NEW YORK — Martin Oberman, chairman of the Surface Transportation Board, had several complimentary statements in his address Thursday to the RailTrends conference about progress in the nation’s rail sector. He called out several Class I CEOs by name for praise.
One who didn’t receive compliments was Union Pacific CEO Jim Vena, who assumed the role in August.
In contrast to his RailTrends address last year, when his criticisms were more broad and not as company specific, Oberman — who announced at the end of his speech that he was leaving the STB — began his remarks with what could be viewed as praise.
For example, he talked about “a number of positive developments across the network,” led by the acquisition of Kansas City Southern by Canadian Pacific to form Canadian Pacific Kansas City (NYSE: CP), a single system linking Mexico, the U.S. and Canada. That move, Oberman said, was likely to have led to other joint ventures in the industry, including the recent upgrade of intermodal service between BNSF and J.B. Hunt (NASDAQ: JBHT) and an agreement earlier this year among CPKC, CSX (NYSE: CSX) and short line conglomerate Genesee & Wyoming to create a direct interchange in Alabama that is targeted at improving service between Mexico and the U.S.
But after praising by name such CEOs as Keith Creel of CPKC and the management of BNSF, Oberman turned his attention to Union Pacific (NYSE: UNP) and Vena. His primary criticism is that even as other companies have disavowed furloughs and layoffs as a regularly invoked tool, UP has gone a different way. Oberman said UP has had furloughs as recently as this week.
“In sharp contrast with the other railroads, his first few moves leave me concerned and bewildered,” Oberman said. The furloughs will “necessitate reducing previously budgeted maintenance during the last six weeks of this year by tens of millions of dollars.”
And if that cut in maintenance was in the budget for 2023, Oberman said, “presumably the budget makers determined that maintenance needed to be done.”
UP President Beth Whited pushed back against Oberman on Friday, the second day of the annual sold-out RailTrends conference in New York. RailTrends is organized by independent Wall Street analyst Tony Hatch and Progressive Railroading.
Departing from her prepared remarks, she made reference to Oberman’s statements as having given the audience “the mistaken impression that there’s deferred maintenance happening at the end of the day.” She did not mention Oberman by name.
Whited said the normal maintenance program at UP is that track, tie and bridge replacement work starts in the calendar year in the southern part of the country and makes its way north. When it is completed, “we allow these workers to take the rest of the year off and then come back to work in January,” she said. “As we speak, there are thousands of workers doing inspections to keep the system safe.”
During a question-and-answer session, Whited said UP did furlough slightly less than 100 mechanical employees earlier in the fall, but all were offered opportunities elsewhere in the company. “A number of them took us up and said, ‘Yes, I’d like to work in another location,’” she said. “So the net furlough was not that many.”
UP is “actively hiring” in several locations, Whited said. Hiring is particularly difficult in areas with significant needs but where the population base isn’t high; North Platte, Nebraska, site of a giant rail yard, was cited as an example.
Oberman in his address returned to a familiar theme: Railroads, in this case UP, are too focused on shareholder returns to adequately service their networks.
He cited an email sent by the company to its workforce about the latest round of layoffs that said the cuts were as a result of “budget controls in today’s business environment.”
“In other words, the most natural explanation for these furloughs and reduction is to make the financials look better,” Oberman said.
“What’s troubling is that I fully expect that Wall Street analysts will know that these adjustments to the financial statements don’t reflect real improvement in performance,” Oberman said. “They’re just accounting maneuvers aimed at supporting the UP stock price.”
That stock price has hardly been a high flier; in the last 52 weeks, it’s up about 3.3%. But that’s better than Norfolk Southern (down about 16.6%) and CSX (barely more than flat for the year).
Oberman said the furloughs are coming after UP has been the only Class I railroad to have service embargoes in the last year, a situation that led to Midwest congressional representatives asking the STB to take steps to ease the squeeze.
Among the focus of Oberman’s praise was NS CEO Alan Shaw. Oberman said that on a recent earnings call, Shaw was “met with significant pushback from a number of analysts over a difficult financial picture this year, to a large extent caused by a unique event,” a reference to the East Palestine, Ohio, derailment in early February.
During his presentation at RailTrends, Oberman referred to the “cult of the OR.”
According to a transcript of that earnings call, Shaw made the following statement that likely would have aligned with what Oberman was talking about: “Look, we’re committed to industry-competitive margins. We said that from the get-go. We’ve also said that returns follow the investment. We’re investing over the long term and we’re not going to chase short-term [operating ratio] targets.”
Before Whited took to the stage at RailTrends on Friday, UP released a statement pushing back on Oberman’s comments, without identifying him by name.
“Accusations that Union Pacific does not invest in its infrastructure and maintenance are untrue,” the statement said. “This year alone, the railroad will spend $3.7 billion on capital investment, of which a significant portion is allotted for maintenance.”
As to the furloughs, the UP statement said those moves are “part of the capital planning process.”
Oberman touched on some of the same themes as he did in 2022: spending too much money on distributing profits to investors and too little on infrastructure. He said in the last 14 years, railroads “have extracted $253 billion — that’s over a quarter of a trillion in profits — out of their businesses and sent them back to their shareholders in buybacks or dividends.”
During that time, the Class I railroads spent only $40 billion on what he called “expansion capital,” which is not normal maintenance but would “add to the railroads’ capacity to operate faster and more reliably.”
UP’s current quarterly dividend is $1.30 per share. It was raised to that level from $1.13 at the end of May 2022. It has held at the $1.30 level for six consecutive quarters. That is a relatively long stretch compared to the historic UP dividend history, recently surpassed only by a seven-quarter stretch during the heart of the pandemic.
At a yield of about 2.35%, it is about 20 basis points less than the payout at NS (NYSE: NSC) but more than 100 bps higher than CSX.
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