Why Some Kids Might Get Their Presents Late This Christmas

America’s railroads are far more monopolized and even less regulated than they were a century ago.

This holiday season, Americans are expected to spend a record $720 billion on all sorts of gifts from tablets to toys. But there’s a hitch. The demand for truck drivers far exceeds the supply of them. While many shippers are desperately turning to railroads to haul more of Santa’s bounty, Wall Street financiers are insisting that railroads turn away the business.

Yes, you read that right. Even when demand for freight rail transportation is surging, railroad owners are dramatically cutting back on capacity and service to boost short-term profits.

Consider the case of CSX, which connects most major U.S. cities east of the Mississippi River. Since 2017, the railroad has laid off 6,000 employees, dramatically cut back on capital spending, and slashed the number of trains it runs—as well as hundreds of the routes it serves. On September 17, CSX and Union Pacific—which serves major U.S. cities west of the Mississippi River—discontinued service on 197 out of 301 cross-country routes that the two rail giants partnered on.

This means that shippers, or companies that want to send goods across the country, can no longer send a container directly by rail from Houston to Baltimore, for example. Instead, CSX will only take the container as far as Chambersburg, Penn., where the shipper will have to hire a trucker to drive the remaining 77 miles to Baltimore. It’s the same difference if the shipper tries to use CSX’s only remaining competitor in the East. Norfolk Southern, for its part, will take the container only as far as Harrisburg, Penn., where the shipper will have to arrange for a trucker to take the container 76 miles to Baltimore.

Ann Warner, a spokesperson for the Freight Rail Customers Alliance, a coalition of companies and trade associations advocating on behalf of freight shippers, says CSX’s changes increase “the uncertainty of paths that shippers can take to try to secure reliable, cost-competitive, rail-shipping alternatives.” Ultimately, CSX’s service cutbacks also mean more trucks on the road and more highway deaths. Because trucks are much less efficient than trains, that means more diesel fuel use and greenhouse gas emissions. For the kids, it may mean lighter, even empty, Christmas stockings this year.

So why would CSX owners do this? Because all the cost cutting brings short-term profits and a soaring stock price. Between the beginning of 2017 and the end of this year’s third quarter, CSX labor expenses declined by 18 percent while the value of its stock rose by 106 percent.

The man who figured out how to pump up railroad profits by cutting railroad service was E. Hunter Harrison. Over the course of his career at the Illinois Central Railway, Canadian National Railway, and Canadian Pacific Railway, Harrison implemented his trademark program: “precision scheduled railroading.” Besides cutting capital and labor costs, precision scheduled railroading has meant less frequent, longer trains and fewer routes.

Harrison arrived at CSX thanks to a new hedge fund, Mantle Ridge, led by founder and CEO Paul Hilal. Mantle Ridge had, and still has, only one investment: an initial $1.2 billion stake in CSX stock purchased in late 2016 that’s worth nearly $3 billion as of last quarter. In January 2017, using Mantle Ridge’s ownership stake, Hilal exhorted CSX to hire his partner, Harrison, to implement precision schedule railroading.

By March 2017, CSX agreed to Hilal’s demands, in large part because other shareholders salivated at the thought of Harrison boosting CSX’s profits right into their pockets. Reporting on the hiring, the Wall Street Journal noted that“the depth of investor support for his leadership at CSX was unexpected,” and quoted Harrison saying that “shareholders took a much more active role than I’ve ever seen before. They wanted change.”

Harrison was in poor health but still able to negotiate an incredible package. In an industry in which rank-and-file workers are subject to random drug tests, Harrison refused to allow an independent doctor to examine his reportedly ill health while negotiating his contract to be CEO. The $35 million that he made by the time he passed away last December made him one of the highest paid CEOs in 2017. Harrison’s protégé and successor Jim Foote stayed the course this year and announced plans in March to further cut long-term capital spending by 20 percent. Then he also completely cut domestic intermodal service to Detroit in May.

CSX and Foote are far from done. Earlier this month, the company announced that they would be cutting 230 more domestic routes and 65 international routes in January. On their third quarter earnings call last month, they reassured investors that more cuts in jobs and capital investments would be in the pipeline for the future. Foote explained that they were waiting to make more changes “because we made a commitment to our customers we wouldn’t make any kind of dramatic change until after peak season.”

Due to CSX’s spectacularly successful financial performance, other railroads are now also under pressure from Wall Street to imitate its service cuts. On the same day this past September that Union Pacific and CSX ended those nearly 200 cross-country routes, Union Pacific announced its own plan to cut costs and services across the board—called “Unified Plan 2020”—almost surely to copy CSX.

The U.S. has learned before that railroads cannot be run solely to maximize profit at the expense of service. That’s because the public suffers when it can’t get the things it needs. In his 1914 book, Other People’s Money, Louis Brandeis included a whole chapter, entitled “The Curse of Bigness,” in which he described how bankers forced well-engineered railroads to neglect investments in our infrastructure. Rather, they favored financial manipulations for profit. But now, America’s railroads are far more monopolized and even less regulated than they were a century ago.

Matthew Buck

Matthew Buck is a reporter-researcher with the Open Markets Institute.