By Justin Franz
Outgoing U.S. Surface Transportation Board Chairman Martin J. Obermann said last week that public safety and the American economy as a whole are at risk if aggressive activist shareholders continue to get their way with Class I management by forcing them to make drastic cuts in pursuit of short-term profit.
In remarks on February 29, to the Southeast Association of Rail Shippers’ spring meeting, Obermann said that service issues following the pandemic were a direct result of executives cutting their workforce and that there was no doubt the crisis “depressed the nation’s industrial output.” Almost two years after the STB demanded that Class I executives answer for the industry’s shortcomings, Obermann said he’s worried that some in the industry are again heading in the wrong direction.
Obermann’s comments come as the investment group Ancora Holdings is trying to overthrow Norfolk Southern CEO Alan Shaw. The group has said they want to boot Shaw and put in their own management to increase safety on the railroad following last year’s explosive derailment in East Palestine, Ohio. But many observers, including Obermann, don’t buy that.
“Several weeks ago, Ancora wrote me a letter. The essence of their message was that they had taken a $1 billion dollar stake in NS in order for it “to become a safer railroad.” Really? What hedge fund raises $1 billion to promote safety anywhere?” Obermann told the shippers group.
After a series of hearings in early 2022, most of the Class Is, including CSX Transportation, Canadian National, CPKC and NS, made steps to try and be more resilient to economic changes. Specifically, they made moves to increase their workforce to handle traffic surges. Obermann said such moves benefit the public, the economy and shareholders. But some shareholders don’t see a benefit to preparing for the long term and instead want quicker gains. One of the best ways of doing the latter is lowering a railroad’s operation ratio through cuts, something that was preached by the creator of Precision Scheduled Railroading, Hunter Harrison.
“It does not take a degree in higher mathematics to understand that there is another way to lower the OR than by reducing the numerator, i.e., which includes the amount spent on payroll. The OR will also go down if you increase the denominator—that is by having enough resources to attract new business to the railroad, increase the volume—the number of loads—and thereby increase total revenue,” Obermann said. “That is the vision being employed up to now by this new group of CEOs—particularly those at CSX, CN and yes, Norfolk Southern.”
Obermann said if people want a preview of what could happen to NS, they should look at what has happened to Union Pacific since Jim Vena took control last year. Obermann blasted Vena for reducing his workforce and capital improvement budgets while other railroads were increasing both. Last week, the head of the Federal Railroad Administration sent a letter to UP stating that he was concerned about safety on the Class I railroad because of the continued cuts, particularly to maintenance of way departments.
Obermann concluded his remarks by stating that the federal regulator would take steps to prevent service issues in the future, including allowing for reciprocal switching, something that the Class Is have long resisted.
“To be clear: Railroads are a regulated monopoly,” he said. “They have a common carrier obligation to the public interest and to the nation’s economy. Unlike other businesses, railroad management and owners are not just free to manipulate the business by draining the company’s resources for short-term gain. Those of us in the rail community—and every U.S. citizen—need to stay tuned.”
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