Washington Monthly - Why Some Kids Might Get Their Presents Late This Christmas

Matthew Buck , reporter-researcher for the Open Markets Institute, writes in The Washington Monthly about the monopolization of America’s railroads.

This holiday season, Americans are expected to spend a record $720 billion on all sorts of gifts from tablets to toys. But there’s a hitch. The demand for truck drivers far exceeds the supply of them. While many shippers are desperately turning to railroads to haul more of Santa’s bounty, Wall Street financiers are insisting that railroads turn away the business.

Yes, you read that right. Even when demand for freight rail transportation is surging, railroad owners are dramatically cutting back on capacity and service to boost short-term profits.

Consider the case of CSX, which connects most major U.S. cities east of the Mississippi River. Since 2017, the railroad has laid off 6,000 employees, dramatically cut back on capital spending, and slashed the number of trains it runs—as well as hundreds of the routes it serves. On September 17, CSX and Union Pacific—which serves major U.S. cities west of the Mississippi River—discontinued service on 197 out of 301 cross-country routes that the two rail giants partnered on.

This means that shippers, or companies that want to send goods across the country, can no longer send a container directly by rail from Houston to Baltimore, for example. Instead, CSX will only take the container as far as Chambersburg, Penn., where the shipper will have to hire a trucker to drive the remaining 77 miles to Baltimore. It’s the same difference if the shipper tries to use CSX’s only remaining competitor in the East. Norfolk Southern, for its part, will take the container only as far as Harrisburg, Penn., where the shipper will have to arrange for a trucker to take the container 76 miles to Baltimore.

Ann Warner, a spokesperson for the Freight Rail Customers Alliance, a coalition of companies and trade associations advocating on behalf of freight shippers, says CSX’s changes increase “the uncertainty of paths that shippers can take to try to secure reliable, cost-competitive, rail-shipping alternatives.” Ultimately, CSX’s service cutbacks also mean more trucks on the road and more highway deaths. Because trucks are much less efficient than trains, that means more diesel fuel use and greenhouse gas emissions. For the kids, it may mean lighter, even empty, Christmas stockings this year.

So why would CSX owners do this? Because all the cost cutting brings short-term profits and a soaring stock price. Between the beginning of 2017 and the end of this year’s third quarter, CSX labor expenses declined by 18 percent while the value of its stock rose by 106 percent.

The man who figured out how to pump up railroad profits by cutting railroad service was E. Hunter Harrison. Over the course of his career at the Illinois Central Railway, Canadian National Railway, and Canadian Pacific Railway, Harrison implemented his trademark program: “precision scheduled railroading.” Besides cutting capital and labor costs, precision scheduled railroading has meant less frequent, longer trains and fewer routes.

Harrison arrived at CSX thanks to a new hedge fund, Mantle Ridge, led by founder and CEO Paul Hilal. Mantle Ridge had, and still has, only one investment: an initial $1.2 billion stake in CSX stock purchased in late 2016 that’s worth nearly $3 billion as of last quarter. In January 2017, using Mantle Ridge’s ownership stake, Hilal exhorted CSX to hire his partner, Harrison, to implement precision schedule railroading.

Read the full op-ed on The Washington Monthly here.