, yet the service recovery plans we received are woefully deficient and do not comport with the spirit or the letter of the Board’s order.” In a final rebuke, it made clear that it sees railroads responsible for the current crisis, calling it “a problem caused by their own lack of preparedness to respond to external shocks and fluctuations in demand.” The board also mentioned “especially short-sighted management of labor forces and other resources.”
· Back on the labor relations front, Canadian National warned of a strike threat from the International Brotherhood of Electrical Workers (IBEW), the union representing about 750 of the railroad’s signal and communication workers. CN last faced a major labor disruption in 2019, when conductors and railyard workers stopped working for eight days. Earlier this year, Canadian Pacific suffered a brief strike.
· The big news in the economy last week: An interest rate hike by the U.S. Federal Reserve. Its policy making committee announced an aggressive three-quarter point hike to short-term rates, reacting to alarmingly high inflation data. The decision drove up 30-year mortgage rates to nearly 6%, roughly double what they were a year ago. While the increase hasn’t caused housing prices to fall much, at least not yet, housing sales have screeched to a halt. Railroads will of course be watching to see if that causes a slowdown in home construction-related shipments, like lumber, metals, pipes, etc. The overall economy is clearly slowing, evidenced not just by the housing slowdown but also falling retail sales and tumbling bond and stock markets. Ideally, these headwinds will slow the economy just enough to torpedo inflation. The U.S. economy does, helpfully, still rest on a solid tripod of ample corporate profits, healthy household balance sheets and a strong job market. WTI oil prices, meanwhile, dropped to $110 per barrel, from $121 a week earlier.
· A quick update from North America’s busiest port: In Los Angeles, imports measured in TEUs declined 7% y/y in May. But they were still 20% higher than the running five-year average. Exports, conversely, rose 14%. The U.S., of course, imports a lot more than it exports, especially when it comes to consumer goods. Speaking to the media, L.A. port director Gene Seroka emphasized again that there was really no major slowdown in ships leaving from China even during Shanghai’s Covid lockdown; ships simply left from other nearby ports like Ningbo. In any case, as L.A. and its sister port Long Beach prepare for peak season, “rail operations continue to be our biggest current challenge.” Seroka says more than 29,000 rail container units are currently on the ground on port property, some 15,000 of these for nine days or longer. In normal times, there’d be about 9,000 units on the ground and none for more than nine days. Rail dwell time at the port’s marine terminals, he added, is now averaging 7.5 days, which is three times longer than normal. It’s still a tough situation, in other words, complicated by warehouses throughout southern California still lacking space. Inland rail terminals like Chicago, Memphis and Dallas, meanwhile, are starting to get congested again, with containers piling up as they await truck transport to fulfillment centers and retail stores. L.A. port says it’s working closely with BNSF and Union Pacific to improve fluidity.
· On Capitol Hill in Washington, the House Transportation and Infrastructure Committee—more specifically its subcommittee on Railroads, Pipelines and Hazardous Materials—held a hearing on freight rail safety. Several union representatives were harshly critical of their employers, citing safety risks associated with excessively long trains, understaffing, draconian attendance polices and so on. PSR bashing was rampant and unrestrained. And one labor leader accused management teams of refusing to fill open positions. Jeremy Ferguson of the SMART union warned “the railroad industry is going to end up like Boeing,” referring to the aerospace giant whose B737-MAX jets suffered two fatal crashes. The one railroad executive present at the hearings: Norfolk Southern’s Cindy Sanborn (also representing the AAR), who argued against legislation that would ban one-person train crews—this would do nothing to boost safety, she said, and hurt the industry’s ability to compete with trucks. She also expressed support for more widespread use of automated track inspection, while defending long trains as a means to help with the current labor shortage. As for PSR, she thinks that’s often just a “catchphrase for things going on that people don’t like about the railroads.” Also testifying was Federal Railroad Administration chief Amit Bose, who addressed topics including transport of hazardous materials, rail grade crossings, crew fatigue and automated track inspections.
Labor Pains
· Well, that didn’t last long. After not even five months of mediation—and just three weeks of in-person meetings—the National Mediation Board in Washington said essentially: That’s enough, these talks are going nowhere. The NMB thus opted to end the mediation process between the nation’s railroads and their unions. More specifically, the talks involve the National Railway Labor Conference (NRLC), which represents the Class Is along with some smaller railroads, and two separate coalitions of labor unions collectively representing about 115,000 railroad workers. The NMB, to clarify, is an independent federal agency created nearly a century ago to deal mostly with railroad and airline labor disputes.
· What’s next? The NMB said the parties can submit their dispute to binding arbitration, in which a third-party expert would decide the matter after hearing arguments from both sides. But that almost assuredly won’t happen. As the labor side stated: “All unions in our coalition plan reject the arbitration offer.”
· According to the Railway Labor Act, the end of mediation brings a 30-day “cooling-off” period (which began Saturday, June 18th). If there’s still no deal thereafter (i.e., starting July 18th), the unions will be authorized to strike, and the companies authorized to impose a lockout. Unless, that is, the White House decides to create an emergency board, which most observers in this case expect. After 30 days, the board would make recommendations, which either party could still reject. But it usually doesn’t come to that point. Even if it does, Congress could then intervene with legislation.
