Jeff Hartman 1/30/2023
One of the most salient features of our culture is that there is so much bullshit. ~Harry G. Frankfurt, Princeton University Professor Emeritus, On Bullshit
What do Hunter Harrison—slash-and-burn railroad turnaround maven who was an early implementer of Precision Scheduled Railroading, and Benito Mussolini—murderous Italian dictator—have in common? 1) Both are said to have made the trains run on time, and 2) both are dead. What’s the difference between the two men? One said, “Cultures change, one funeral at a time” and emphasized the importance of “detoxing the culture by weeding out the non-believers.” The other was just a dictator.
When five Union Pacific (UP) railroad corn trains from the mid-west were missing in action in December 2022 somewhere between mid-west grain elevators and California feed lots, half a million hungry Foster Farms cattle were shambling around barren feed lots like zombies, and 50 million Foster Farms chickens and turkeys on the verge of starvation were staring at each other with murder in their hearts, ready to take up cannibalism. UP blamed the situation on bad winter weather.
Foster Farms, though, snitched off the Feds, filing a petition with the Surface Transportation Board for an emergency service order due to a significant deterioration in rail service from UP. Again. Foster Farms wrote that while Union Pacific had at one time provided service “with reasonable regularity… but has demonstrated without any doubt that it can no longer do so for the indefinite future under its current operating plans and priorities.”
American railroads are actually not entirely for-profit operations. They are common carriers that are essential to the success of the American economy as a whole, and the Surface Transportation Board has the power to regulate how they operate in the same way that the FDIC has the power to regulate banks. Until fairly recently, though, a phone call from the CEO of a Class I railroad was enough to get the ICC or the STB to back off proposed regulations and orders that displeased the management of a big railroad.
The STB investigated for a day or two and ordered Union Pacific to deliver the grain to Foster Farms with the highest possible priority and to inform the STB daily of the precise location of any and all UP corn trains making their way toward Foster Farms. As well, the feds ordered UP to send top executives to a mandatory hearing where representatives of the STB, UP, rail unions, and UP customers would discuss why a Union Pacific meltdown was again threatening the lives of 50M Foster Farms chickens, turkeys, beef cattle, and milk cows.
It turns out a similar chicken-feed crisis had occurred between UP and Foster Farms just six months earlier. But that was in June, when frigid, winter weather probably hadn’t seemed like a plausible excuse. In the summer of ‘22 starving chicken crises, Union Pacific blamed their failure to get Foster Farms’ chickens fed on “congestion.”
If you’re thinking congestion seems like the kind of weasel word that belongs in Prof. Frankfurter’s book on the theoretical underpinnings of “bulls***” and the rigorous distinction between bull***, humbug, balderdash, claptrap, hokum, drivel, buncombe, imposture, quackery, and everything else short of high-octane lies, you aren’t alone.
In June, STB Chairman Martin J. Olberman—an attorney who’d previously served as Chairman of Metra, Chicago’s commuter railroad, as well as a Board member for the Chicago Metropolitan Agency for Planning and the Chicago City Council—who clearly viewed his job as more than that of an errand boy for the railroads like the good old days, had issued an emergency order to UP to get the chickens fed in a great hurry.
Plenty of Union Pacific customers, rail union members, and rail shippers thought “congestion” had little or nothing to do with what civilians might imagine, i.e., lines of long freight trains standing motionless on the tracks with the crews playing TikTok and texting cute women on Tinder or something while waiting their turn at a single-track switch. This included outfits like Foster Farms in danger of killing chickens, turkeys, and cattle if UP trains were too late, but also outfits merely in danger of having to shut down assembly lines, lay off workers, lose money and possibly go out of business if the trains ran seriously late. According to Trains Magazine, STB Chair Martin Olberman told the RailTrends conference in New York in November 2022 that “congestion” was a euphemism for “we don’t have enough crews to move our trains and keep our network fluid.” Picture trains standing motionless with no one playing TikTok or texting because there’s nobody in the lead cab. The non-UP definition of congestion: Cutting to the bone on “lanes,” routes, crews, locomotives, rail cars, wages, and safety; for instance, running super-long trains with skeleton crews.
