US Railway Industry Catches Fire; Investigations and Lawsuits Incoming

This one’s a doozy (and it’s not the vinyl chloride kicking in).

Over two weeks ago, a Norfolk Southern train derailed in East Palestine, Ohio — spilling highly toxic materials.

Fish, dead. Humans, pissed. Norfolk, dodging.

Last week, Norfolk issued a letter stating, “We will not walk away, East Palestine” — except Norfolk Southern reps skipped a town hall just the day before, and Ohioans were rightfully irritated.

Since the accident, several lawsuits have been filed against Norfolk alleging negligence, including a class-action lawsuit.

Why carry hazardous materials by rail in the first place? It’s required by law, and train derailments are common, with ~1,700 each year in the US (mostly with little harm).

Focus has turned to railway companies’ growing earnings.

Operating profit margins of the five largest US railroad operators grew from 29% to 41% over the last 10 years (thank cost cuts).

The result: Happy investors (railroad stocks outperforming), overworked employees and angry customers + citizens (Ohioans, get out your pitchforks).

Here’s what railroad critics are pointing out:

1/ Trains are getting too long. The longer the trains, the higher the profits — but the more dangerous they become. The derailed train had 149 cars and the feds classify trains with 150+ cars as “very long.”

2/ Cost cuts have gone too far. Large railroads have cut over 40K workers since 2016. One Iowa state legislative director argues that safety inspectors were reduced — despite trains getting longer. Norfolk’s accident rates have increased in each of the past four years.

3/ Not enough investments into railroads. Last year, Norfolk invested $2B into railways and operations, and returned $18B to shareholders over the past five years (double that of railroad investments).

4/ More safety measures are needed. Last week’s report found that the train derailed from an overheated wheel bearing. One rail worker union is questioning the drop in maintenance standards.

In 2017, railroad companies pushed to lengthen when the breaks of inactive rail cars were checked — a change that was estimated to save the industry $600M over 10 years.

About Norfolk: Railroad analyst Anthony Hatch said, “they are insured, they are in good financial condition, but it is a reputational hit” (FT).

Catch up: US railroad stocks find themselves with a unique problem: being too profitable