Track services

Railroads run off track obsessing over profit margins


America’s freight railroads are in a tough spot, and it’s not just because they’re pushing through labor contract negotiations with their 115,000 workers.

Major railroads, including Union Pacific Corp. and Warren Buffett’s BNSF Railway Co., have boosted their profits so much by increasing efficiency and downsizing in recent years that they have locked themselves in a corner with no catalyst to continue attracting investors. Adjusted(1) operating margins for the five largest US railroads were 41% last year, down from 29% 10 years ago and 15% lower than 20 years ago. These margins are off the charts compared to other transportation companies including trucking, parcels, air freight, ocean shipping, airlines, and more.

By pushing these margins over the past five years to a level that analysts most likely would have thought unobtainable, the railroads have angered their customers with high prices and poor service and alienated their workers, who complain of being overworked after the railways. cut their ranks as much as possible.

Profit margins cannot rise further without inflicting even more damage on customers and workers, and the railroads have come to the attention of regulators. The Surface Transportation Board, the independent rail regulator, is on a war footing over shoddy rail service and is now listening favorably to customers who want more nimble mechanisms for challenging rates, especially when they are captives of a single railroad. The STB held hearings in April in which shippers and workers rushed to the railroads, and the regulator’s new chairman, Martin Oberman, intervened, saying service problems stemmed from companies had laid off 45,000 workers in the past six years. The only outlet for railroad growth, beyond the U.S. industrial production rate comparable to that of utilities, is to take long-haul freight out of trucks. That’s impossible with the current bad service, of course. But even when the railroads do eventually improve their on-time delivery stats, most of the goods they get off the trucks will dilute their margins. Although railroads can be 10% to 15% cheaper than trucks simply because a mile-long train is inherently more efficient than hauling freight in 100 18-wheelers, railroads are much slower and notoriously unreliable on delivery times compared to trucks.

To gain truck traffic, railroads will need to seek out more goods that do not earn as much as transporting automobiles and coal, such as shipping containers. In other words, the railroads have no lucrative, low-hanging fruit to take on trucks. Railroads will also need to significantly improve service and demonstrate consistent reliability with on-time pickup and delivery times, even during floods or blizzards. With more consistent service, customers would not complain so loudly to the regulator and would likely be more open to the railways’ argument as to why they pay so much for rail service. Many shippers would be willing to choose the slower but more economical option of trains over faster trucks if they could rely on delivery times. This most likely means the railroads would have to maintain operations with more staff and more locomotives ready to deploy. All this involves more costs and will lower profit margins.

Staff reinforcement has a double advantage. This gives the railways more protection against weather and other unforeseen disruptions, and it would also help restore the relationship with employees by addressing their overwork complaints, which go beyond the normal complaints of a workforce. ‘work. Railway workers are quitting and companies are struggling to hire enough replacements, which is highly unusual for high-paying union jobs in the industry.

But far from seeking to improve these relationships with customers and workers, the railways still seem obsessed with operating margins. Even as negotiations with unions have dragged on for more than two years and have frozen railway workers’ wages at 2019 levels, the railways are asking union members to pay more out of pocket for health care.

And no one can argue that the railways cannot afford to pay their workers. In one example, Union Pacific, the largest publicly traded U.S. railroad, paid investors more than $41 billion in dividends and stock buybacks over five years to 2021. In the first six months this year, the Omaha, Nebraska-based company raised an additional amount. $5 billion on shareholders.

While rail companies have been mindful of their investors, they were caught off guard early in the pandemic by the mood of their workforce. When freight momentarily slowed in March and April 2020 due to US lockdowns to stem the spread of Covid-19, railroads laid off workers to cope with declining operations. They were somewhat surprised that they could not easily bring these workers back as they had been able to for decades after furloughs.

All railroads struggle to hire workers despite wages and benefits. This should be a wake-up call for everyone, including rail investors. Instead of viewing the employment contract as an opportunity to convince their employees and work together to improve service – again, key to any strategy to take truck traffic – the railways seem more concerned with protecting their profit margin gains.

Railroads are offering a compound raise of 17% over five years; the unions want 31% while keeping the same medical benefits and relaxing some work rules. Three professional arbitrators appointed by President Joe Biden will now craft a proposal that the railroads and unions can accept. If this plan is rejected, Congress will have to intervene to avoid a strike.

Don’t hold your breath for the railroads to stand up to Wall Street and tell analysts and investors that the only way to grow faster than industrial production is to take action that will push margins back to less than historic lows. , say 40% or even 35%. If a railroad announced this strategy, its actions would likely be hammered.

In the meantime, the railroads will still be stuck and investors will soon lose interest when revenue growth and profit margins stall.

More other writers at Bloomberg Opinion:

• Customer demand is there. Supply is still not: Brooke Sutherland

• The UK railway strike is a cautionary tale for American labour: Clive Crook

• Pandemic writes new labor market playbook: Conor Sen

(1) If you follow the railroads, you might notice that I’m talking about operating profit margin instead of the industry term, operating ratio. No other industry except transportation uses the operating ratio, which is simply the opposite mirror of what all other industries use. It’s just confusing, and until someone can explain why the industry had to adopt the term operating ratio, I’m going to continue to think it was precisely to obscure and disguise the terrible margins operating decades ago.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, it covered US industrial and transportation companies as well as Mexican industry, economy and government.

More stories like this are available at