Something was definitely off the rails (sorry) between Foster Farms and Union Pacific. But what? You had a giant railroad ($21.8B in 2021) and a giant meat packing company ($3B in 2021) in a marriage you’d have thought was made in heaven: Two big companies whose business mattered to each other, a scheduled series of nine or ten unit corn trains per month that traveled directly from Point A (mid-west grain elevators) to Point B (Central Valley California feed lots) on a regular basis with no switching required in a situation where making the trains run on time was critical to keeping Foster Farms feed lots from transmogrifying into Nazi-scale death camps, where millions of dead chickens, turkey, and beef cattle had to be bulldozed into mass graves.
It looked good on paper, but by late December 2022, Foster Farms milk cows hadn’t been fed in 11 days and chickens on the verge of starvation were giving other chickens the stink eye, as chickens will do, and gearing up to peck each other to death and cannibalize their buddies in lieu of Union Pacific feed corn.
Meanwhile, a nationwide rail strike had been narrowly averted in September by federal government involvement, and plenty of people thought rail union workers in a mood to strike was highly related to the troubles at Foster Farms.
Many rail customers and workers blamed such problems on Precision Scheduled Railroading (PSR), a business modelthat arrived at various American railroads like the Black Death in a slowly accelerating epidemic in the decades following deregulation. (The Staggers Rail Act of 1980 deregulated American railroads, many of which were, at the time, on life support or had already gone bankrupt.) These same people made a compelling case that PSR was to blame as well for the September 2022 narrowly averted nationwide rail strike.
Trains Magazine agreed. In a January 2023 article titled, Union Pacific Has Lost Its way, Bill Stephens asserts that Union Pacific, “has a long list of problems, many of them self-inflicted as a predictable result of its pursuit of a 55-percent operating ratio.” Some of the problems enumerated by Trains included:
- Amtrak’s Sunset Limited, which runs on UP tracks was late 90 percent of the time as a result of Union Pacific running freight trains too long to fit in any passing sidings, forcing the shorter passenger trains to wait in sidings or behind long freight trains too underpowered to keep up track speed.
- Train crew shortages that preexisted the current tight job market that followed the COVID pandemic.
- Enormous numbers of shipper embargoes (in which rail service for specified rail shippers is temporarily eliminated) in the years following UP’s adoption of Precision Scheduled Railroading in 2018 revealed flaws in the system, whether a lack of crews, locomotive power, or track capacity.
- Two STB emergency orders in the same year.
- Safety issues including the deaths of several workers within a few months and a significant derailment of over 30 rail cars.
According to Trains Magazine, running an overly lean railroad to lower UP’s operating ratio, (which is the point of PSR), had backfired. It costs more to run an under-resourced sluggish railroad with a high recrew rate and unpredictable service. If Union Pacific is unable to stabilize service over the next few years, predicted Loop Capital Markets analyst Rick Paterson in a note to clients, the expected result is more share losses to BNSF railroad, failure to arrest continuing share loss to trucks, and more pushback from captive shippers fed up with high prices, culminating in more risk of reregulation and stock that’s little more than a no-growth buyback and dividend yield play. Trains wrote that UP should follow the lead of Norfolk Southern: Drop the focus on the operating ratio and concentrate on building a railroad that can provide reliable service year in and out.
Precision Scheduled Railroading (PSR). Three words. But what is it?