· With a presidential emergency board (PEB) thus likely, the question now is what side it will favor. On one hand, President Biden counts organized labor as an important supporter, one he’d take considerable political risk in upsetting. On the other hand, the last thing the U.S. economy needs right now is another major supply shock, which a strike would surely constitute. In that sense, the railroad labor talks are not unlike the dockworker labor talks now underway at the L.A./Long Beach port complex. In both cases, the union negotiating position is boosted by Biden’s presence in the White House yet constrained by the reality of how economically damaging another major supply chain disruption would be right now. If the dispute does make it all the way to Capitol Hill, note that Congress too is controlled by Biden’s Democratic party, albeit by slim margins. Any change of control wouldn’t take place until after November, when all House seats and one-third of Senate seats are up for election.
· What do the railroads want? They’re more than willing to boost pay. In fact, they’ve offered to do so separate from the contract talks—they recently proposed an extra $600 a month for the remainder of 2022. The unions said no thanks, concerned that the money might have to be repaid once a contract deal is finally reached. Compensation aside, management also wants to move from two- to one-person rail crews.
· What do unions want? Higher pay, better benefits and more favorable work rules, naturally. They’re also seeking an end to certain attendance policies enacted by BNSF and others. They’re vigorously fighting to preserve two-person train crews.
The CG Railway
· Of the 116 freight railroads owned or leased by Genesee & Wyoming, the CGR is surely the most unique. It’s in fact a rail ferry service—almost like a railroad operated over water. Based in CSX’s hometown of Jacksonville and owned jointly by G&W and Seacor, the CG Railway moves cargo-filled railcars by ship across the Gulf of Mexico, connecting the ports of Mobile, Alabama, and Coatzacoalcos, Mexico. It’s a roughly five-day trip, which is about half the time it would take to run a train between the two cities over land.
· In Mobile, CGR connects with five Class I railroads (CSX, Norfolk Southern, Kansas City Southern, Canadian National and BNSF). It also connects with G&W’s Alabama & Gulf Coast Railway, a shortline. In Coatzacoalcos, Mexico, near Veracruz, meanwhile, the CGR links with Ferromex, partly owned by Union Pacific.
· The rail ferry recently added 590-foot vessels capable of carrying 135 railcars each, up from 115 on prior-generation models. CGR currently transports approximately 10,000 annual carloads of diversified commodities across the Gulf of Mexico.
Updates on Trucking
· Take note of a report last week in the Journal of Commerce, which said that “some U.S. intermodal shippers are forgoing trains to put their spot freight on trucks.” Why? Simply because “the cost savings associated with rail have narrowed significantly since January.” While demand and pricing seem to be holding firm for longterm trucking contracts, the spot market has clearly softened. With second quarter earnings season about a month away now, we’ll soon see if railroads mention this as a cause for any recent demand deterioration.
· On June 7th, the trucking firm Schneider presented at a UBS investor event. Its CEO agreed that spot markets were softening while overall demand remains strong. The company, a major player in the intermodal business, is switching its western rail partners, working with Union Pacific now, rather than BNSF. This will help boost operational efficiency on transcontinental shipments, it said, because UP and its eastern rail partner CSX have smoother rail connections at key interchange points (like Chicago, Memphis, East St. Louis and New Orleans). There will be less of a need, in other words, to truck boxes over from one railroad to the other. The new UP partnership also gives Schneider more origin and destination pairs. More generally, the company aims to double its intermodal business by 2030, having increased container counts by 10% annually (on average) since 2017. Separately, Schneider’s executives appear eager to participate in consolidating the notoriously fragmented trucking sector.
· The Wall Street Journal’s Christopher Mims writes about developments in autonomous trucking, with dozens of self-driving trucks projected to be on the road by the end of 2023. That’s still just a tiny fraction of the roughly 2m long-distance trucks currently delivering freight in the U.S. But longterm, driverless trucks have the potential to greatly cut shipping costs. There are up-front costs to the technology. But these are far outweighed by the prospect of cutting labor costs, which account for 15% to 20% of a truck’s operating costs. In addition, autonomous trucks can be utilized more intensively, absent the need for drivers having to stop and rest. “That means every truck, which can cost between $100,000 and $200,000, is only being used about 30% to 40% of the time. Just running them 24 hours, stopping only for fuel and maintenance, increases their utilization by a factor of two or more.” By the end of next year, several companies plan to start deploying trucks without any drivers in the cab, typically in partnership with other freight shippers. TuSimple, for example, will move freight for Union Pacific. To be sure, autonomous trucking will be limited—at least in the near future—to highways and good-weather days. But in places like the Sun Belt, that’s most of the time. The biggest question, meanwhile, is what happens to the 500,000 truck drivers in America?
Book Discussion
· Few people have shaped the modern North American railroad industry quite like Robert D. Krebs. His autobiography published in 2018—"Riding the Rails: Inside the Business of America's Railroads”—describes his journey from loading potatoes onto freight cars in California’s Central Valley to eventually running what’s today the continent’s largest railroad, the BNSF.
· Rather than following in his father’s footsteps as a banker, Krebs went directly from Harvard business school to becoming a management trainee for the Southern Pacific line. Founded in 1861, SP’s network swept from Oregon down the southwest rim of the U.S., into Texas and ending at New Orleans. It also featured an important appendage from El Paso to East St. Louis, resulting from its 1935 takeover of the St. Louis Southwest Railway—this was known as the “Cotton Belt.” By the 1960s, SP was America’s largest railroad by most measures, including track mileage, revenues and—most importantly—profits. Time magazine at the time called
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