Freight railroad service is terrible, even without the threat of a strike

New York(CNN) The fact that a freight railroad strike didn't start on Friday is a huge win for the US economy and its still struggling supply chain. But that doesn't mean freight railroads are providing good service to their customers.

Many of the problems tangling up the supply chain, driving up prices and slowing the economy can be traced to the steady decline in freight rail service in recent years. Even the railroads themselves admit that the nation's current freight service is a problem, mainly because of fewer calls to pick up or drop off freight cars, routine, prolonged delays and the general unreliability that plagues the industry, its critics and customers say.

"Railroads understand that service is not at the level customers expect or deserve. Aggressive measures are underway to put the right plans, people and equipment in place to improve service and reliability," said a statement last fall from the Association of American Railroads, the industry's trade group.

"Over the past year, Union Pacific accelerated our hiring efforts and we have reached our goal of hiring 1,400 employees, of which nearly 1,000 have been trained," said a statement from Union Pacific — one of the four major railroads that collectively handle 90% of the nation's rail freight. "As a result of our hiring efforts and our employees' hard work, Union Pacific has made progress to increase fluidity and better meet our customers' demands and we will continue to do so to provide the service our customers expect and need."

Union Pacific, the AAR and the other major railroads all say that statistics show service levels are improving, even before all the new workers are in place.

Some experts who represent rail customers who have complained about service in the past say service has gotten better since earlier this year.

"We're not all the way back, but for most carriers things are improved from the spring and summer," Max Fisher, the National Grain and Feed Association's chief economist and treasurer, told CNN. "There's still room for improvement."

Widespread complaints

But many other business groups are on record complaining about the poor service, including longer transit times and fewer trips by the railroads to pick up freight or return empty cars to the businesses they serve.

"With the potential for a strike now behind us, we hope the rail industry turns its focus to improving timeliness, stability, and affordability for customers in the ethanol and agriculture sectors," said Geoff Cooper, CEO of Renewable Fuels Association.

Cooper and other groups representing rail customers said they were relieved that Congress acted a week ago to stop a strike that could have started this past Friday.

"It is important to note, however, that 'normal service' is still incredibly bad and increasingly expensive for shippers and consumers," said Rob Benedict, vice president of the American Fuel & Petrochemical Manufacturers, a trade group that represents the nation's refineries. "With the threat of a full work stoppage off the table, the next Congress must elevate the long-overdue issue of freight rail reform to finally correct these abuses of service.

A recent survey that Benedict's trade group conducted of its members found that all respondents have experienced rail shipments delayed or held up for three days or more. One member noted that at the time they completed their survey, they had more than 350 cars delayed in transit for more than 72 hours.

Many businesses that depend on rail are reluctant to speak publicly about the problems, even if they are on record voicing their concern to railroad regulators. The businesses have few alternatives than to try to keep relations with the railroads as smooth as possible. Their trade associations, however, are less reluctant to speak publicly.

So are rail unions, many of which are furious about being blocked from striking by Congress. The contracts imposed upon their members, they say, will only add to worker dissatisfaction and workers will quit, creating more staffing shortages and freight service that's even worse than it is now.

"The American rail worker has spoken, as have the American rail shippers," said a statement from the transportation division of the Sheet Metal, Air, Rail Transportation union, the largest rail union, which represents about 28,000 conductors. "The national freight rail network is broken, and the need for long-term rail reform is clear. Labor and shippers are united on this front."

The Congressional action that blocked the strike and imposed unpopular contracts on workers "will worsen supply chain issues and further sicken, infuriate, and disenfranchise railroad workers as they continue shouldering the burdens of the railroads' mismanagement," said the Brotherhood of Maintenance of Way Employes Division, the third largest rail union.

Long waits now the norm

The biggest concern of shippers is the reduction in service calls that railroads make to pick up freight, and the amount of time it takes to get the goods delivered. The rail cars themselves are mostly owned by the customers, who are anxious to get those their empty cars returned to fill them with freight once again.

The ethanol industry ships nearly 400,000 carloads a year, according to the Renewable Fuels Association. But trains carrying ethanol are now sitting idle 30% more often than they did a year ago, and 40% more than before the pandemic, Cooper said.

Rail delays are also a major part of the problem with the flow of goods through the Port of Los Angeles and the neighboring Port of Long Beach, the major entry points for shipping containers from Asia.

Putting profits ahead of service

The problems date back to well before the pandemic. Statistics show rail service is now much worse than it was at the start of this century, and has gotten particularly bad during the last five years, according to Pete Swan, professor of logistics and operations management at Penn State Harrisburg.

"Railroad management has been focused on maximizing payouts to the shareholders and their return on assets, not the quality of service," Swan said. "What's got us into trouble now is there's no incentive to provide good service. There's lots of incentive to have the service suffer, and reduce the costs."

And profits are definitely up. Union Pacific (UNP), Norfolk Southern (NSC) and Berkshire Hathaway's (BRKA) Burlington Northern Santa Fe all reported record earnings in 2021.

Rail customers have almost no alternative for the products they ship. Trucking has its own shortages and service issues, and can't competitively move the volume of freight the distance that rail can.

Many rail customers are what's known in the industry as "captive shippers," companies served by a single railroad and can't negotiate for better rates between different providers.

Swan said it's unlikely any other business could stay afloat providing the same poor quality of service as the railroads. "What other business has the monopoly power that the railroads do?" he said.

Calls for regulation and penalties

That is one reason that business groups are pushing for tighter regulation and penalties to be placed on railroads that cause delays or have service problems.

"We're all for free market solutions, but this isn't a free market," Benedict said. "That's why you need a government backstop."

The Surface Transportation Board, one of the railroads' federal regulators, has held hearings to consider penalties for bad service, and there is also legislation before Congress.

Not surprisingly, the railroads argue this is the wrong solution.

"Today's temporary service challenges in no way justify an about-face on the market-based principles that brought the industry back from the brink and paved the way for the safest, most efficient freight rail service in the world," said the AAR's statement.

The industry argues those proposals "would have far-reaching, negative impacts on the efficiency of the freight rail network but combined they would be devastating for long-term US rail service, reliability and investment."

Meanwhile, the idea to increase regulation on the railroads increased regulation has is gaining widespread support across much of the business community looking for better service.

"The railroads are very adept at the Washington insider game, that's why these conditions have lasted this long, but I think the tide has turned," said Chris Jahn, CEO of the American Chemistry Council, the trade group that represents the US chemical industry. "Congress and the Surface Transportation Board have more work to do to resolve the freight rail problems that are continuing to put the brakes on the US economy and prolong the supply chain crisis."