Wired Magazine summed up PSR as the attempt to simplify a complex rail network by 1) running fewer, longer trains, 2) replacing, where practical, unit trains carrying one commodity with manifest trains consisting of a heterogenous mix of rail cars carrying more or less anything, and 3) cutting labor costs by laying off large number of workers. The result was a bare-bones operating model that significantly amped up the profits and stock price while creating a lack of resilience to weather, pandemics, and other significant problems that were very predictable in the long run but very unpredictable in the short run
Some people (not employed in upper management at Class I freight railroads) thought PSR was lipstick on a pig: Railroading, yes, but neither precision or scheduled. Fancy words to disguise what was really going on: A gigantic money grab fueled by ultra-rich Wall Street venture/hedge types who’d engineered the hostile takeover of Canadian Pacific and then CSX, and installation of an evil genius CEO named Hunter Harrison, who’d previously implemented PSR at Illinois Central and Canadian National, and came out of retirement with enthusiasm to slash and burn the guts out of Canadian Pacific and CSX to make the rich richer, rail workers and customers be damned. After which Norfolk Southern and Union Pacific were “inspired” into implementing their own version of PSR. Operating margins soared to 41 percent in 2021, which was “off the charts” compared to other transportation companies. Meanwhile, workers at PSR railroads complained that leaner operations piled more work on them at the cost of fatigue, injuries, and burnout. Strict attendance policies to boost staffing following huge layoffs had led to protests, resignations, near-strikes, and more railroaders quitting what used to be lifelong work.
On paper, the idea of PSR was to improve the profitability of railroads and provide better, faster, and more reliable rail service by implementing efficiencies that allowed a railroad to transport the same amount of freight with fewer locomotives and freight cars (and, thus, a lot fewer people on the payroll), which would improve the railroad’s Operating Ratio (OR). Operating Ratio describes the relationship between the operating profit of a company and its net sales. It’s used to specify the revenue earned by a firm after paying all its operating expenses. OR is a shorthand to establish the earning efficiency of the company, i.e., how much money must be spent to bring in a dollar of revenue.
PSR (it didn’t have that name at conception) was conceived of in an M.I.T.-led study that looked into how to make railroads more efficient and more competitive compared to trucks and other methods of transportation. Note: Not how to pump the stock price. The study examined the following:
- Minimizing railcar “dwell” time in yards.
- Reducing rail car classifications.
- Using multiple traffic outlets.
- Running fewer specialized and more general-purpose trains.
- Balancing train movements by directions.
- Minimizing locomotive power requirements.
- Striving for more smoothed-out steady work.
- Conversion of Hub-and-Spoke models where possible into Point-to-Point models (like Southwest Airlines) that theoretically ship cargo faster by eliminating lengthy stops and handling.
- Departure scheduling.
- Terminal-to-Terminal vs loading dock-to-loading dock, i.e., focusing on moving rail cars instead of trains.
PSR strategies articulated by Hunter Harrison and other railroad CEOs (who are extremely interested in pumping the stock price!) to implement PSR have described tactics such as:
- Scheduling trains (rather than running trains when a specified number of freight cars accumulate)
- Removing rail cars and locomotives from the fleet
- Reducing the size of employee payrolls.
- Consolidating rail networks
- Increasing train speeds
- Running longer trains
- Improving the fuel efficiency of locomotives and trains
- Implementing more efficient technology
- Running more manifest (mixed-cargo) trains rather than unit trains so it was easier to assemble an efficient-size train and send it on its way on time.
Assuming anyone in the real world actually intends to implement these tactics, you may notice that some of them have significant potential to conflict with each other. For example, if you lug giant, underpowered trains with a minimal number of locomotives powered by onboard diesel generators powering AC traction motors, you may save money on fuel and locomotives and crews, but you’re not going to increase train speeds. If you consolidate rail networks by abandoning and scrapping entire rail lines or fall back from two-way double tracks to a single track with passing sidings, you save on track maintenance and property taxes, but you’ve lost the flexibility to maintain schedules if business increases or tracks wash out or get inundated by mud slides or burned up by forest fires.
And so on.
Amongst all American companies, a 60-80 percent OR is considered good. By the time every Class I railroad operating in America (with the possible exception of BNSF) had caught PSR, the managements of these railroads were aiming at an OR of 55 percent.
Keep in mind that by the 1990s, when Hunter Harrison was implementing PSR in a significant way in the real world for the first time at Illinois Central (a mid-sized north-south road that had been losing money at a furious rate), the U.S. rail network had already shrunk from a peak of 254,037 miles in 1916 to 170,000. Some of this decline in trackage was a huge rip out of spurs that at one time could put rail cars at every loading dock, and much of the rest was the loss of “redundant” track created by scores of railroad mergers that occurred when the federal government essentially stopped enforcing anti-trust legislation in the interest of efficiency at the expense of competition. In 1939 there’d been 132 Class I railroads. By 2012, consolidation, bankruptcies, and migration from rail to truck freight had reduced the number of Class I’s to eight. With the recent takeover of Kansas City Southern by Canadian Pacific, in 2023 there will be six Class I’s operating in the U.S.
