The Washington Monthly - Amtrak Joe vs. the Modern Robber Barons

Policy director Phil Longman argues that President Biden’s big bet on rail infrastructure will be wasted unless he takes on the financiers who control the industry.

For a chief executive whose love of trains won him the nickname “Amtrak Joe,” this must be a pretty exciting moment. President Joe Biden’s bipartisan infrastructure bill, which designates an unprecedented $66 billion to expand rail service across the country, appears poised to pass the Senate.

The bill promises to furnish a more convenient and environmentally friendly mode of travel between destinations that are far enough apart to make driving tedious but close enough together to make flying impossible or at best impractical. You may never use these new trains yourself, but those who do will create less traffic congestion, cleaner air, and a cooler planet. Removing more freight from pavement-pounding long-haul semi-trucks onto super fuel-efficient trains will make driving safer and more pleasant, and may yield huge reductions in carbon emissions.

But for any of this to happen on any meaningful scale, the Biden administration will need to do more than invest more public money in train travel. It will also need to reverse decades of deregulation, lax antitrust enforcement, and other policy blunders that left latter-day robber barons in control of nearly all the nation’s highly monopolized railroad infrastructure, just as they were in the worst days of the Gilded Age. This time, the financiers aren’t presiding over an expanding rail system; they’re selling it off and permanently liquidating its assets for short-term economic gain.

Unless Biden takes on the financiers, merely maintaining Amtrak service–let alone expanding it–will become ridiculously expensive. Here’s an example that shows why.

Amtrak for decades ran two roundtrip trains a day along the Gulf Coast corridor between New Orleans and Mobile. In 2005, Hurricane Katrina badly damaged the tracks. The two giant corporate rail systems that own the line, Norfolk Southern and CSX, made the necessary repairs, and within a year resumed running their own freight trains. But Amtrak service never returned.

It’s not that people in the region don’t want their Amtrak trains back. A broad coalition of civic and business leaders, including Mississippi’s Republican Senator Roger Wicker, has been trying for years to persuade the railroads to let Amtrak resume service. They point to a study by the Trent Lott National Center at the University of Southern Mississippi that says restoring Amtrak service will boost tourism significantly, greatly benefiting Mississippi’s beaches and casinos. They point to the report of a special Gulf Coast Working Group, created by Congress, that estimates the cost of resuming Gulf Coast passenger service at $5.4 million. They point to the fact that the Biden administration, Amtrak, and the three states involved are all willing to furnish the necessary operating funds.

But after five years of negotiations, you still can’t take the train to Gulfport, Biloxi, Pascagoula, or anywhere else along the Gulf Coast. CSX, which controls most of the track along the route, insists that restoring Amtrak service would interfere with the seven or eight daily freight trains it runs daily along the Gulf Coast. It’s an argument that rail corporations often deploy against passenger service.

The objection is absurd on its face. During World War II, when troop and military freight trains crowded this route along with civilian freight traffic long since lost to trucks, dispatchers still managed to move 11 scheduled passenger trains per day between Mobile and New Orleans. These included the storied “Pan American” of country music fame. And they did it using and telegraphs and hand operated semaphores, not the efficient GPS technology available today.

CSX’s recalcitrance is a negotiating strategy to get Amtrak either to go away or to pony up for huge infrastructure investments that would mostly benefit CSX itself. The railroad says restoring Amtrak’s two trains requires a second main track, new sidings, siding extensions, yard bypasses, and modernization of drawbridges. At one point, CSX put the price tag at $2 billion–orders of magnitude more than estimates provided by the Federal Railway Administration and other independent experts.

Such maneuverings reflect the growing power of hedge funds and other “activist investors” over the railroad industry. In 2017 the financier Paul Hilal used his activist fund Mantle Ridge to buy a $2 billion stake in CSX and win control of its board. Hilal used this power to depose CSX’s long-standing management and replace it with a team of downsizing specialists committed to boosting short-term profits by shrinking the railroad’s physical assets, labor force, other expenses. The new focus on cost cutting and downsizing seriously degraded CSX freight operations and caused CSX to take an impossibly hard line with Amtrak.

Exasperated by the railroads’ refusal to negotiate in good faith over the restoration of Gulf Coast service, Amtrak recently appealed to an independent federal agency known as the Surface Transportation Board. But deregulation left the federal government with very limited control over railroad infrastructure. When Congress and the Nixon Administration created Amtrak in 1970, they relieved railroad owners of their previous obligation to provide passenger service at their own expense. Half a century later, the federal government has no clear legal standard to decide when freight railroads must grant Amtrak access to their track, or what the terms of service will be. And since Amtrak owns track only between Boston and Washington and a few other places, dependence on freight railroads is a huge obstacle to improving or expanding passenger rail service.

