America’s Railroads Are in Trouble–With or Without a Strike

After all-night negotiations, freight rail companies and unions representing tens of thousands of workers reached a tentative agreement to avoid a strike that could have started as soon as Friday, Sept. 16. The deal includes higher pay for workers, and was hailed by President Biden as a victory for both the workers and the railway companies who, he says, “will continue to be part of the backbone of the American economy for decades to come,” he said in a statement.

But the agreement, which averts what would have been an economically-damaging strike, sidesteps a bigger issue: the railroad industry is currently in turmoil, and customers including farmers and energy producers, as well as railroad executives themselves, say that the industry needs an overhaul.

Lockdowns followed by a surge of consumer demand created supply chain bottlenecks during the pandemic, making it harder for consumers to get hold of everything from tampons to garage doors. While trucking and shipping companies have begun to recover from these issues, the railroad industry has struggled more in 2022 than it did at the beginning of the pandemic. A survey of members of the American Chemistry Council, whose members ship everything from ethanol to sulfuric acid by rail, found that in July 2022, 46% of companies said rail delays and service challenges had gotten worse since the end of 2021, and only 7% said that service had improved. Nearly 60% of members surveyed said they had been charged higher rates.

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“Railroads recognize that their service over the past year has not been at a level their customers deserve and expect,” said Ian A. Jeffries, the president and CEO of the Association of American Railroads, in a statement prepared for a Congressional hearing Sept. 15 on rail service challenges and their impact on agriculture.

In April, the problem became so desperate that the Surface Transportation Board held a public hearing on “urgent issues” in freight rail service, saying that it was getting reports “from a broad range of stakeholders about inconsistent and unreliable rail service.” It asked them to provide information about their plans to fix these problems. Then, after it determined that their plans were not sufficient, the board ordered the four biggest railroads—BNSF Railway Company (BNSF), CSX Transportation, Inc. (CSX), Norfolk Southern Railway (NSR), and Union Pacific Railroad (UP)— to develop service recovery plans and provide monthly information about their progress. “We are in the middle of a rail service crisis and the Board continues to receive reports about persistent, acute, and dramatic problems in rail transportation, disrupting critical supply chains and shutting down companies,” board chair Martin Oberman said in a statement at the time.

Without major improvements in rail service, more companies will decide to move goods by truck instead of freight rail, says Adriene Bailey, a partner at research firm Oliver Wyman’s Transportation practice. This will lead to more congestion, more damage, and more accidents on the roads. It could also lead to higher costs, since rail is a less expensive way for companies to move products across long distances. Not to mention that if railroads lose more market share, the major rail companies will have to tear up tracks, lay off employees, and shrink their networks.

The potential strike was “not the big issue in the long term,” says Tony Hatch, a rail and intermodal analyst who consults with Wall Street. “The biggest issue is: are railroads going to get their service act together?”

Here are some of the biggest problems railroads face even without this labor dispute:

Railroads can’t get the staff

On paper, working for a railroad seems like a pretty good deal. Workers don’t need a college degree, and the average total compensation for rail employees is $160,000, according to the Association of American Railroads.

But workers say the last two years have been very hard. That’s in part because of the pandemic, but also because the major railroads have for years been making major staffing cuts that have forced employees to take on more work.

Over the last six years, Class 1 railroads have cut their workforce by 29%, of 45,000 employees, according to Congressional testimony by Oberman. Some of these cuts were of administrative workers made in search of the type of efficiency pushed by investors, but some of them, especially at the beginning of the pandemic, were of skilled workers, Bailey says.

Now, railroads are doing everything they can to recruit new workers. In his statement, ARR’s Jeffries says railroads’ recruitment efforts may be starting to bear fruit. After offering thousands of dollars in signing bonuses and incentives to workers to relocate to regions experiencing demand, employment among Class I railroads—the biggest companies—was up 4.2% between February and July of this year, he says.

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Still, Bailey worries that people don’t want to do the type of physical work that requires them to be away from home for long periods of time, or live somewhere far from family or friends, she says. Many workers that start railroads’ training programs don’t make it to the end, she says. “There’s this shift in worker mentality that is getting brought to bear in this labor crunch that the railroads are trying to resolve for themselves.”

