Railroads in a Pickle - Blaming PSR

Part 4 of Supply Chains, Railroads and Where Things Go Wrong

June 21, 2023 - by Charles A. Turek

Image courtesy of Crowdfund Insider

Railroads are in a pickle, and it wasn't caused by Congress or the president.

My most recent post wasn't so recent. Back in January of 2022, I finished three posts about the supply chain problem. Oddly enough, it hasn't resolved itself completely in these past fifteen months, and that isn't entirely the fault of the railroads. Even though Union Pacific has been laboring mightily to see to it that other supply and delivery problems happen on their railroad, I can no longer blame it all on the railroads.

So . . . What's the pickle?

Nobody wants to work for the railroads.

That's an exaggeration. Some people want to, and more will eventually try it. But as a broad generalization, the freight railroads (let's leave Amtrak out of this for now) have gone from an industry that used to attract labor in a wide range of categories, including the best of engineering minds, to an industry that disrespects its workers and, with few exceptions, publicly focuses more on attracting capital than on satisfying its customers and its workers. Ask anyone in rail management, and they'll lie about this; but ask anyone in rail labor and they'll agree.

Image courtesy of Lancaster Public Library

The railroad strike that was threatened earlier this year is just one symptom of this, but it covers many points. Point one is that the railroad unions (there are many) are no longer labor unions in the old sense, but are more like well-funded political action committees. If the unions weren't in the business of supporting the same political hogwash that the railroads themselves are supporting, there would have been a strike, and the settlements would have favored labor more successfully. Who wants to work in a job where even your union is on management's side?

Point two involves layoffs. The railroads have been focused on something called PSR, which requires that they maximize asset utilization. Yes, crews are an asset, but they are a human asset. Railroads have forgotten why, decades ago, we stopped calling it the "employment" department and started calling it HR or Human Resources.

Layoffs for railroads are the equivalent of putting a long line of expensive locomotives onto a siding and leaving them there for months. The difference for railroad labor is that engines sitting on sidings don't have to eat or pay for healthcare, housing and clothing. The idle locomotives don't go off and find other railroads to work for, and they don't suddenly jump the tracks and become trucks. Not so with workers.

Bringing this up to date.

The regulatory pendulum is swinging. You know: The one that will slice off your head if it swings too close. And railroads are starting to notice.

As of this writing, at least one railroad CEO has reported that he will not value adherence to an arbitrary bottom-line target over safety, customers and railroad employees. In saying so, however, this same CEO has demonstrated that the executive suite has become more proficient in the jargon of corporate politics than it is in the unique and usually unchangeable jargon of railroads themselves.

That PSR has soured in the executive suite is not a given. The bottom line is a powerful force that can be used against this same CEO as a cudgel to beat him into compliance with investor demands or beat him completely out of the boardroom. It remains to be seen if the people who do railroading can convince those who invest in railroading that they should back off on profit demands before the pendulum mentioned above takes off some heads; and when those heads get taken off by the regulatory juggernaut that we all know has gotten even more out of control than pre-Staggers Act, it will be a long time before American railroads can grow they way they have in the past thirty-odd years.

So what can be done?

Exactly what that CEO said: Value safety over bottom line. Value customer satisfaction over bottom line. Value the work force over bottom line. And value all over investor satisfaction. Despite the reality that railroads are safer by all measures than they have ever been, and that includes hazardous materials, the public perception is driven by a few ultra-high profile disasters. And the public perception drives the regulatory agencies that can swing the blade across neck of the unheeding railroad.

Customers will always grouse and complain and want lower rates and better service, but customers can also pull their business, put it on trucks, and tell the railroads to take their investors and shove them. Customer dissatisfaction also opens the door to regulatory bureaucrats who need something to write up and hold hearings on. Causing supply chain issues by using embargoes to excuse shoddy traffic management doesn't help, either.

The work force? Where should I start? Labor unions have a lot of money to throw at politicians, and politicians also love regulations, hence, labor unions will not fight off regulation, should it come. The labor unions aren't going to go away, so the alternative is to treat union members as co-equals in the operation and management of the complex networks that railroads have become and will continue to be for the foreseeable future. While I think that the time for "employee owned" has come and gone, giving the rank and file ownership of what happens going forward will go a long way toward keeping the regulatory pendulum from swinging too far back in the direction of the muck railroads were before wholesale deregulation.

Then there are the investors. Railroads need investors. Or do they? Like it or not, the big railroads in the U.S. are, with a few exceptions, publicly traded stock corporations. Railroads also need big banks, both for credit lines and to underwrite bond issues. Investors will buy both stocks and bonds in railroads, and expect a return. While the bonds offer a pegged return as opposed to a dividend depending on bottom line, their value in trade, along with equity values, depend on a healthy bottom line. The perception of health is determined by analysts and the investment funds that hold equity and debt. Not to simplify too much, but those analysts and fund managers trade in more BS than they do in any stock or bond. They use BS to legally manipulate the market and frighten corporate boardrooms into doing their bidding.

The railroads are going to have to find a way to chuck some of the precepts of PSR and a new way other than arbitrary metrics like "operating ratio" to make the analysts and fund managers happy. The way I see it, it's going to have to be a new way, or it'll be PSR with regulation. Heavy regulation.