Working on a freight train is not a glamorous occupation, according to the editorial director of Freightwaves.

According to Rachel Premack, Editorial Director of FreightWaves, “there is no Top Gun for the rail industry”. While I discovered a three-season reality TV show called Railroad Alaska with an onslaught of bears and a porcupine infestation, I’m pretty sure Premack’s premise still applies.

Crew members receive fair pay but often work unfavorable hours. Starting salaries for plumbers, electricians and carpenters are lower than the starting salaries offered to trainees on the largest US freight railroads ($50,000). Earnings for conductors and engineers can exceed $80,000 a year, not including bonuses and other compensation. However, many people in the workforce rely on on-call shifts. On Thanksgiving Day, an early morning call can mean getting up at 4:30 a.m. to embark on a multi-day trip. The work can be tedious and physically demanding, and it often takes place outdoors in all weathers.

Despite years of cutting costs and making greater use of remaining labor to improve profits, US railroads now appear to have weak near-term prospects for their stock price. Crew shortages led to a decrease in service and volume. It looks like a strike will be postponed but not prevented. Immediate hiring of additional staff may be too costly. Employing them could prevent a worse outcome than not hiring them.

Think about the setting and the history of rail transport in this region. Eight so-called Class 1 railways operate as three regional freight duopolies; we’ll get to the math in a minute. East of the Mississippi, CSX rivals CSX -0.32% (ticker: CSX) and Norfolk Southern NSC +0.41% (NSC) are battling it out. There are two major railroads in the West: Union Pacific UNP +0.71% (UNP) and BNSF, which Warren Buffett’s Berkshire Hathaway BRK.B acquired -0.32% (BRK.A) in 2010. Canadian National Railways (CNR), Canadian Pacific Railway (CP) and CNR-0.04% (CNI). The Canadian Pacific has just acquired the Kansas City Southern, a railway linking the American Midwest to Mexico. Kansas City performed the railroad equivalent of the courtship rite by placing its shares in a voting trust while the Surface Transportation Board assesses the situation. Amtrak is the eighth largest passenger railroad in the world, and thus the eighth “Class 1” railroad.

In his 2020 letter to shareholders, Warren Buffett eloquently summarized the first 150 years of the railroad as “frenzied construction, shenanigans, overbuilding, bankruptcies, reorganizations and mergers.” The last six years have seen a 29% decrease in the class 1 population; this may be related to the pandemic in some cases.

Between those two times, a man called E. Hunter Harrison, born in Tennessee but raised in Tennessee, temporarily oversaw the Canadian railroads and the American CSX until his death in 2017.

He pioneered a method called “precise programmed railroading” (PSR). This requires moving away from convoluted hub-and-spoke systems, in which trains only move when fully loaded, stop at marshalling yards to change carriages, and keep goods separated. More and more often, trains run at fixed times on direct routes, carrying a variety of products.

The result is that railroads employ fewer people to operate longer trains. Stocks have outperformed the stock market for the most part over the past decade due to falling expenses as a proportion of sales and rising profits. According to Buffett, an accurate railroad forces consumers to change to fit the railroads. The only major carrier that has not taken the approach is BNSF. However, it has also become less bulky.

There are now several outward signs of stress. When the outbreak hit the United States, freight railroads saw a drop in business as trucking companies filled the void. The market fell 3.2% in June. Cargo containers are once again piling up in the tightly guarded Port of Los Angeles, with the majority of containers being rail boxes that have been waiting for some time. According to JP Morgan analyst Brian Ossenbeck, who recently downgraded Union Pacific and Norfolk Southern to Neutral, the industry’s inability to attract or retain people is the biggest impediment to volume growth.

After President Biden formed an emergency commission to oversee talks between management and labor on July 15, the training industry averted its first major strike in three decades. On August 17, he will propose a recommendation without legal value. The industry must reach an agreement by mid-September to avoid a 30-day cooling-off period.

Bascombe Majors, who follows the business for Susquehanna Financial Group, says a walkout is unlikely to happen. In the past, compromises have resulted from the recommendations of the presidential council; if it doesn’t happen this time, Congress can step in and make one for them. While Wall Street expects increases of 2% to 3%, the majors think they will be higher. Profit projections may be affected since the railways’ largest expense is labor, which accounts for 20% of revenue.

Citi analyst Christian Wetherbee recently downgraded U.S. railroad stocks to neutral for a different reason: lackluster economic indicators that make earnings growth expectations seem too high. However, Wetherbee is still an advocate for the Canadian rail industry. The increase in volumes is a more recent trend there.

Since Canada was an early adopter of precision railroads and experienced rapid expansion, American railroads felt that reducing grease would increase their competitiveness and attract consumers. . However, that did not happen. There is growing evidence that Canada’s rapid expansion can be attributed to structural advantages. Coal is an important commodity transported by rail. While the United States has more thermal coal used by power plants, its use has declined as more affordable and cleaner natural gas has been mined by these facilities. Canada is producing more of the type used in steelmaking, where demand remains strong. Canada’s major cities are dispersed and connected by fewer roads, giving the rail system an advantage over vehicles.

Railroads in the United States had better come up with a stronger recruiting pitch quickly if they want to keep their businesses afloat. The transportation industry as a whole is actively seeking new employees. About 80,000 truckers are needed in the United States immediately. There is a need for 10,000 pilots, and if retirement rates continue to rise, that need could reach 25,000 by the end of the decade. In contrast, ad-supported online behemoths have recently announced job freezes and staff reductions. While it’s hard to imagine former Tik Tok programmers adjusting to life on the railroads, freight companies will soon need innovative solutions.

Michael A. Bynum