Money Rehab with Nicole Lapin - What a Toxic Cloud Over Ohio Has To Do With Railroad Sick Leave Policy

Episode Date: March 9, 2023

Last month, a toxic cloud hung over Ohio. Reports have focused on the chemical reactions that led this to take place… but the real origin of this event isn’t chemical, it’s financial. Today, Nicole explains what happened, and what it has to do with the railroad industry.

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It's time for some money rehab. Last month, a toxic cloud hung over Ohio. Reports have focused on the chemical reactions that led this to take place. But the real origin of this event isn't chemical. It's financial. Today, I'm going to be breaking down what happened and what it has to do with the railroad industry. So to start, let's take a look at the industry by the numbers. Every year across the country, U.S. freight rail cars move an average of 1.7 billion tons of raw materials and manufactured goods. To give you an idea of just how much that is, it would take over 99 million trucks to move the same amount.

It's about 4,000 Empire State Buildings worth of materials being moved every year with a lower carbon footprint than those millions of trucks. Moving all this stuff, coal, cars, chickens, has earned railroads serious cash. In the past decade, the major freight rail companies in America, and there are only seven, have almost doubled their profits. In the last decade, profits went from $15 billion in 2012 to $27 billion in 2021. That's an incredible rate of growth, especially in an industry that's been around since women wore corsets and life expectancy was about 40. Railroads owe those amazing profits to the work of one man, Hunter Harrison, who was kind of

the Ford of the railroad. He was obsessed with efficiency and created the Precision Scheduled Railroading, or PSR, system. The goal of the system is to create a lower operating ratio, or how much a company needs to spend to make a dollar. The lower their operating ratio, the higher their profits. Railways used to use a hub-and-spoke system. In other words, trains would come in from all over to a central line hub and then be redirected to their final destination. This is how most airlines work. You fly to a hub and then be redirected to their final destination. This is how most airlines work. You fly to a hub and then you take another plane to your final destination. PSR cuts all of that out and focuses on the most lucrative lines. So instead of going through a hub and reshuffling

things, trains run back and forth along several dedicated routes with the goal being to make as few stops along the track as possible. A single train with limited stops requires a smaller crew to run. In terms of increasing profits and lowering the operating ratio, this system has been massively successful. At one of the first railroads where Harrison instituted the system, the operating ratio was reduced from 98% to 60%. They were making two cents for every dollar they spent before PSR and 40 cents after. That's a huge boost in profits. He went on to work for many other freight rail lines and repeated his success. Even after his death, other rail

lines adopted his methods. All of this sounds great, right? Increased efficiency, increased profits. Cool. Sign me up for the Harrison coaching class because that's how you run a business. Well, not so fast. And this is where ethical issues come into the fold. Net-net, there is a lot to learn from the railroad industry as a case study. And the lesson may even be how not to run a business. Because while investors love Harrison's one easy trick for making bank, everyone else hates it. We all know railroad employees hate it, and we will get to them, but railroad customers hate it as well. Back in April of 2022, railroad customers across a broad section of industries testified in a

hearing held by the U.S. Surface Transportation Board that since railroads had instituted PSR, service has sucked. One industry head said, quote, precision scheduled railroading is doing less with less, end quote. Their complaints included not having the correct cars available for their goods, not picking up goods on time, and having a terrible or non-existing complaints department. At the same hearing, the deputy secretary of agriculture testified about farmers not being able to get the grain they needed for their herds because rail service in their area was so unreliable. The service deteriorated so much that when rail workers threatened to strike, the head of the largest national trade organization for chemical companies in America

wrote a letter of support for the workers, and his letter solidly blamed precision-scheduled railroading for the workers' terrible conditions, for the poor service members of his organization experienced, and ominously hinted that the railroads would struggle in the future to provide safe and reliable service. So just to recap, here we have an industry that is making record profits but alienating its customer base. Now, normally, when customers get turned off by how a business operates, they can go to a competitor. Or if there is none, a new business might start up to fill that gap. But railroads have what is called an economic moat. An economic moat is a term that Warren Buffett, whose company Berkshire Hathaway owns one of the seven major rail companies

we keep talking about, popularized to describe a company that has a long-term advantage over its competitors. Railroads have two major moats. First, there is a high switching cost. For companies to start moving their products by trucks or by some other method, they would have to find enough vehicles to move their wares, and there simply aren't millions of extra trucks with licensed drivers just waiting around for their loads. incredibly high barrier of entry. All freight rail tracks in America are privately owned. To build even one mile would cost millions of dollars and require extensive and complicated permission from the areas where they would be developed. So no one is going to do that. Realistically, there is never going to be a competitor for these seven railroads. And there's no way to get millions more trucks on our roads. So freight rail customers are trapped. Also trapped by precision scheduled railroading are the workers. Since switching to PSR,

