Much is being made in the railroad industry and other transportation media about the Precision Scheduled Railroading (PSR) wildfire sweeping from coast to coast. Proponents of PSR will tell you that it will prove to be the industry’s savior. But it also begs the following question; just what does the industry need to be saved from?
According to transportation industry news provider Transport Topics, the combined operating income of the Class I railroads topped $16 billion for the first half of last year, based on company reports. The carriers are now well into their second decade of ever increasing profits, setting new records virtually every year.
So, why the stampede toward PSR? And what does PSR really mean for railroad workers, shippers and the nation as a whole? While everyone seems to have a slightly different definition of PSR, there are a couple of common threads in all the definitions.
What the PSR crowd is in unanimous agreement on is that the process will be driven by maximization of every single asset. That includes even the fixed-point shippers, as Norfolk Southern and Union Pacific eliminated more than 425 domestic and nearly 100 international origin-and-destination interline pairs in just the first six weeks of the year.
As a result, hundreds of locomotives and cars already have been mothballed, and that number will increase into the thousands in the next few years. Dozens of shops and yards have already been closed or are slated to be shuttered.
And where a line doesn’t pass muster under the profit maximization test it will be sold off or leased to some short line. NS did just that last year with an entire operating division, and CSX has been trying to do with its main line along the Florida Panhandle since last fall.
While all this is unfolding, thousands of railroad workers already have been furloughed.
For BLET members, there are signs beyond yard closures, demotions and furloughs. Increasing numbers of Distributed Power locomotives are used to run trains of dangerous lengths in order to eliminate road jobs, vastly exceeding the train lengths that current communication technology can manage.
Of even more concern is that many railroads refuse to consider the introduction of actual scheduling for our work shifts in road freight service. There is no consistent “precision scheduled railroading” insofar as BLET members are concerned. Predictability for road freight crews on many railroads is all but non-existent, creating avoidable fatigue risks every day. And the carriers continue to complain about crew size even when a single crew of two is moving hundreds of truckloads hundreds of miles every day across America. All of this combined creates the potential for a much less safe workplace, all in the name of short term profits.
What is the purpose of all this asset maximization? At a conference held in Atlanta in February NS identified three key targets for investors.
One was that it plans to reduce its operating ratio, which measures operational costs as a percentage of revenue. The carrier’s operating ratio was 65.4 percent in 2018. NS vows to slash that ratio by over 8 percent in just three years’ time.
The second is that NS plans a dividend payout ratio of 33 percent. What this means is that one out of every three dollars in profits will be paid to shareholders as a dividend.
On top of that, the third key is that NS plans to continue share repurchases using free cash flow and borrowing capacity. In other words, much of the two dollars in profit that are not paid out in dividends will be used to buy back stock and, if there isn’t enough money to do that, then the railroad will borrow money for buybacks.
These financial goals reveal PSR for what it really is ... a scheme to suck up as much of the railroad’s revenues as possible and distribute it to investors, particularly to the hedge funds that own an ever-increasing stake in the industry.
PSR is nothing more than what has been called by many industry observers, and with good reason, vulture capitalism. Hedge fund investors swoop into a company and drive down operating costs in order to wring out every possible dime in profits, but don’t share those profits with the workers who created them. They buy back stock to pump up the price, and when they run out of cash they borrow against the company’s assets to buy back more stock and pump up the prices some more. At the same time, operational downsizing cuts are removing much more than “fat”; they cut into the muscle and bone of the operation and are much harder to repair when the hedge fund investors move on to greener pastures.
And what happens when this merry-go-round stops? Just ask the folks who used to work for Sears, or Kmart, or Toys ‘R’ Us, to name just a few of the more recent victims of vulture capitalism. Their companies were cannibalized in the name of making wealthy investors even wealthier.
To be sure, it is very unlikely that CSX or KCS or NS or UP will disappear from the economic map the way those companies did. But history instructs what happens when vulture capitalist schemes like PSR have squeezed all of a railroad’s assets dry.
In 1968 the Pennsylvania and the New York Central railroads merged to become the Penn Central. When it became apparent that the two operations were not a good match, a system-wide cannibalization and liquidation of assets began so that stock prices could be maintained and dividend payments continued. Penn Central’s shippers and workers were mere afterthoughts. Less than two and a half years after the merger, the Penn Central became the largest corporation in U.S. history — to that point — to declare bankruptcy ... and the carcass of the railroad was dumped on the nation’s taxpayers to rebuild.
Significantly, Burlington Northern Santa Fe, which is the only privately-owned Class I railroad in the country, has said “Thanks, but no thanks” to PSR. Perhaps BNSF understands this history, or maybe it knows that short-term gain for a few ultra-wealthy investors at the cost of long-term pain for everyone else is not a plan for long term success.
Former Republican President Theodore Roosevelt said in 1913, four years after he left the White House, that “Of all forms of tyranny, the least attractive and the most vulgar is the tyranny of mere wealth, the tyranny of a plutocracy.” Time will tell if PSR is what the railroad industry needed. Unfortunately, much harm could come to the nation’s railroad infrastructure by the time that question is answered.
By Dennis R. Pierce