For example, more than ten years’ studying and lobbying has been dedicated to the question of whether Amtrak will be permitted to run more than one round-trip train per day between Harrisburg and Pittsburgh. Public policymakers must wrestle with many knotty problems; this shouldn’t be one of them. There’s plenty of track capacity. Amtrak ran two roundtrip trains along the mostly three-track mainline as recently as 2004. But Norfolk Southern says today that bringing back that second train would create unworkable disruptions to its freight service. The railroad’s latest maneuver was to demand that the State of Pennsylvania pay for a study to calculate how much the public must pay Norfolk Southern for the necessary capital improvements, such as a possible fourth track.

Another example is the drawn out battle Amtrak and the public had to wage to restore passenger service between Boston and Portland, Maine. By the time Amtrak came into being, passenger service on the route had already been discontinued. To get it started again, Amtrak, along with state and local governments, had to agree to pay the railroad that owns the tracks tens millions for capital improvements. Then it to took another decade of litigation before the railroad, now known as Pan Am, would allow Amtrak to run its trains fast enough so that people would want to ride them. A pending merger between Pan Am and CSX now threatens the public’s considerable investment in that passenger route and any prospect of expanding Amtrak service elsewhere in New England.

Biden recently signed an executive order that commanded the Surface Transportation Board to put more pressure on railroads to stop their habitual practice of delaying Amtrak trains by making them wait for passing freight trains. That’s helpful. But the order failed to clarify what rights Amtrak possesses to expand service, and on what price it and other public entities must pay railroad owners for capital improvements. Because there’s no clear statutory authority, some industry insiders predict Amtrak’s legal fight to restore Gulf Coast passenger service will go all the way to Supreme Court, which could take years. State and local governments seeking to establish commuter rail service have even less legal leverage than Amtrak in negotiating terms with private railroad owners.

It’s much the same story when you consider the prospects for expanding freight rail service in the U.S. Don’t expect much progress unless we claw back Wall Street control.

There’s an urgent and overwhelming societal need to divert more freight from trucks to trains. Freight trains are three to five times more fuel efficient than trucks, and produce far less emissions. Indeed, when electrically powered by overhead wires, trains can be emission-free, and lack the battery disposal costs that plague electric trucks. According to one study, a modest investment in electrifying freight railroads could reduce carbon emissions by 39 percent and, by 2030, remove an estimated 83 percent of long-haul trucks off the road.

Moving more freight by rail would also reduce the number of Americans who are killed or injured by collisions with large trucks, a casualty rate of 156,000 people per year. In addition, it would reduce dramatically the damage done to America’s roads and highways by large trucks–each of which causes the same wear and tear as 9,600 passenger cars.

Yet hedge funds, private equity firms, and other financiers are using their control of highly monopolized, underregulated railroads not to expand rail freight but to sell off rail assets and hand over all but the highest margin business to trucks.

Some of this downsizing is justified by the decline of the railroads’ thermal coal business as electric utilities convert to natural gas. But most of the downsizing results simply from financiers forcing railroads to shed all but their most lucrative lines of business. Such practices threaten to shrink the nation’s rail network to the point of non-viability, but so long as rail expenses fall faster than rail revenues, the short-term return on assets increases. That’s all Wall Street cares about.

The scale of the downsizing is dramatic. One measure is the rapid disappearance of box cars. During the ten years leading up to 2019, even as GDP increased by nearly 50 percent, the railroad box car fleet shrank by one third. Between 2000 and 2019, the trade journalist Bill Stephens reported, the equivalent of 16,132 merchandise freight trains, each with 75 cars, vanished from the tracks of CSX and Norfolk Southern. The main driver of this decline was an industry trend known as “de-marketing,” in which railroads actively turn away profitable but low-margin business—for example, hauling grain or consumer appliances—if the move doesn’t involve huge volumes or if it requires box cars to be hauled back empty. As a consequence, many farmers now have to use expensive trucks to get their crops to market while many kinds of manufactured products become far more difficult if not impossible to move in towns and cities where the railroads will no longer do business.

Railroads are also making it more expensive and cumbersome for shippers to realize any advantage from combining shipment by truck with shipment by rail. Especially for trips over about 500 miles, moving containers by both truck and train is much more fuel efficient and environmentally friendly than using trucks for the entire journey. During the 1980s and ‘90s railroads won substantial market share back from trucks in some lanes by offering such inter-modal service. But that was before Wall Street started demanding that railroads limit themselves to the highest-margin business.

