Washington Monthly has a disturbing report from Matthew Buck:
even as shippers are are having trouble finding enough trucks to move their goods.
This holiday season, Americans are expected to spend a record $720 billion on all sorts of gifts from tablets to toys. But there’s a hitch. The demand for truck drivers far exceeds the supply of them. While many shippers are desperately turning to railroads to haul more of Santa’s bounty, Wall Street financiers are insisting that railroads turn away the business.
Yes, you read that right. Even when demand for freight rail transportation is surging, railroad owners are dramatically cutting back on capacity and service to boost short-term profits.
The key words are ”short-term Profits”.
Taking track out of service cuts maintenance costs. Running fewer if longer trains cuts payroll costs. That boosts short term profits and stock prices — but also means poorer service, longer shipping times, and decreasing ability to meet demand. It means long-term decline as infrastructure decays and shippers abandon rail. It means increasing likelihood of derailments and other accidents as resources become constrained.
(It also doesn’t help passenger rail when slow freights delay passenger trains and closing lines makes passenger service impossible.)
The key player in Buck’s report is the late* Hunter Harrison and “precision scheduled railroading”.
Over the course of his career at the Illinois Central Railway, Canadian National Railway, and Canadian Pacific Railway, Harrison implemented his trademark program: “precision scheduled railroading.” Besides cutting capital and labor costs, precision scheduled railroading has meant less frequent, longer trains and fewer routes.
Harrison arrived at CSX thanks to a new hedge fund, Mantle Ridge, led by founder and CEO Paul Hilal. Mantle Ridge had, and still has, only one investment: an initial $1.2 billion stake in CSX stock purchased in late 2016 that’s worth nearly $3 billion as of last quarter. In January 2017, using Mantle Ridge’s ownership stake, Hilal exhorted CSX to hire his partner, Harrison, to implement precision schedule railroading.
That translates into fewer people running longer trains on fewer routes — and forcing customers to like it or leave it. Harrison’s arrival at CSX and his moves to implement his vision caused more than a little disruption — it did not go well. Harrison did not take kindly to the criticism that ensued.
* Harrison’s health at the time of his arrival at CSX, which was not good, is drawing some critical notice — as in was it really a good idea to put a man in charge with undisclosed health issues that led to his death shortly thereafter?
It’s difficult to say whether or not Harrison’s tenure at Canadian Pacific or Canadian National can be blamed for recent problems meeting shipper demands for service; railroads have always had to deal with boom-bust cycles. Too much capacity can bankrupt a railroad and striking a balance is an art — but the flip side is lost ability to meet surging demand which impacts the larger economy as well as lost railroad business. In Canada for example...
The nation’s biggest railways haven’t been able to deliver enough cars after harsh winter conditions and as a sudden boom in energy production sparked a swell of demand. Some farmers have been waiting for months to deliver wheat and canola to elevators before they can get paid. The squeeze also means that crude supplies are piling up in Alberta, pushing prices to the biggest discount relative to New York futures in more than four years.
The bottleneck mean some Canada’s commodity producers are getting left behind as other nations take advantage of a recent run up in global prices. Benchmark wheat futures in Chicago are up more than 9 percent since the end of November, while West Texas Intermediate in New York added more than 7 percent.
Harrison may have been loved by Wall Street, but this notice of his death at TRAINS magazine had this to say as well:
Rail labor considered Harrison the enemy. Harrison created a culture of fear and intimidation at CP, rail labor leaders say.
“Before Hunter Harrison, we had a number of pretty high-level disputes with CP. It was a pretty standard relationship,” says Doug Finnson, president of the Teamsters Canada Rail Conference, which represents the running trades. “After Hunter Harrison arrived, it just went nuts...it was just an all-out war on workers at CP. The workers became the enemy in his drive to please the Pershing Square venture capitalists.”
It wasn’t only rail labor who felt Harrison’s wrath. Harrison despised top-heavy management structures and bureaucracy. So he culled the ranks at CP and CSX. Managers who didn’t measure up, or who couldn’t grasp Precision Scheduled Railroading, were quickly dismissed at CN, CP, and CSX. CP went through four chief financial officers while Harrison was CEO because it was difficult to find someone who could satisfy both Harrison and the board.
Wall Street was pleased with the immediate results and their effect on CSX earnings despite early stumbles in implementing Harrison’s vision. Harrison’s successor Jim Foote intends to keep trimming back CSX. Other railroads are under pressure to follow suit. Buck ends his report with a reminder that this isn’t the first time something like this has happened.
The U.S. has learned before that railroads cannot be run solely to maximize profit at the expense of service. That’s because the public suffers when it can’t get the things it needs. In his 1914 book, Other People’s Money, Louis Brandeis included a whole chapter, entitled “The Curse of Bigness,” in which he described how bankers forced well-engineered railroads to neglect investments in our infrastructure. Rather, they favored financial manipulations for profit. But now, America’s railroads are far more monopolized and even less regulated than they were a century ago.
emphasis added
This is a bad development in more than one way. A quarter of all greenhouse gas emissions in the US come from transportation. Shifting more freight onto highways, reducing the ability of the rails to move goods and people is exactly the wrong way to go when Climate Change is only getting worse. Read the whole thing.