This turns into a vicious cycle: with fewer employees, those left have to work much longer shifts to cover the railroad hours of operation. One Union Pacific conductor recently told the publication Freight Waves that workers “are dropping like flies,” in part because shifts that used to be eight or nine hours are now up to 19 hours.

Local problems affect the entire railroad

Lots of industries across the U.S. are having staffing problems, but the impact of staffing problems is bigger on railroads. If Walmart has enough workers on the coasts but not enough in the middle of the country, that problem is contained to the middle of the country. But if a railroad has a huge hole in staffing in the middle of the country, it delays service on both coasts, because railways are interconnected networks.

This isn’t just a staffing problem. Throughout the pandemic, containers sent inland ended up stuck there because it wasn’t cost effective to send them back empty and because there wasn’t the equipment to move them. Some containers are still stuck there, because warehouses are full and there’s not enough workers or equipment to move the containers, which causes bottlenecks across the country, Bailey says.

“If I have two or three areas of my network where I cannot get the people, I can have 10,020 employees but the system has still gotten disjointed and congested and the cars aren’t flowing,” Bailey says. It’s one of the downsides of trying to use a system that was created when the biggest competition was horses to underpin modern commerce.

Shippers prefer trucks

Even before the pandemic, railroads were losing market share to trucking companies. As the freight market in North America booms, the trucking industry is growing much faster than the railroad industry, says Bailey. That’s because many companies that move goods say they’ve had bad experiences moving goods by rail.

One poll of companies done by Bailey, of Oliver Wyman, found that 100% of executives surveyed found truck freight superior to rail. Trucks were more likely to be on time, executives said, and when they weren’t, companies would call and tell them where their goods were and when they’d arrive. By contrast, railroads often couldn’t give very much information about where companies’ containers were and why there was a delay.

“Even before COVID, the level we were running at was not sufficient to build success and growth for the industry going forward,” Bailey says. “The railroads need to fundamentally evolve and improve the operating model.”

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Railroad CEOs have talked about making big investments in their network and spending money so that they’ll be able to gain market share in the long-term, she says. But investors haven’t been as supportive. On earnings calls, investors have focused on short-term profits and on operating margins, Bailey says, essentially how much profit the railroad makes on a dollar of sales.

“We have to set our sights on running a highly reliable, predictive scheduled network that will deliver the kind of service performance that shippers need,” Bailey says. “I’m a big believer that we can get there. But so far, the industry has not proven its ability to get that done.”

Technological upgrades have been delayed

For all of America’s obsession over autonomous cars and trucks, most people haven’t given a lot of thought to autonomous trains, even though they would run on rails instead of public roads, arguably making them a much safer option. Still, there are many technologies that already exist that could make railroads more efficient, says Hatch, the analyst. But regulations may prevent them from being implemented.

For instance, after a deadly 2008 train collision in Chatsworth, California that the National Transportation Board blamed on a train engineer who was texting, the government mandated that almost all trains install something called Positive Train Control (PTC). As of December 29, 2020, all required trains had installed Positive Train Control, which overrides operator errors and can slow or stop trains that are going too fast. Because PTC can be monitored from a central dispatching system, the railroad operators have argued that some trains should be able to run with one-person, rather than two-person crews.

Though the Federal Railroad Administration said in 2009 that there was no evidence to support prohibitions against one-person crews, the same agency in July 2022 proposed a rule requiring a minimum of two train crewmembers for most rail operations. The rail companies argue there is no safety justification for this, and that the government should allow railroads and unions to decide, through collective bargaining, the size of the train crews. Railroad crews have been reduced from five to three and then to two people through collective bargaining agreements over time, according to the Association of American Railroads.

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Train companies have had similar complaints about their automated rail inspection programs. Currently, conductors have to walk the whole length of a train to inspect it and look under the cars. When freight trains are longer than a mile, that can take a long time. There is technology, called Automated Track Inspection, which allows railroads to do this using lasers and cameras, and various railroads have received federal approval to test it in some locations. But the Federal Railroad Administration has let some of those test programs expire, and though railroads are appealing the decision, analysts like Hatch worry that the government will get in the way of the technology railroads need to survive. This technology may change the nature of railroad jobs, he says, but is necessary for the industry’s survival.

He says railroad companies “need to be allowed to take advantage of technological advancement.”

“Railroads need to be able to spend money on technology—which could be job reducing—but if the cost per train starts to go down, you can do a different kind of business.”