Bowing to such pressure, in 2018 the Union Pacific and CSX discontinued their partnered service on 197 of 301 cross-country container train routes. As a consequence, even shippers who still use railroads to ship containers wind up making much greater use of trucks. Rather than taking a container from Midwest cities to Baltimore, for example. CSX will take it only as far as Chambersburg, Penn. and then make the shipper hire a trucker to drive the remaining 77 miles to Baltimore.

Railroads have also been stripping out terminal capacity. Wonder why it took so long to get that new car you ordered? The shortage of rail terminal space is a major reason for the widespread logistical bottlenecks that have occurred since the economy began recovering from the Covid pandemic.

In July, the Union Pacific railroad told customers it was suspending all container freight service between West Coast ports and its Global IV terminal in Chicago, a hub clogged with stacked containers that the railroad lacked the capacity to sort and redirect. The embargo immediately meant that still more boxes coming from Asia, with everything from auto parts to transistors, piled up on docks as West Coast ports waited for canceled trains. As the chain reaction continued, the steamship line HMM warned customers to expect more delays and announced restrictions on loading containers bound for Chicago. Rail expert Larry Gross calculated that it would take 50 double-stack trains, each carrying 800 20-foot containers, to haul away the pileup caused by just one week of suspended rail service.

Why was Global IV overwhelmed? In large part because, to appease Wall Street’s demands for higher margins, Union Pacific closed a separate Chicago facility, Global III.

Wall Street has also pressured railroads into cutting expenses by reducing the frequency of freight service. If you live near railroad tracks, or if you drive regularly over grade crossings, you may have noticed that railroads run freight trains much less frequently nowadays, and that the trains they do run can stretch as long as three miles. The industry refers to this as PSR, or “Precision Scheduled Railroading.” In practice, PSR has nothing to do making trains run on precise schedules. The term was coined by the late E. Hunter Harrison, a railroad executive who, starting in the 1990s, boosted railroad stock prices through radical downsizing. This made him the darling of hedge funds like Pershing Square Capital Management and Mantle Ridge.

The late CSX CEO Hunter Harrison pioneered the use of radical downsizing to boost the price of railroad stocks. (Larry MacDougal/The Canadian Press via AP)

PSR mostly just involves running fewer trains to fewer places using fewer employees, while imposing all kinds of new fees on shippers. After Harrison implemented PSR at CSX, Norfolk Southern and Union Pacific and other railroads imitated him, and freight rail operations deteriorated nationwide. In 2019, Congress held hearings where shippers relayed example after example of paying more for worse service. Since then, CSX and other railroads have taken PSR still further by ripping out yards and laying off hard-to-replace employees such as locomotive mechanics and engineers. Between 2014 and 2019, before COVID had any impact, the four largest railroads laid off 30,000 mostly unionized workers.

The downsizing was so great that railroads can’t meet the post-pandemic surge of freight shipments. As a consequence, still more freight will crowd onto the nation’s highways. “We can’t let hedge fund managers write the rules of railroading,” complained Rep. Peter DeFazio, (D-OR), chairman of the House Transportation Committee, in May, as he called for an investigation of the way PSR has degraded railroad freight service.

Deregulation and a retreat from antitrust enforcement also feeds the financiers’ control over railroads. Since 1980, the number of major, or Class 1 railroads has shrunk from 33 to seven –-a number that will drop to six if a proposed merger between Canadian National and Kansas City Southern wins regulatory approval. The result is that more shippers are served by only a single railroad. There’s always trucks, of course, but some commodities (grain and chemicals, for instance) are too heavy and bulky to move economically by truck for more than short distances.

Captive shippers once could depend on the Interstate Commerce Commission to protect them from predatory pricing, but in 1980 the Carter Administration and Congress stripped the government of almost all its practical ability to do so. The combination of deregulation and lax antitrust enforcement that ensued leaves railroads free to hike prices or degrade service standards.

The shippers’ loss has been the railroad stockholders’ gain. Less than three years after Mantle Ridge brought in Harrison to run CSX, the railroad’s stock price doubled. Today, its new CEO says he’s committed to growing the business—but that isn’t necessarily the railroad business. On his watch, CSX bought a trucking company and used a $5 billion stock buyback program to raise the company’s stock price and fatten his own $15 million compensation package. The stock of other Class 1 railroads have also surged thanks to cost cutting that now allows railroads to spend less than 60 cents for every dollar they take in as revenue.

This is the industry on which Congress and Biden propose to bestow $66 billion. To protect that investment, we’ll need to do a lot more.

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