Oberman Fears Wall Street Pressure Harming Class 1 Railroads

A top federal regulator express concern this week during a webcast that Wall Street investors are pressuring railroads, which has thus led to a deterioration of freight service.

U.S. Surface Transportation Board Chairman Martin Oberman also raised questions about the need for major railroad mergers.

“Our mandate as an agency . . . is to ensure and protect a strong national rail network. That’s why we exist. And everything we do should be aimed at that outcome,” Oberman told investors.

He said the pressure from Wall Street includes pushing for ever-lower operating ratios and aggressive share buyback programs.

“There’s been a huge decrease in the level of the workforce over the last few years, I think something like 25 percent,” he said.

“I am concerned it has left the Class I’s with too little cushion to respond to a major crisis like the pandemic or the [polar] vortex, which is more likely to keep coming around. So we are keeping a close watch on the situation.”

In the past decade, the North American Class 1 railroads have adopted the precision scheduled operating model.

Typically, aggressive cost cutting, including reducing the size of the labor force and the number of trains being operated, has followed in the wake of PSR adoption.

The railroad have sought to reduce their operating ratios in a bid to boost profitability.

From February 2017, the month before CSX adopted PSR, through December 2020, U.S. Class I rail employment fell 21 percent overall.

“We’re seeing, I believe, some impact from that on the service side,” Oberman said citing missed switches and crew shortages.

“A lot of this stems from furloughs and quarantines from COVID, but I think it’s also related to the fact that the whole workforce has been greatly reduced over the last few years, I think largely in response to pressures from Wall Street. And I am beginning to get concerned that this could start impacting capital expenditures as well.”

As for stock buybacks, Oberman said in some cases those have been funded with borrowed money.

Stock buybacks are efforts by railroads to boost earnings per share and stock prices.

“Those forces are of concern to me in terms of what they mean for the long-term health of the freight industry and whether we’re going to have an industry staffed enough to fully serve and with enough incentive . . . to keep spending money on greatly needed capital improvements,” Oberman said.

“It’s not our job to come in and micromanage and tell them how to run their companies, but it is our job to keep an eye on the ball so things don’t get too far out of whack,” he said.

Independent rail analyst Anthony B. Hatch told Trains magazine that for all of the talk about railroads cutting capital expenditures, the industry spends far more of their revenue on capital expenditures than most other industries.

He said financial strength is what enables railroads to keep their physical plants in good condition.

The STB chairman also questioned the rationale for railroad mergers as well as the substantial premiums Canadian Pacific and Canadian National were willing to pay to acquire Kansas City Southern.

As for railroad mergers, Oberman expressed skepticism that consolidation will lead to railroads being able to siphon more freight business away from trucking companies.

“I am all for promoting much more competition in the freight world, particularly among railroads and particularly with railroads getting more freight off the highways and onto the rails,” Oberman said, adding that what is needed is more rail competition, not less.

“The thing that’s impressed me most since I’ve come to the board is the lack of competition for most shippers in most parts of the country,” Oberman said.

Many of these shippers are captive simply because they are located on a single rail line with no opportunity for service from a distant second railroad.

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