At Foster Farms feed lots in California, directly serviced only by Union Pacific, the company was forced, at one point, to truck feed grain from more distant BNSF tracks, since Foster Farms had no local direct connection from any other railroad, and the STB, despite occasional threats to implement reciprocal switching (allowing railroads to run trains on competitor’s tracks where there was no competition), had not implemented it to any significant extent.
After the Staggers act deregulated American railroads in 1980, it took railroads varying amounts of time to fully appreciate that they now had significant market power—which the right kind of ruthless CEO could wield to drive up the price of the road’s stock, which is how CEOs and stockholders make most of their money. In the process of implementing PSR at Illinois Central and Canadian National, Hunter Harrison not only improved the profitability of these PSR roads and greatly increased the stock price but he managed to employ enough metaphorical high explosives to move the Overton window representing broadly acceptable behavior from modern American corporate common carriers. Harrison loved stockholders, despised unions, and tolerated customers, who he was certain knew less than he did about what they needed. Exactly what cognitive dissonance theory predicts a person will feel when they’re screwing over customers and workers to make rich people richer.
Hunter Harrison beta-tested PSR in his first CEO gig at Illinois Central in the early 90s and at Canadian National later in the decade when CN bought the newly-profitable Illinois Central and promoted Harrison to run the whole show. And railroad stockholders fell deeply in love. Hedge fund guys were praising Hunter Harrison as the greatest railroader since E.H. Harriman built the Union Pacific.
Everyone else? Not so much.
Other people noticed that, unlike E.H. Harriman, Harrison didn’t build anything. What he did do was to deconstruct what other railroaders had built. Then he ripped out tracks and sold them for scrap, sold off vast amounts of rolling stock, deployed locomotives with AC traction motors that could lug heavy trains up long hills at a snail’s pace at very high fuel efficiency without burning up the windings the way you would with DC motors. Harrison bulldozed customers into modifying their operations into what was good for the railroad (nice little chicken farm y’all got there, Foster Farms, be a shame if the chickens all croaked or something). Harrison browbeat and fired workers (including executives he’d sized up as unable or unwilling to get with the PSR program like the other worshipful yes-men who slavishly took orders), made many people work six or seven days a week, made sick days essentially unavailable and generally cracked the whip until he’d created a vast climate of overwork and fear that made working at PSR railroads pure hell. And drove up the stock price with orgasmic operating ratios as low as the 50s that made billions for the stockholders. PSR worked great. For stockholders. For a while.
President Bill Clinton and Osama bin Laden agreed on one thing. Clinton said people preferred someone who was strong and wrong to someone weak and right. Bin Laden said it slightly differently. He said people always prefer the strong horse. By the time Hunter Harrison was slashing and burning his way toward PSR in the final months of his life as CEO at CSX Transportation, he was a CEO rock star who didn’t mind telling anyone f*** you, and a lot of people worshipped him. Even some people who despised him had to admit that Hunter Harrison was a straight shooter when it came to telling the truth about what he was doing. Harrison blamed service problems that arose at CSX in the summer of 2017 on the “old guard at CSX resisting change. A few have pushed back and continue to do so,” he said. Hunter Harrison was the strong horse.
And he was not some celebrity CEO air-dropped in from PepsiCo or some other massive corporation whose experience had everything do to with financial tricks and nothing whatsoever to do with running a railroad. Harrison was a guy who loved getting his hands dirty, who dropped out of college after his freshman year when he took a summer job as a rail car undercarriage oiler and discovered railroading was the love of his life.
