By Wolf Richter, editor of Wolf Street. Originally published at Wolf Street.
So there are few hiccups in the US economy right now. James Foote, the chief executive of CSX, one of the largest railroads in the US, put it this way during the earnings call yesterday (transcript by Seeking Alpha):
“I’ve never seen any kind of a thing like this in the transportation environment in my entire career where everything seems to be going sideways at the same time,” he said.
“In January when I got on this [earnings] call, I said we were hiring because we anticipated growth. I fully expected that by now we would have about 500 new T&E [train and engine] employees on the property,” he said. “No way did I or anybody else in the last six months realize how difficult it was going to be to try and get people to come to work these days.”
“It’s an enormous challenge for us to go out and find people that want to be conductors on the railroad, just like it’s hard to find people that want to be baristas or anything else, it’s very, very difficult,” he said.
“Nor did we anticipate that a lot of the people were going to decide they didn’t want to work anymore. So attrition was much higher in the first half of the year than what we had expected,” he said.
“So even though we brought on 200 new employees, we fell short of where we thought we would be by now….”
Railroads are grappling with a weird phenomenon that is a combination of “labor shortages” and 12.6 million people still claiming some form of unemployment compensation, amid stimulus-fueled demand.
And this comes after railroads had spent six years shedding employees in order to tickle Wall Street analysts and pump up stock prices. The North American Class 1 freight railroads combined – BNSF, Union Pacific, Norfolk Southern, CSX, Canadian National, Kansas City Southern, and Canadian Pacific – have tried to streamline their operations, using fewer but longer trains and making other changes, including under the strategy of “precision scheduled railroading,” implemented first by Canadian National, then by CSX.
The resulting deterioration in service triggered numerous complaints from shippers. But one of the big benefits was that the workforce could be slashed, which fattened the profit margins at the railroads. Wall Street analysts loved it, and it was good for railroad stocks. By now, precision scheduled railroading has become the new religion at all Class 1 railroads except at BNSF, which has not officially adopted it, at least not completely.
In the process, over the past six years, the Class 1 railroads have axed 33% of their workers through layoffs and attrition. According to the Surface of Transportation Board (STB), an independent federal agency that oversees freight railroads, the Class 1 railroads slashed their headcount from 174,000 workers in April 2015 to 116,000 workers in June 2021.
The results of the efforts to hire people back this year are barely visible in the chart – that risible uptick in employment over the past few months. Turns out, it’s a lot easier to cut workers than it is to suddenly hire workers:
Before the railroads blame the 33% cut in the workforce on the pandemic, let’s point out that by February 2020, just before the pandemic, their headcount had already been cut by 46,000 workers, or by 26%, to 128,000. Only 12,000 workers were cut during the pandemic.
Since September 2016 – the beginning of the STB monthly data by individual railroad – the biggest workforce slashers were CSX and Norfolk Southern, which both cut over 30%, and Union Pacific which cut nearly 30%. The other railroads cut far less over that period. But massive cuts occurred in 2015 and 2016, before this by-railroad data began.
During the pandemic, some of the workers were put on furlough, to be recalled more easily. But turns out, not all of them are eager to return to work on the conditions offered by the railroads, including relocation to new assignments.
These cuts in the workforce, and now the scrambling to hire people amid “labor shortages,” is contributing to issues in meeting heavy transportation demand: Union Pacific temporarily suspended traffic from Los Angeles into Chicago, and BNSF has started to meter traffic into Chicago, to allow them to catch up unloading the trains that are stuck in their Chicago railyards. The resulting pot-banging by frustrated shippers has gotten the attention of the STB.
“The railroads cannot strip down to bare-bones operations,” STB chairman Martin Oberman told the Wall Street Journal. “It’d be like a professional football team only having one quarterback.”
The American Chemistry Council – which represents companies in the chemical industry, such as BASF, Chemours (the DuPont spinoff), Chevron Phillips Chemical, DuPont, ExxonMobil Chemical, etc. – lamented in a letter to the STB, cited by the WSJ, that railcars were waiting at railyards for over a week and travel times for some routes more than doubled. Some factories were running out of materials because shipments had gotten hung up and were approaching the point where they’d have to close, and other factories have cut production.
The railroads “clearly weren’t as prepared as they should have been for the increase in traffic,” Jeff Sloan, senior director of regulatory and technical affairs at the Council, told the WSJ. The deteriorating service shows that the railroads cut too deep before the pandemic and were unable to catch up, he said.
In line with the executive order from the White House that exhorts agencies to work on making markets more competitive, the STB is now examining what can be done to improve competition among the railroads. Nixing any thought of mergers among Class 1 railroads would be a no-brainer.