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AAR challenges points made in STB chairman’s speech to shippers

By Bill Stephens | October 12, 2021

Jefferies says rail volumes are up, rates are reasonable, and share buybacks are necessary

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Smiling man in coat and tie
Smiling man in coat and tie
Association of American Railroads CEO Ian Jefferies. (AAR)

WASHINGTON – Association of American Railroads CEO Ian Jefferies has taken issue with many of the points Surface Transportation Board Chairman Martin J. Oberman raised his speech to a shipper conference last month.

Oberman told the North American Rail Shippers that the railroad industry’s drive for ever-increasing profits resulted in a loss of market share to trucks over the past 15 years and is restraining growth today [see “Top regulator urges railroads to focus on growth,” Trains News Wire, Sept. 9, 2021]. The STB chief said Wall Street’s influence has put shareholder interests above those of other key railroad stakeholders, including customers, employees, and the public. And he was critical of railroad stock buyback programs and dividends that have put more money in shareholders’ pockets than into maintaining and expanding the rail network.

“The evidence shows that railroads have fought to maintain and grow their volumes while keeping their rates comparatively low and continuing to invest in their networks,” Jefferies wrote in an Oct. 3 letter posted on the STB website.

Oberman, using STB waybill data, said rail traffic excluding coal had declined since 2006 [see “Analysis: STB chairman flags railroad growth problems,” News Wire, Sept. 30, 2021].

But Jefferies says AAR data shows that rail ton-miles were up 9% from 2006 to 2019 when coal is excluded from the tally. “Making up for the loss of coal volume will take time, but to imply that railroads have not worked to grow volumes, especially in the face of steep coal declines, is simply not the case,” he wrote.

Jefferies also wrote that rail volumes should not be measured against the U.S. gross domestic product, but rather the goods-related GDP. The goods-related share of the overall economy has declined over the past 15 years. “That’s important because rail traffic growth is correlated quite closely with goods-related GDP,” Jefferies wrote. “Thus, one cannot draw the conclusion that railroads have not sought to grow their volumes from overall GDP data.”

The AAR chief said rail rate increases “have been reasonable in comparison to railroad costs” and that overall rates remain significantly lower on inflation-adjusted terms than when the Staggers Act partially deregulated the industry in 1980.

Jefferies defended the industry’s capital spending, which has averaged nearly 19% of revenue over the past decade – or six times higher than the manufacturing industry’s average.

He also said Class I railroad share buyback and dividend programs struck a balance between the industry’s reinvestment needs and providing the returns that shareholders demand.

“It is an unavoidable fact that shareholders and lenders will seek the highest return possible commensurate with the risk involved. No law or regulation can force investors to provide resources to a firm whose returns are lower than what the investors can obtain elsewhere,” Jefferies wrote. “If railroads are viewed as returning less to shareholders, for whatever reason, than comparable alternatives, then capital will seek those returns elsewhere or will only be available at higher costs than we see today.”

6 thoughts on “AAR challenges points made in STB chairman’s speech to shippers

  1. The ton-mile increase could just as easily be explained by the major modal shift from TOFC to COFC between 2006 and 2019… carry double the weight in one well, you double the ton-miles. In which case, the ton-mile metric could plateau or even decrease in the coming years if TOFC is completely phased out as the class 1’s seem to want, but the business is picked up by trucks as many predict.
    Measure just the carload ton-miles minus coal and intermodal, and it may tell a different story. The latest quarterly traffic report shows intermodal flatlining despite dozens of container ships waiting to be offloaded. The carload rebound is almost entirely tied to coal. How far backwards do we need to go before this disconnect between the AAR and STB ends?

  2. Joseph Samolwicz, you are just plain wrong.

    Switching from TOFC to double stack will not, in anyway, “double the ton-miles.” The railroad can get more tons on a train, making things more efficient, but the total ton-miles will be the same.

    1. If you double the capacity of a train, the ton-miles definitely doesn’t stay the same, as long as the # of trains does not decrease. I guess maybe that’s more of a market share thing when coupled with the ability to load more cargo than trucks or planes, though.

      Please DM me if you want to throw insults.

  3. The cynical AAR predictably twist statistics to fit their interests with little regard for the truth and zero regard for the public interest. When investments in climate denial stop delivering returns, they switch to greenwashing and sowing apathy in the public and elected representatives. God bless Martin Oberman.

    In this piece of spin, Jeffries muddies the waters and confuses the audience like the professional spin-doctor he is.