Hunter Harrison was at the Illinois Central inventing and implementing incremental rail yard efficiency improvements, as the railroad slowly sunk into desperate enough shape that someone rolled the dice and gave Harrison take a shot as CEO implementing PSR, previously an academic theory invented in the mid-70s, in a real-world application. Harrison cracked the whip and accomplished his first big turnaround, which vastly increased the profitability of a moribund railroad and convinced people with money that railroads—surprise!—could be a super-high-yielding investment.
Once the idea caught hold, PSR spread like a disease. When stockholders saw what could be done to make one company a “better railroad,” management at other roads came under intense pressure to achieve the same types of operating ratio or see their nice CEO gig vaporize in a hostile takeover.
By the time Union Pacific began rolling out its own PSR plan in 2018 (“Unified Plan 2020”), big Class I railroads had laid off something like a third of their workers in recent years in a single-minded quest to lower the operating ratio to Precision Scheduled Railroading’s grail 55 percent while averting hostile takeovers like the ones that took Canadian Pacific Railway and CSX Transportation when Hunter Harrison and his hedge fund backers smelled railroads ripe for the old slash-and-burn.
Hedge-fund managers love low operating ratios, and cutting expenses has a greater effect on OR than increasing revenue, and it’s the reason PSR railroad management and stockholders view labor unions as The Enemy.
These days, by the way, “trains crews”—which STB Chair Martin Olberman thought Union Pacific didn’t have enough of to keep their network flowing—may consist of one guy all alone on a three-mile-long train notching the throttle at Zero Dark Thirty in some remote area where help or medical assistance may not be available for hours if something goes wrong—a mode referred to as Single Person Train Operation (SPTO). And there are many other potential downsides. Think about it. In two minutes, the engineer of a two-person crew can be driving the train at 12 mph past a conductor with a flashlight looking for problems who’s looking at the end-of-train device on the last car in fifteen minutes, but an SPTO engineer walking to the other end of a three-mile train is going to need an hour or so, plus another hour to walk back to the locomotive. SPTO has one purpose—cutting the cost of labor.
It’s one thing to increase efficiency by turning around rail cars faster so they’re in use more or even all of the time so you don’t need as much capital invested in rail cars. If rail cars wear out faster, you repair them or buy new ones. But it’s different with people. Besides increasing the Coefficient of Misery by screwing every bit of work possible out of rail crews, some people have made the case that SPTO cost-cutting can be dangerous. And that cost-cutting, as typified by SPTO, was, for example, a contributing factor to the Quebec Rail Disaster at Lac-Mégantic in 2013.
At Lac-Mégantic, an engineer hauling 79 tank cars filled with oil in SPTO mode reached the end of his 12-hour shift at 11 PM, seven miles from the town. The SPTO engineer, who by all accounts was one of the best at the railroad, parked the train on the main line and left the lead locomotive’s engine running to maintain air-brake pressure, failing to set enough manual brakes on individual locomotives and train cars (2-3 person-minutes of hard work each) to hold the train on a 1.2 percent grade without help from the air brakes.
The railroad, Montreal, Maine, and Atlantic (MMA), had a rule requiring setting the manual brakes on at least nine cars to hold a train consisting of 79 oil tank cars, five locomotives, a loaded buffer car, and the Locotrol car needed for SPTO. Which did not happen in Lac-Mégantic. What’s more, Transportation Safety Administration (TSA) experts testified in a criminal trial that it would actually have taken the manual brakes set on a minimum of 17 cars and possibly as many as 26 to hold the MMA oil train on a 1.2 percent grade, depending on the amount of force with which the brakes were applied. Applying the TSA figures, it would have taken one person between roughly 35 and 80 minutes to tighten enough manual brake wheels, depending on strength and will-power, not to mention any time running back and forth to the leading locomotive to rock the train with the engines to judge if you’d set enough manual brakes (a third mile each way at the 21st car) to hold the train on a hill. Try working 12 hours driving a train full of dangerous, explosive chemicals and then spending another hour and a half at hard exercise setting the brakes by yourself. Not only do two people make the job twice as fast, but a substandard job setting brakes requires a conspiracy.
