Railroads Aim to Maintain Stability After Averting Strike

President Biden signed a bill on Friday that restricts rail workers from going on strike. However, the industry is still facing a big problem: a shortage of staff to meet customer demand.

The largest U.S. freight railroads have reported strong profits in recent years, helped by higher prices and steady business in transporting everything from automobiles to fertilizer. This year, export demand for coal and grain, stemming from disruptions in supply chains in Europe after Russia invaded Ukraine, bolstered freight volumes, railroads said.

Railroads are facing disruptions due to a shortage of workers. This year, Union Pacific Corp. has been particularly affected by this issue.

BNSF Railway and Union Pacific have both issued more embargoes in recent years than in years past. Embargoes are restrictions placed on the amount of cargo that can be transported, and railroads often issue them in order to control traffic movements when service is disrupted due to a disaster or to ease congestion.

According to data compiled by analysts at JPMorgan, the number of embargoes issued by freight railroads has increased from 945 in 2020 to 1,486 in 2021. This is a significant increase from the 641 recorded in 2020.

Railroad operators said they have had insufficient numbers of train and engine workers, though unions representing other types of railroad hands, such as signalmen and track workers, said they have shortages as well.

According to Brian Ossenbeck, an analyst at JPMorgan, railroads are all trying to grow and add more head count. However, they cannot really create new demand. Instead, they are just trying to match their plans and assets with what is coming onto the network. Ossenbeck notes that this is quite a difficult task.

Some freight railroad operators, such as Union Pacific and CSX Corp., have been struggling in recent years. Union Pacific's operating ratio, a measure of how much it spends to run its trains, rose to a record high in 2018, while CSX's operating ratio has been climbing for the past few years.

The company said that it has made progress on hiring and service levels since this past spring.

The most recent round of collective wage bargaining took more than two years to resolve, eventually requiring President Biden to intervene twice. Unions raised concerns about railroads being understaffed during negotiations, saying that their members are working irregular schedules more often and have less time off. They also said that workers still need relief from having inadequate paid sick days, which stems from railroads' efforts to streamline operations since 2017.

"This legislation is a step in the right direction, but there is still more work to be done to fix the freight rail network," said Chris Jahn, president and chief executive of the American Chemistry Council, a trade group.

Since the beginning of the year, a slowdown in rail service has caused problems for Washington's Snohomish County Solid Waste Division, which transports 600,000 tons of waste each year. Division leaders say the slowdown has hampered their operations.

For a few days in May and September, the county closed solid waste transfer stations after it didn’t receive enough shipping containers from a railroad to transport the waste to a regional landfill, said Public Works Director Kelly Snyder. At one location, garbage piled up 45 feet high, and staff had to go on a 24-hour watch looking for smoke and flames for two days because of the risk of combustion, she said. Public officials asked residents to take their yard debris to private composting stations.

"Rail reliability is very important to us," said Ms. Snyder. "It's our only way to export to landfills, so we need to make sure that the service is maintained over time."

The Surface Transportation Board (STB) has received numerous complaints that the embargoes being instituted are hampering the operations of businesses. The STB is a federal agency that primarily regulates freight railroads.

Embargoes were traditionally issued in response to unforeseen disasters like floods or polar vortices, but increasingly they are being used as part of railroads' operating plans to clear congestion, Martin Oberman, chairman of the STB, said in a recent speech at a railroad conference in New York. "Congestion is a railroad euphemism for 'we don't have enough crews to move our trains to keep our network fluid,'" Oberman said.

Union Pacific's finance chief Jennifer Hamann has described embargoes as a "tool of last resort." "We don't have other mechanisms to fully suppress volumes coming onto our network," Ms. Hamann said at a recent industry conference. She added that the company is providing permits to allow customers to continue to ship despite the embargoes.

Executives from Union Pacific are scheduled to testify at a hearing later this month regarding the company's use of embargoes. The board overseeing the hearing has said that Union Pacific has issued more than 800 embargoes this year, compared with just five in 2017.

Railroads have a long history of furloughing workers during periods of decreased cargo volume, and then bringing them back when economic activity picks up again.

As the Covid-19 pandemic began to shift customer demand in 2020, railroads followed suit, aiming to call back workers once activity returned. However, demand snapped back faster than railroads anticipated, making it difficult to rehire furloughed workers.

Some executives have acknowledged that the current furlough model is outdated. This is especially true since railroads typically aren’t quick enough to get workers back fast enough to reap the benefits of an economic turnaround.

Norfolk Southern's stock is down 0.89% today.

The company said that it plans to make changes in decisions regarding furloughs, including finding ways to keep workers even if freight volumes soften.

"We are ahead of our target for hiring train and engine team members, with a strong pipeline of trainees into next year," said a spokesman from the Atlanta-based railroad. "Our customers are noticing these improvements and talking to us about bringing back more volume."