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Freight rail’s Q3 dominated by labor contract uncertainties, service issues

CSX, Union Pacific kick off Class I earnings season Oct. 20

A Union Pacific train. (Photo: Jim Allen/FreightWaves)

A last-minute tentative labor agreement struck by the railroads and the two largest U.S. railroad unions dominated the headlines in the third quarter. But headcount updates, questions about rail service improvements, a surprise announcement that there is a new CEO at CSX and efforts to fully restore service in the wake of Hurricane Ian also are expected to be addressed as the Class I railroads release their Q3 2022 earnings later this month. 

“These macro events are sort of overwhelming the mundane day-to-day incremental improvement,” said Tony Hatch, a senior transportation analyst and independent consultant.

At the start of 2022, the railroads were talking about volume growth. But service disruptions in the first half of the year tempered that optimism. Meanwhile, pandemic-related absences in early 2022 exacerbated the lack of crew availability, which itself was brought about by declines in headcount that have taken place over the last several years.

For the second half of 2022, industry observers will be watching for several things. One is how and whether rail service has improved, in part because of aggressive efforts by the Class I railroads to add more train and engine employees so that network capacity can be more nimble.

“Service levels continue to be a major issue and that’s especially true now with the STB’s [Surface Transportation Board’s] eyes on the fall grain shipping season,” said Mike Baudendistel, FreightWaves’ market expert for rail and intermodal. 

If the railroads have improved their crew availability, particularly in regions where it was harder to find suitable employees, another question is how much of that effort will help grow rail volumes, even as macroeconomic indicators point to a possible global market slowdown.

People will be watching “whether getting crews back will stimulate growth,” Hatch said. “Is there pent-up rail demand that wasn’t solved because of the fluidity issue that can be now solved and recaptured when crews get out there? Where are they in terms of the most recent service and operating metrics? What we really hope to see is incremental improvement. And I think we will, for the most part, see that.”

Indeed, many of the shipper complaints to STB this year have focused on an inability to get the desired number of railcars, which supports the notion of pent-up demand. 

“That ‘what is the nature of the pent-up demand’ is a big question to me. And what is the true nature of the Kansas City Southern mantra … [of] service begets growth?” Hatch said.

This SONAR chart shows a drop in domestic intermodal volume that coincided with Norfolk Southern’s (NYSE: NSC) announcement that it would stop in-gating containers ahead of a potential strike. That volume has since recovered roughly to year-ago levels. (FreightWaves SONAR) To learn more about FreightWaves SONAR, click here.

The potential ratification of the outstanding labor agreements — and whether the road to ratification is smooth or bumpy — is another issue that industry observers may be keeping tabs on during third-quarter 2022 earnings calls. 

On one level, observers might be looking for how the Class I railroads are thinking about their costs, including whether they have reserved enough money for wage increases or back pay.

“The biggest question I have going into the 3Q earnings season is whether the railroads have fully accrued for the forthcoming increase in labor costs,” Baudendistel said. “It will also be interesting to see how the Class I management teams address questions about whether higher labor costs give the carriers cause to take pricing up more than they otherwise would.”

At another level, there is uncertainty about what will happen once all the unions approve and ratify their contracts, as well as uncertainty over how long it might take for outstanding contract-related issues to resolve, especially as the Brotherhood of Maintenance of Way Employes Division said Monday that its members have voted against ratifying the labor agreement.

Do the railroads and unions negotiate on work roles, which could aid the railroads as they try to address technology advances, and how will they address quality-of-life issues so they can reduce attrition? Hatch asked. 

“These are questions that are going on now that cannot be answered in October in all likelihood. I’m sure they have ideas about this, but they will wait until they have something more concrete,” Hatch said.

International intermodal volume is down a little from last year and down significantly compared to 2019 and 2020, according to this SONAR chart. (FreightWaves SONAR)

An additional issue that might be brought up is the effect that a slowdown in U.S. imports and tempering of ocean vessel rates could have on the railroads. 

“I am interested to see whether the railroads expect a softening ocean shipping market to translate to lower international intermodal volumes and whether the railroads believe that domestic intermodal is losing share to the highway in the more competitive lanes (e.g., CHI-ATL) in light of the soft truckload spot market,” Baudendistel said. 

With the fourth quarter of 2022 already at hand and the start of 2023 just at the horizon, one question will be what effect having plenty of warehousing and inventory have for the freight rail industry and the broader supply chain, Hatch said. 

“Everybody’s worked hard to address these issues individually within a supply chain, and you have a big bunch of boxes coming in and a big bunch of warehouses being built and a big bunch of chassis is coming in,” Hatch said. “Are we going to go from significant shortage to surplus in 2023? That’s a better problem than ‘we need a more resilient supply chain.’ But when we swing so much, will the reaction to that swing be to cut back again?”  

CSX (NASDAQ: CSX) and Union Pacific (NYSE: UNP) will kick off earnings season for the Class I railroads, with both announcing their third-quarter 2021 financial results on Oct. 20.

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Joanna Marsh

Joanna is a Washington, DC-based writer covering the freight railroad industry. She has worked for Argus Media as a contributing reporter for Argus Rail Business and as a market reporter for Argus Coal Daily.