After the engineer left the scene in a motel-bound taxi with only the lead engine running, a turbocharger fire resulting from substandard engine repairs to the engine flooded the area with black smoke, oil droplets, and sparks, and someone called the fire department. The fire department shut down the lead engine to prevent the 3000-hp V-16 from pumping additional motor oil into the fire, at which point there was nothing to keep air-brake pressure recharged as air leaked from various components in the system. An hour or so later, when air-brake pressure got low enough, the manual brakes of the five locomotives and two cars set by the engineer were insufficient to hold the train. A dark train with no headlight or running lights or engine noise began rolling (quietly and slowly…at first) down a 7-mile, 400-foot hill toward Lac-Mégantic, culminating in speeds literally too fast to activate the cross-buck traffic signals and gates at grade crossings in time. The runaway train cars—wheels and tracks spewing sparks and making a hellish noise—derailed on a 10 mph curve doing 65 mph and exploded into flames, which killed 49 people and vaporized most of downtown.
But, hey, extra trainmen cost money and screw up the operating ratio, so railroads have lobbied hard for SPTO.
Hunter Harrison, while running Canadian Pacific in 2015, pared the railroad to the bone, greasing the tracks with a climate of fear. To the bone meant thousands and thousands of layoffs, hundreds and hundreds of locomotives sold off, thousands and thousands of railcars sold, miles and miles of track abandoned and scrapped. Harrison screamed a lot and gratuitously fired anyone who looked at him cross-eyed, and returned billions and billions to stockholders. Harrison hated labor unions and he kept the trains rolling during a labor walkout in 2015 by preemptively training managers and executives to operate, switch, and repair trains, then putting them to work keeping the trains rolling during the walkout. Yeah, it’s just like driving a Pinto with a stick shift. “The union guys’ eyes got awful big,” Harrison recalled later with relish, “when they saw a train coming down the track at 60 mph with a manager in engineer’s cap at the controls blowing the whistle while they’re holding picket signs.” Meanwhile, 37 percent of CSX shippers surveyed switched freight to CSX’s leading competitor, Norfolk Southern, from March through July of 2017, when Harrison was furiously slashing and burning at CSX.
Union Pacific bought into the PSR bug in 2018 (in 2023 the only Class I railroad not explicitly implementing the PSR model across the board is BNSF, which is a wholly-owned subsidiary and not publicly traded, and thus under less pressure to achieve short-term results). Prior to UP’s embrace of PSR, the railroad had been implementing a few emergency freight embargoes a year. Embargoes, which temporarily cut rail service to certain customers for a specified time, were originally intended as an emergency measure in response to expanding gridlock, danger to employees and equipment, and so forth—analogous to rolling blackouts on a power grid. The idea is to keep local network problems from expanding to clog to much larger areas in the face of freak weather, equipment damage, track washouts, derails, floods, forest fires, acts of God and so on.
In 2022, at which time PSR had spread through UP like a virus, after considerable Harrison-style slash-and-burn tricks, there were roughly 1,000 embargoes at Union Pacific alone. Which caused some people to speculate that embargoes, rather than being a last resort in a rare emergency, were now a calculated part of the operating strategy for a railroad that was pursuing a 55-percent operating ratio at, apparently, any cost. Well, except to the stockholders.
During UP’s PSR implementation, the COVID-19 pandemic spread across America and the world and eventually killed 1.25M Americans and over 100M people in the world. Just in time to be a perfect scapegoat for…everything. That is, all the bullshit downsides of PSR, not to mention just about any management screwup, any wet-dream price increase, “supply chain issues” that soon combined to constitute world-wide rip-roaring inflation. You could blame anything on COVID. Anything. Insane prices. The Great Resignation. The Big Quit.
After tangling with the STB in early 2023, Union Pacific temporarily stopped all embargoes and promised to study how to do better. Since Union Pacific rolled out its Unified Plan 2020, the company had removed 1,500 locomotives and 30,000 railcars from service and eliminated the jobs of 1,000 people. In early 2020, UP reversed course and started reestablishing some services it had cut. By early 2023, UP was in trouble with its customers, its workers, the STB, and rail magazines writing headlines that Union Pacific had lost its way.
Meanwhile, Hunter Harrison was conveniently dead.