LA QUINTA, CALIFORNIA, US — The rail industry has endured a troubling post-pandemic recovery. Compounding issues defining the industry in the last couple of years include a barrage of poor service complaints by shippers, labor disputes that threatened to shut down the nation’s entire rail transit system, and the recent disaster in East Palestine, Ohio, US, where a train carrying toxic substances likely suffered a mechanical failure and derailed, which led to the town being placed under a state of emergency with temporary evacuation orders for its residents.
“We heard from many stakeholders about just how bad service had gotten.” - Michelle Schultz
Michelle Schultz, a board member on the Surface Transportation Board (STB), an independent federal agency with jurisdiction over economic regulations for railroads, addressed these and other issues in her March 21 presentation at the 127th annual National Grain and Feed Association convention in La Quinta, California.
Schultz said throughout her conversations with shippers over the past two years, there were three main complaints that continued to surface, including a desire to ship more volume by rail and a need for better communications with carriers about delayed shipments and the locations of their rail cars. But the most frequent complaint, she said, was a relentless inability for predictable service.
“We heard from many stakeholders about just how bad service had gotten,” Schultz said, recounting some examples from shippers who shared their experiences during a two-day hearing on rail service challenges in April 2022. “One member had to spend $3 million on secondary freight to keep animals fed and another had to stop selling feed because a loaded train sat at origin for one week because of lack of crew.”
After the hearing, Schultz said the board issued an order requiring rail carriers to report service metrics and head counts on a biweekly basis. STB members also met with the chief executive officers of Class I carriers to develop service recovery and labor development plans. She said these efforts have been productive.
“I’m happy to say we’ve started to see improvements across the network, and we are also seeing reduction in service complaints,” she said. But while improvement may have been noted in service issues, labor difficulties continue to distress the industry.
“As if the post pandemic recovery did not present enough of a challenge, six months ago the rail carriers and the unions were engaged in a labor dispute that posed a threat of bringing our freight rail network to a grinding halt,” Schultz said, adding a complete shutdown would have cost the US economy roughly $1 billion per day while driving inflated prices for consumer goods even higher had the strike not been thwarted by a bill from the Biden administration imposing a settlement between labor and management.
Prior to the settlement, the STB became aware of another service challenge from Union Pacific Railroad’s efforts to reduce the number of cars on their network by giving their customers a brief span of time to decrease their car capacity or risk a congestion embargo placed on their goods.
“By the first week of December 2022, UP had more than 1,000 embargos in place for the year, and there were 141 active embargos,” Schultz said. “By way of comparison, in 2017 UP had only implemented 27 embargos.”
After a two-day hearing in the second week of December, Union Pacific initiated an inventory management program and was able to reduce its congestion-related embargo by half. Schultz said these efforts, while commendable, didn’t go far enough.
“I understand the extreme difficulties being embargoed places on a shipper,” she said. “You’ve got to assign manpower to deal with the issues, choose which shipments to delay, decide which receivers are going to be told they’re not getting their shipment and then try to move some traffic by truck if you can, and it just injects so much unnecessary difficulty and uncertainty as well as increases cost.”
She said she hoped Union Pacific would soon set a goal to achieve the industry standard.
STB also had conversations with Class I chief executive offers Joe Hinrichs of CSX and Alan Shaw of Norfolk Southern. Schultz said both acknowledged that while service was improving, they still were not where they wanted their companies to be.
“Both Joe and Alan talked about how they wanted to focus on resiliency and take a more customer-centric focus,” Schultz said. But she did wonder if these leaders were just trying to appease regulators, saying “Haven’t the carriers made promises of improved service in the past while at the same time promising their investors they would reach an even lower operating ratio by reducing expenses, which often means cutting head counts?” But having these executives deliver such statements publicly and directly to investors had separated them from previous closed-door promises, she acknowledged.
“Carriers seem to be under intense pressure from short-term investors to focus on cost cutting and to reduce their operation ratios,” Schultz said. “A pivot toward growth would most likely result in the loss of some short-term investors in the exchange for higher profitability long term. But if they are successful, this could result in higher head counts and the ability to meet more of their customers’ needs as well as better fluidity along the network.”
Schultz also addressed the issues that arose from the rail industry’s response to the COVID pandemic, a period that could have been a financial boon for carriers.
“In order to take advantage of the surge in demand, grow their volumes and provide predictable service, carriers needed to be prepared for it and they were not,” she said. “And while no one could have predicted the pandemic nor the national labor shortage that followed, what this experience has now shown is that resiliency matters, and the carriers are making positive changes.”
She noted that five of the seven Class I carriers had reached agreements awarding employees sick leave and that total employment for the carriers was up by more than 5% from last year.
The industry’s resiliency was certainly being tested during the recent derailment in East Palestine. But Ms. Schultz was hopeful lessons gleaned from the event would help prevent future accidents.
“As a result of the derailment, the Department of Transportation has reintroduced proposed rail safety regulations, and members of Congress introduced the rail safety act of 2023,” Schultz said.
She also acknowledged Norfolk Southern, the carrier behind the derailed train, had announced a six-point plan to immediately improve safety standards, and the Association of American Railroads reported other Class I railroads had taken immediate steps to prevent similar accidents from occurring in the future.
Embracing technology and its capacity to enhance transparency was another opportunity for carriers to improve railroad-shipper relationships, Schultz said.
“When I first joined the board two years ago, I was absolutely blown away to learn you cannot track rail cars as well as you can track an Amazon package,” she said. “And today I’m still not sure what is holding the industry back, but I do believe technology that can provide transparency might resolve a lot of the issues that rail customers are complaining about.”
While the STB is directed by Congress to serve as a regulatory entity, Schultz said regulation to address these and other service-oriented complaints is not always the best approach.“The carriers will do a much better job of voluntarily achieving this goal across the networks than perhaps any changes that can be put into place from regulations,” she said. “That is not to say some regulation is not warranted. It’s just my view the carriers are in the best position to make operational decisions on how to meet the needs of their customers. And while regulations may correct certain issues, at the end of the day, only the carriers themselves can deliver a good service product that meets the needs of their customers.”