most major freight railroad companies have reduced their staffing levels and consequently decreased safety and increased stress on the remaining workers. Almost a year ago, Vice reported that Norfolk Southern, an American railroad corporation, had gone from spending a minimum of five minutes doing safety inspections on each car to pressuring workers to spend less than a minute and a half inspecting each car. Workers were also reporting that they had so little time that they were sometimes unable to inspect every car on the train. They also complained that maintenance was being neglected. These complaints were a huge part of the strike and collective bargaining agreements that rail worker unions were advocating for in

the fall. Fast forward to February 3rd, 2023, a Norfolk Southern train traveling from Illinois to Pennsylvania carrying toxic materials derailed in East Palestine, Ohio. The crash impacted 50 of the train's 150 carriages, and 10 of those impacted carriages were carrying toxic items. The solution? The railroad ordered a, quote, controlled detonation where they burned off chemicals in order to reopen the rail line. Scott Deutsch of Norfolk Southern said this controlled detonation process entailed creating a small hole in each one of the tank cars and allowing substances to go down into a pit which was then lit on fire. Yes, that is as scary as it sounds. And yes, this is what created the toxic, poisonous cloud over

Ohio. The Philadelphia Inquirer quotes a former battalion chief in Ohio's nearby Youngstown Fire Department who said, quote, we basically nuked a town with chemicals so we could get a railroad open, end quote. Thousands of residents were forced to evacuate the nearby neighborhood of Youngstown, but now are told by state and federal officials and Norfolk Southern that their homes are not polluted. Meanwhile, residents are reporting fish and frogs dying in nearby streams and say the air smells like a mixture of nail polish remover and burning tires. Unfortunately, most of the coverage about this derailment has focused on railroad workers wanting more sick days. The reason for that is in large part because the work schedules and sick leave policies of the seven major freight railroad companies are so bananas that it is almost impossible to explain. But I am going to try. But let me warn you, they're pretty nuts. Under PSR, there are no regularly scheduled train trips.

The company waits until they have enough cargo for a run to be profitable. Therefore, there is no work schedule. Rather, there's a list with everyone's name on it, and when the train is ready to go, the boss calls the first couple people on the list to come in and work. But everyone on that list? They're expected to be on call. When you get the call, you're expected to be there within 90 minutes. And the call can come as soon as 12 hours after your last shift. So if you just got off at 2 p.m., you're back on call

and can be called in at any time after 2 a.m. that night. Then you're on the train working for about 12 hours straight, at which point your shift is over and the company puts you up in a hotel until the call goes out that there is a train going in the other direction. Again, same expectation. You're on call 12 hours after your last shift ends and you have to get into work in 90 minutes. So that's how scheduling works. Now let's review the sick leave policy. And it is just as wild. The sick leave policy revolves around a point system. Workers get 30 points but can get more points by being on call 24 hours a day or 14 days straight. If a worker wants a day where they're not on call, they can spend

their points to take a sick day. Taking a sick day can cost between 2 and 15 points. The points change depending on several factors the workers have no control over. Here's an example. Let's say you manage to save up 45 points, but over Thanksgiving you get food poisoning. Since it's a holiday weekend, each sick day, or really a day not being on call, costs you 15 points. So in just three days, you can burn through all your sick leave and have no choice after those three days than to just go drive a train, sleep deprived, dehydrated and sick, or be fired, which is just as unsafe and miserable as it sounds. So just to be absolutely clear here, when rail workers were asking for sick days, they were asking to just be able to not be on call. Because of course, PSR institutes that there simply aren't enough workers to go around. When it comes to making a profit, understaffing is a feature and not a bug.

Right now, rail companies are making big bucks. We're talking about billions and billions of dollars. And they are making shareholders very happy. But they aren't making customers happy, and they're failing their employees. As we all saw in Ohio, they're also failing to keep everyone around them safe. But that economic moat still stands. The question is, will shareholders and regulators force these companies to do the right thing? Will the lawsuits coming out of East Palestine, Ohio, and the reputation of Fallout from the crash be enough to change things? Will we actually listen the next time the head of a union says, and this is a verbatim quote from two years ago, It's only a matter of time before fatigued workers, unrealistic inspection policies,

and unqualified inspections result in a major incident in someone's neighborhood. For today's tip, you can take straight to the bank. If you work at a company with more than 50 employees and suffer from a serious illness, have a sick close family member give birth, or have an emergency related to your or someone in your family's military service, you are entitled to time off under the Family Medical Leave Act. While this isn't paid time off, it is federally required by law if you and your workplace meet a certain criteria. Hopefully you work in a less toxic environment than we just talked about and are able to actually take the time off you need. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin.

Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you.

Thank you for listening and for investing in yourself, which is the most important investment you can make.