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Union Pacific CEO called to hearing in Washington on ‘disturbing’ use of embargoes

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A GE AC4400CW diesel-electric locomotive in Union Pacific livery, is seen ahead of a possible strike if there is no deal with the rail worker unions, as a Metrolink commuter train (right) arrives at Union Station in Los Angeles, California, September 15, 2022.

Bing Guan | Reuters

The Surface and Transportation Board is calling Union Pacific management including CEO Lance Fritz to appear at hearings December 13-14 about the freight railroad’s use of embargoes.

The STB, an independent federal agency with oversight of surface transportation, wants to question Fritz and other Union Pacific top executives about UP’s increased use of embargoes that the regulatory body characterizes as “substantial.”

According to STB data, UP’s use of embargoes to control congestion has increased from a total of five in 2017 to more than 1,000 to date in 2022. The agency said it has received numerous reports that the embargoes are hampering shippers’ operations and adding to supply chain problems.

UP carries nearly 27 percent of freight served by rail and nearly 11 percent of all long-distance freight volume. 

“Disruptions in UP’s service levels have a significant detrimental impact on the supply chain and the nation’s economy,” the STB said in a release. “The Board has been closely monitoring UP’s usage of embargoes and has noticed a disturbing upward trend in their usage in recent years.”

A Union Pacific spokesperson said due to its geographic span, number of yards, customer facilities, and commodity mix, “embargoes are one of the few tools, and last steps, to manage and meter customer-controlled railcar inventory levels, helping alleviate network congestion.”

The railroad also from time to time reduces Union Pacific-controlled railcar inventory, and can often work with customers to better align supply and demand without any embargo, the spokesperson said. “However, in some cases for a small percentage of customers, we create embargoes that allow Union Pacific to fairly serve everyone,” the spokesperson said.

STB has been reviewing the service reliability of the railroads, including staffing levels and the use of embargoes to stop the flow of freight as a way to deal with congestion. Government data shows a decrease in rail employee headcount in recent years as the companies adopted a model known as Precision Scheduled Railroading, though the rails have presented data to show they have been more aggressively adding workers in 2022, but overall headcount levels remain close to flat compared to last year.

The attrition of labor from furloughs has been among the sources of anger from railroad unions in the current standoff with rail management over a new labor deal. The risk of a nationwide freight rail strike in December has been rising.

“They’ve cut us to the bone, they’re working us to death. We have quality of life issues,” said Jeremy Ferguson, president of SMART-TD, which on Monday voted to reject the labor deal, with a rail strike now potentially starting as soon as Dec. 9. “We have attendance policy issues, the morale is at an all-time low. It’s time for these CEOs to take a look at their culture,” Ferguson said. “If they want to be a good railroad they’re going to have to change their ways. The members are upset with the railroad management and the CEOs’ record profits for the last five years.”

Ferguson, similar to fellow union president Dennis Pierce of BLET, referenced a recent CNBC interview with Fritz, during which the Union Pacific CEO laughed when asked about the risk of a rail strike.

“It infuriated me and it infuriated my members,” he said. “Obviously, the CEOs are out of touch, you know? They’re not paying attention to what’s going on at what we call the ballasts’ level, which is where all the work is done.”

Rail strike is possible, but 'not probable': Union Pacific CEO

The unions have support for their concerns about rail labor cuts. Surface Transportation Board Chairman Martin Oberman has said that rail carrier service has been impacted based on their own self-inflicted actions, and it is damaging the economy.

“You can’t just dump that many workers and expect to recall them when you need them, it just doesn’t work that way,” Oberman recently said on the Prospect podcast. “Corporate profits and buybacks have gone up while service has gone down dramatically.”

The STB previously called freight railroads including UP, CSX, Norfolk Southern and Berkshire Hathaway‘s BNSF, to testify in April about rail service deficiencies, which ultimately resulted in a June STB order directing rails to correct deficiencies, and referred to initial plans that had been submitted by the rails as “perfunctory” and lacking “the level of detail that was mandated by the Board’s order.”

In late October, STB noted in a release that recent data showed the four carriers meeting some of their six-month targets for service improvement, and many key performance indicators were trending in a positive direction. “However, the data continue to validate the anecdotal information that continues to be reported to the Board regarding significant service issues,” STB stated.

Richard Edelman, a top rail union lawyer who has testified before the STB, told CNBC the new business model only benefits the carriers.

“Those who now dictate the railroads’ business model do not care about ‘growing’ the business or even serving all those who currently desire rail service. They only want to serve those shippers who can be served at the target profit margin,” said Edelman, counsel for BMWED, BRS — both of which have voted to strike — and several other rail unions. “Rail workers and rail shippers are both victims of this new business model,” he said.

Ferguson has testified before the STB on the thin labor staffing. He told CNBC that union members are not only infuriated with not being able to take adequate time off, but shippers are also being disrespected.

“The railroad carriers have just about the same amount of respect for their shippers as they do for us,” Ferguson said. “The carriers don’t want to bring trains and carloads on time. They’re lagging. We wanted to give our testimony before the STB. The shipper groups could see we do care. We’re not in this just for the money, we take a lot of pride in our jobs.”

The BRS announced Tuesday it is aligning its status quo period through December 8 to align with the BMWED, the Brotherhood of Maintenance of Way Employees, SMART-TD, and the International Brotherhood of Boilermakers. If no agreement is made, a coordinated strike could start on December 9. Railroad unions who have voted for ratification have said they will not cross the picket lines and will support their fellow union workers.

Economic and supply chain impact of strike

The Council of Supply Chain Management Professionals (CSCMP) is among the entities concerned the economy would be stifled by a rail strike.

“Rail not only services domestic freight but international freight as well,” said Mark Baxa, president, and CEO of CSCMP. “This would impact the global markets as well. We have some members taking measures in anticipation of a strike. To what degree depends on their logistical needs.”

DHL Global Forwarding tells CNBC it has advised customers of the serious impact that a rail strike could have on their operations, including delays and related detention and demurrage charges.

“Our first priority has been to make them aware of this situation so that they can make preparations for the risk of delays in receiving merchandise,” said Goetz Alebrand, head of ocean freight for the Americas business of DHL Global. “As a contingency, we are also moving import boxes out of rail yards to the extent possible and reviewing all import and export flows using rail to check whether trucking is an option if strikes materialize.”

Tom Nightingale, CEO of AFS Logistics tells CNBC, “Should there be a strike at this stage, the effects will be felt in the chemical, energy, and passenger sectors in December and more broadly in January as the market preloads the supply chain in advance of the Chinese New Year.”  

If no agreement is reached between the four unions to vote down the labor deal and rail carriers during cooling-off periods, there could be a strike or a lockout unless Congress intervenes using its power through the Constitution’s Commerce Clause. Under this clause, Congress would be able to introduce legislation to stop a strike or a lockout and to set terms of the agreements between the unions and the carriers.

This story has been updated to include a comment from Union Pacific.

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