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Supply chains: The rail labor mayhem that Biden entered has been brewing for years

Rail workers across the country were set to walk off the job on July 18 before President Joe Biden intervened, the latest development in a contentious saga that has been brewing for years.

In an executive order signed on July 15, Biden established an emergency three-person board of arbitrators to work with the freight railways and their 115,000 workers to hammer out a contract that has been under negotiations since January 2020.

"The president’s goal is to make sure America’s freight rail system continues to run without disruption, delivering the items that our families, communities, farms, and businesses rely on," the White House stated in a press release.

That action from POTUS came after one union, the Brotherhood of Locomotive Engineers and Trainmen, which is leading a coalition of 10 rail unions in negotiations, voted to authorize a strike after their wage demands were not being met.

President Biden departs after speaking at an Amtrak event at the William H. Gray III 30th Street Station in Philadelphia on April 30, 2021. (Photo by Olivier DOULIERY/AFP)
President Biden departs after speaking at an Amtrak event at the William H. Gray III 30th Street Station in Philadelphia on April 30, 2021. (Photo by Olivier DOULIERY/AFP) (OLIVIER DOULIERY via Getty Images)

"I wish we could have gotten an agreement earlier in the process," Union Pacific CEO Lance Fritz said on Yahoo Finance Live this week. "But the railroads and the union leadership are pretty far apart right now in terms of what we think is an appropriate settlement on wages."

The three-member board will have to investigate and get back to Biden in 30 days with its findings. If the railroads can't agree, Congress will likely have to step in by voting to impose terms or taking other action.

The main sticking points for the new contract revolve around wages and benefits.

"I think if you look at the opening proposals that both sides came with, I think the unions have moved quite a bit, actually, "AFL-CIO Transportation Trades Department President Greg Regan told Yahoo Finance on Friday. "The railroads have not."

A spokesperson for the Brotherhood of Locomotive Engineers and Trainmen told Yahoo Finance that the union is prepared to make their case to the board of arbitrators to argue that raises "are more than warranted."

10/24/07 photo of Ken Kertesz, the then-Chairman of the Pennsylvania State Legislative Board of the Brotherhood of Locomotive Engineers and Trainmen. (Photo By Ryan McFadden/MediaNews Group/Reading Eagle via Getty Images)
10/24/07 photo of Ken Kertesz, the then-Chairman of the Pennsylvania State Legislative Board of the Brotherhood of Locomotive Engineers and Trainmen. (Photo By Ryan McFadden/MediaNews Group/Reading Eagle via Getty Images) (MediaNews Group/Reading Eagle via Getty Images via Getty Images)

The spokesperson added that "the facts are on our side here. Just if you look at the underlying economics, what they're offering, what they have offered, what would be a net pay cut for their employees, for our members that is simply not acceptable when you look at the profits they're bringing in, the rate of inflation we have right now, these people are being asked to suffer while the corporate side are making money."

However, there are other issues the unions care about too.

"There are work rules," Regan noted. "There are attendance policies and things like that that need to be worked out."

'Most of the rails almost certainly cut too deep on labor'

Pandemic-related supply chain disruptions, rising inflation, and labor shortages have made conditions more challenging for both the rail business and workers while contract negotiations continue.

"Despite record profits, the nation’s largest railroads have not given an extra dime in contract raises to locomotive engineers and other essential rail workers during the pandemic," National President Brotherhood of Locomotive Engineers and Trainmen Dennis Pierce said in a statement.

Fort Worth-based carrier BNSF reported $5.99 billion in net income in 2021. Union Pacific (UNP), which connects West Coast ports with terminals up to Chicago and New Orleans, beat on Q2 profits but warned of labor shortages.

(Source: Union Pacific)
(Source: Union Pacific)

"Most of the rails almost certainly cut too deep on labor so that there wasn't any buffer for demand shocks or service disruptions when they did happen," Stifel Analyst Ben Nolan told Reuters.

Major rail carriers have cut roughly 45,000 positions in the past six years — reducing their workforce by 29%— according to an April 2022 report from the Federal Surface Transportation Board.

