Railroads are prioritizing payments to Wall Street stockholders over everything else, including serving the public interest.
In our click-driven world, the threatened strike at America’s freight railroads, and President Biden’s intervention to prevent it, represents last week’s news. But there are two groups for which the averted strike is still very much front and center: the hundred and fifteen thousand rail workers who will be forced to work under the terms of the contract agreement that the White House and Congress imposed upon them after some rail unions rebuffed a deal mediated by the Administration, and the managers and owners of the railroads, who will get back to running what, these days, is an immensely lucrative, and suspiciously monopolistic, business.
Much of the news coverage of the contract dispute focussed on the railroads’ refusal to grant their workers paid sick leave. But this intransigence was only one aspect of a larger parable of modern American capitalism. Unfolding in one of the country’s oldest and most far-flung industries, it is a story of deregulation, consolidation, downsizing, under-investment, and intensification of work practices. Most of all, though, it is a story of financialization, and of prioritizing payments to wealthy stockholders over everything else, including serving the public interest.
During the lockdowns early in the coronavirus pandemic, the railroads accelerated their job cuts and capacity reductions. When demand rebounded last year, many shippers faced chronic delays, cancellations, and, in one case, a temporary suspension of service on key routes between the West Coast and Chicago. “Freight-railroad service is abysmal,” Representative Peter DeFazio, the chair of the House Committee on Transportation and Infrastructure, complained, at a hearing earlier this year. “This appalling service is forcing shippers to recoup their extra costs downstream, and Americans are paying for it—with increased food costs and at the gas pump.”
The modern rail-freight industry dates back to 1980, when Congress partially dismantled a strict system of regulation that had been introduced in the late nineteenth century following a catalogue of abuses by the companies of the original railroad barons, men like Jay Gould, James Hill, and Edward Henry Harriman. The Staggers Rail Act of 1980—named after the Democratic congressman Harley O. Staggers, Sr.—gave the railroads much more freedom to run their operations, including closing down unprofitable lines and setting their own freight rates, which the federal government had previously determined through the Interstate Commerce Commission. For a time, deregulation appeared to work as planned. Thanks to healthy competition in many areas, prices fell and shipments increased. After decades of losing out to trucking, the rail industry started to win back market share, which was good news for its workers and owners, and for the environment. (Rail transportation is much less carbon-intensive than trucking.)
Similarly to what happened in the decades after the Carter Administration deregulated the airline industry, the era of vigorous rail competition gradually gave way to consolidation and tacit collusion. After a long series of mergers, there are now just seven large, or Class I, railroads, compared with thirty-three in 1980, and between them they control more than eighty per cent of the freight market. “CSX and Norfolk Southern have a duopoly on traffic east of Chicago, while Union Pacific and BNSF have a duopoly on traffic west of Chicago,” Matthew Jinoo Buck, a senior fellow at the American Economic Liberties Project, pointed out, in an illuminating article for The American Prospect earlier this year. “Canadian Pacific, Canadian National, and Kansas City Southern run much traffic going north-south through the Midwest.”
Rather than expanding their operations for a greener age, the big railroads have been doing what unregulated or lightly regulated monopolists (and duopolists) tend to do: rationalizing their operations, reducing their workforces, and charging prices well above their costs. According to the Surface Transportation Board, which replaced the defunct Interstate Commerce Commission in 1996, inflation-adjusted freight rates have risen by thirty per cent since 2004, and over-all freight traffic—in terms of carloads and tonnages—has been declining since 2006. In recent years, the industry has slashed its workforce by roughly a third. “Operating the railroads with that many fewer employees makes it difficult to avoid cuts in service, provide more reliable service, and reduce poor on-time performance that does not compete well with trucks.” Martin J. Oberman, the current chair of the Surface Transportation Board, noted, in a speech last year.
Meanwhile, industry profitability and payments to shareholders have been soaring. Between 2011 and 2021, according to Oberman, the big railroads spent a hundred and ninety-one billion dollars on dividends and stock buybacks, which was far more than the hundred and thirty-eight billion dollars they spent on capital investments in the industry’s infrastructure. “Where would rail customers, rail workers, and the public be if a meaningful portion of that hundred and ninety-one billion dollars had been reinvested in expanding service and making service more predictable, reliable, and on time?” Oberman asked.
Much of the impetus for the cost cuts and layoffs has come from Wall Street, where activist investors have taken stakes in railroads and demanded changes and higher profits. The process began more than a decade ago, when the Children’s Investment Fund Management, a London-based hedge fund, invested in C.S.X., and it is still ongoing. Earlier this year, Bill Ackman, a billionaire hedge-fund manager who had previously invested in Canadian Pacific, purchased another stake in the company. Oberman described the pressure that Wall Street exerts on the railroads to prioritize cost-cutting over investment and growth as “ever-increasing.”
The railroad companies claim that they have made up for their lost workers and capacity cuts with gains in efficiency. In recent years, they have introduced some new technology and forced their remaining employees to accept new work rules under a system known as Precision Scheduled Railroading; as Buck explained, this “meant running faster, longer trains, and skimping on service, spare capacity, systemwide resilience, and safety.” It is largely because of this new bare-bones system that the railroads were so reluctant to give their workers paid sick days. If a conductor or engineer calls in ill at short notice, the company has to find a backup to replace the absentee, and this can be costly or difficult. Rather than compromising on paid sick leave, the railroads agreed to raise pay and hold the line on contributions to employee medical plans. That stance indicated just how important maintaining an ultra-lean and ultra-flexible staffing system is to their new business model.
Far from rolling back Precision Scheduled Railroading, the new labor agreement that Congress has imposed formalizes elements of it, including the introduction of “self-sustaining pools” of workers, and thus will give managers more freedom in scheduling crews and replacing absentees. The locomotive engineer Ross Grooters, who is the co-chair of Railroad Workers United, a cross-union caucus of railway workers, explained the significance of this change to the Web site Labor Notes: “So instead of being on a [schedule] where you have multiple people in front of you and you know that you’re, say, the tenth person on that roster to be called and you know that tenth train will come sometime tomorrow—which is still very unpredictable—now all of a sudden, you can get called out of the blue to go to work fifteen minutes from now because they need somebody to fill a train.”
This is the sort of detail that doesn’t attract headlines, but it will affect the work lives of thousands of railroad workers and help keep the profits and dividend payments flowing to Wall Street. And it is surely only a precursor of more labor battles to come. The railroad companies are already pushing to reduce train crews from two to one. With autonomous control systems making rapid advances, it surely won’t be long before the companies try to introduce unmanned freight trains. Over in Australia, autonomous trains are already carrying iron ore hundreds of miles, for the mining giant Rio Tinto. In Wall Street’s relentless drive to raise profits and reward shareholders, there is no rest for workers and little space for broader considerations, such as building a cleaner and more resilient transport system. ♦