US rail industry: ESG investors on track with better worker deal

The US has averted a crippling national rail strike by imposing a labour agreement on rail companies and workers. The intervention has failed to address a deeper issue for the rail industry: chronic labour shortages.

Years of drastic cost cutting pleased investors but frustrated customers and workers. As if by way of recompense, two ESG investors are stepping in, hoping to ease tensions. Trillium Asset Management and Impact Shares have filed proposals at Union Pacific and Norfolk Southern respectively asking the companies to offer paid sick leave to eligible workers. 

This would make business sense. It is true that it would cost the companies $321mn a year to provide seven paid days of sick leave to employees, according to one estimate. But that is less than 2 per cent of the $21.2bn in profits the industry generated in the first nine months of this year. And the cost should be offset by better staff retention.

Over the past six years, big freight rail companies have lost a combined 45,000 workers, according to the Surface Transportation Board. That is almost a third of their workforce.

Cost cutting has generated windfalls for rail companies and investors. BNSF and Union Pacific, two of the biggest operators in North America, reported record profits in 2021. Since 2010, US railroads have paid out $183bn (or $196bn in inflation-adjusted dollars) in buybacks and dividends.

Customers complain of higher prices for shoddier services and workers of exhausting schedules. Under the deal brokered by the Biden administration, rail staff will get a pay raise but not paid sick leave. 

After years of cost cutting, operating margins at big rail companies have peaked. Union Pacific and Norfolk Southern’s valuations reflect this. The two stocks trade on just 18 times forward earnings, compared with valuations in the mid-20s in April 2021.

Rail companies have cut costs to the bone. They now need to provide a better service and motivated employees are key to that. Trillium and Impact are on the right track.