    Would profits fall if the industry didn’t engage in stock buybacks? No. One has nothing to do with the other.
    Does Wall Street set the bar for revenue adequacy? No. The STB does.
    If the Class 1s have operating ratios as low as 55% and net profits in the multiple billions for years in a row – can they afford to invest in growing service, capacity, and reliability of service? Of course they can. But instead they are choosing to force less profitable shippers to use trucks, even if it is bad for the shipper, bad for the public and ultimately bad for long term viability of the railroads themselves. But they are not managing this infrastructure for longevity. As one analyst characterized it to me in private – it is more like a multi-year going out of business sale.

    On the subject of coal and mode share spin. Jeffries doesn’t actually dispute the truth of what Oberman is saying, he twists the facts to instill doubt and confuse. He certainly knows that a significant part of his increase in ton miles starting in 2009 is crude oil. The AAR’s very own own fact sheet from 2013 shows the dramatic increase:
    “In 2008, U.S. Class I railroads originated just 9,500 carloads of crude oil. In 2012, they originated nearly 234,000 carloads and will likely originate around 400,000 carloads in 2013.”
    http://dot111.info/wp-content/uploads/2014/01/Crude-oil-by-rail.pdf
    (And this doesn’t include the hydraulic fracking sand that travelled on trains either. One could spend their whole life fact checking the AAR and addressing their spin. I was in a meeting with the South Coast (CA) Air Quality Board last week and when someone suggested the potential for shorter more frequent trains – and the Board member asked UP and BNSF why are the trains getting so long? They squirmed for a minute and then like good professional liars they said “Fuel efficiency” and “Less emissions.” Maximizing profits and cutting labor costs probably wouldn’t have sounded as good.

    Fundamentally, Oberman’s point is that deterioration in Class 1 service, with reduced reliability and access to service is forcing freight that used to travel by train onto roads. This obvious truth obviously harms public health and road safety, increases wear and tear on public roads and bridges and worsens congestion, and results in more GHG and other pollution. Duh. God bless Martin Oberman!

    Failing to maintain market share is a very low bar when US rail infrastructure has so much potential to actually reduce harms from long haul trucking. It’s also a low bar when this infrastructure has the potential to increase the economic vitality of US manufacturers and agricultural producers big and small alike. Imagine what supply chains could look like had we avoided 40 years of globalization – to increase Wall St. profits – combined with decades of under-investment, consolidations, shedding of branch lines and abandonment of rail service – again, to increase Wall St. profits. Ouch.

    It doesn’t take a genius to understand that when an industry reduces its workforce by 40-50k workers in a matter of a few years that that is going to result in the reduction of capacity and harm service. When Wall St railroads are allowed to mine nearly 200 years of public/private investment in an irreplaceable infrastructure in order to maximize short term profits, something is terribly askew. The greedy corporate swine doesn’t get any prettier with “PSR” branded lipstick.
    It is tragic and immoral – a betrayal of past, current and future generations.

    It only took a global pandemic to start talking about “reshoring” and supply chain resilience – FINALLY!

    But a resilient supply chain for domestic manufacturing and family farms require reasonable access to reliable rail service that does not discriminate against less smaller, less profitable shippers. Sure trucks (electric trucks) can handle the short hauls on either end – but the long hauls in a decarbonized 21st-century requires railroads.

    The reality denying palaver we hear from the Class 1s and their PR firm the AAR about them lifting themselves up by their private bootstraps relies on the public case of amnesia. Americans mostly don’t forgotten that these irreplaceable rights of way were in most cases land grants to state or federally chartered companies created to provide a critical public infrastructure. As Oberman point out, “The United States decided long ago (that) the public interest requires some balance between the railroads operating as private profit-making companies … and the public’s interest.” God BLESS Martin Oberman!

    Strangely, our current situation parallels the time of the Granger laws that preceded the creation of the Interstate Commerce Committee (ICC) in 1887 (the STB’s predecessor). The ICC was established to quiet the public outrage AND provide mechanisms to stop the railroad barons of that time from discriminating against the less profitable haul in favor of the more profitable. The railroad barons are back. It is time for a little public outrage. (Oberman can only do so much.)

    Truly, Oberman’s only fault is that he is gives the Class 1 railroads the benefit of the doubt – appealing to shippers and railroads and unions to realize the we are truly “all in this together.” As true as that is – the Class 1s would rather storm out of the room than have an adult conversation.

    God bless you Martin Oberman for reminding us of that common carrier obligations are real. They cannot be perverted and ignored without consequence. Now is a time for consequences and realignment of infrastructure with its public purpose. Perhaps the experiment of entrusting critical national infrastructure to private industry allegiant only to profits has finally run its course and it is time to try something else.

  4. In a sentence, the problem is pursuit of investment efficiency versus pursuit of the system efficacy and climate efficacy the nation needs.

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