“Railroaders, to make up for severe staff shortages, are forced to work under draconian attendance policies where workdays can stretch to 12 hours and workers can be on call for 14 days," Pierce said.

Inflation has outpaced wage growth

Data from the National Railway Labor Conference showed that railroad workers earn around $130,000 per year in wages and benefits, and receive on average a 3.4% annual wage increase during that period.

Compare that to the median annual wage for a locomotive engineer was $72,940 in 2021, according to the U.S. Bureau of Labor Statistics, excluding health care and retirement benefits.

"The way the railroads are operating, just from their skeletal staffing system, they've been moth buying equipment," Regan said. "They're not functioning in a very good way right now."

Representatives from agriculture and energy companies have complained about delays and limits on rail transportation negatively affecting their businesses in the April hearing of the Surface Transportation Board (STB).

A container ship sits docked in a berth at the Port of Oakland on February 17, 2015 in Oakland, California. (Photo by Justin Sullivan/Getty Images)
A container ship sits docked in a berth at the Port of Oakland on February 17, 2015 in Oakland, California. (Photo by Justin Sullivan/Getty Images) (Justin Sullivan via Getty Images)

Two months later, in June, the STB ordered all rail companies CSX (CSX), Norfolk Southern (NSC), Union Pacific, and BNSF Railway to come up with a detailed plan to address their performance as “the plans simply failed to instill confidence that the carriers have a serious approach to fixing a problem caused by their own lack of preparedness to respond to external shocks and fluctuations in demand, including especially short-sighted management of labor forces and other resources,” the board wrote.

So far, the two sides have remained far apart after they failed to reach an agreement before the National Mediation Board in June.

Now with the president-elected board serving as a neutral arbiter, the National Carriers Conference Committee, which represents the nation’s freight railroads in national collective bargaining, gave a nod to Biden's move, citing that it “remains in the best interest of all parties — and the public — for the railroads and rail labor organizations to promptly settle the bargaining round on reasonable terms that provide employees with prompt and well-deserved pay increases and prevent rail service disruptions.”

In Regan's opinion, to help build a resilient and sustainable supply chain, it starts "by giving these people a contract that they deserve. Then we can start hiring up. Then we can start expanding services and meeting what our economy demands."

High stakes for the U.S supply chain

Any prolonged delay in shipping freight from U.S. ports via rail would cripple the supply chain.

"[If] the union goes on strike, there would be chaos within the supply chain and the reason being again, 29% of your freight is moved via rail," Patrick Penfield, Syracuse University professor of supply chain management, told Yahoo Finance.

Additionally, he said, "customers will try to move stuff via trucks, but there's no trucking capacity," which would result to similar scenarios to supply chain bottlenecks from last year, "but worse... people won't be able to get their shipments on time. There'll be a lot more congestion."

Still — the timing isn't ideal either. A labor contract between U.S. West Coast dockworkers and shipping operators is underway as no new contract or extension has been decided on — increasing the pressure for a rail contract to be settled soon.

An American flag flies near the Port of Los Angeles, in San Pedro, California, October 13, 2021. (Photo by ROBYN BECK/AFP via Getty Images)
An American flag flies near the Port of Los Angeles, in San Pedro, California, October 13, 2021. (Photo by ROBYN BECK/AFP via Getty Images) (ROBYN BECK via Getty Images)

"You've got 60 days from now, which would bring us into September, and that's typically when most of your retailers are getting shipments in to stock up for the holiday season," Penfield said.

Meanwhile, the rail bottlenecks in the U.S are also drawing concerns for the harvest this fall.

The National Grain and Feed Association (NGFA) said its members have been seeing issues. Even so, Foster Farms, the largest chicken producer in the western U.S., asked federal regulators to issue an emergency service order that would direct Union Pacific to prioritize corn shipments as it would jeopardize thousands of dairy cattle and millions of chickens and turkeys.

​​"The point has been reached when millions of chickens will be killed and other livestock will suffer because of UP’s service failures,” Foster Farms wrote in its request to the Surface Transportation Board in June.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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