The District of Columbia (DC) court has granted class action
status to a lawsuit charging major North American railroads for
exercising pricing discretionary on fuel surcharges. A class action
lawsuit would now imply that the railroads have to defend
themselves from collective charges brought by a group of shippers
under Federal Rules of Civil Procedure Rule 23 and 28 U.S.C.A. §
The U.S. district judge, Paul Friedman of the DC court, brought
forward the case of eight shipping companies that accused major
railroads of imposing a series of price increases between 2003 and
These railroads include
Union Pacific Corporation
Norfolk Southern Corp.
) and Burlington Northern Santa Fe. These Class I railroads dictate
more than 90% of the freight revenues in the industry. Shippers
have been constantly targeting these railroads, accusing them of
The pricing practice of the U.S. freight railroads is a major
cause of friction with captive shippers which move their products
through rail and do not have effective alternatives. Since
1980, railroads have been enjoying significant pricing power based
on The Staggers Rail Act that substituted the long existing
Interstate Commerce Act of 1887. The Staggers Rail Act provided
greater flexibility in respect of freight pricing with less
regulatory constraints, more freedom in collective ratemaking as
well as entry and exit of companies from the industry.
The Act allowed the rail industry to recover from its most
unprofitable period since the Great Depression, when these
railroads where exposed to stringent pricing regulation by
Interstate Commerce Commission. Additionally, the rise in
automobile and truck freight market largely dethroned the rail
business. Hence, Staggers Act remains an important milestone in the
history of rail industry for its recovery from a dark period.
However, over the past several years shippers are continuously
struggling to put railroads under review for indulging in unfair
pricing practices. This has not only affected the shippers through
increased shipping costs, but is also hurting consumers. Customers
have accused railroads of extracting more fuel surcharges from them
as well as indirectly charging for other costs, increasing shipping
cost by almost 100% since 2004, while shipping cost from other
modes have only gone up 20%.
Studies show that rail pricing has dramatically shot up since
2004 and continues to increase, with average rise of approximately
4 to 6% per year. On the other hand, other modes of transportation
like trucking and air freight have only risen by approximately
1-2%. Studies have also revealed that all major freight railroads'
fuel surcharges exceeded by approximately $6.4 billion from the
actual cost between 2003 and 2007.
Railroads lashed back arguing that despite the ongoing hikes,
prices remain below the 1980 levels considering the economical
factors. Further, they protest that fuel surcharges which are
subject to adjustments depending on fuel price changes have not
been successful in tapping rising fuel prices.
We believe that the issues between the railroads and shippers
remain a long-standing battle. This will continue to be so as long
as matters regarding price fixing by the railroads continue to be
out of the realm of the U.S. antitrust laws.
Per the latest studies by Surface Transportation Board (STB),
approximately 35% of the annual freight rail is captive to a single
railroad, allowing its monopoly pricing practices. The unfair
pricing power exhibited by the U.S. railroads has summoned
congressional intervention for exercising stringent federal
regulations on the railroads. Congress has discussed railroad price
regulation but has not passed any new rule so far.
In February 2012, shippers forwarded a joint letter to Congress
appealing to support Amendment 1591 to the Surface Transportation
Bill to abolish freight rail industry exemptions from the U.S.
antitrust laws. The amendment, proposed by Senator Herb Kohl, would
create healthier competition among freight rail shippers and stop
unfair pricing polices.
Any change brought forward by Congress or the STB would mean
good things for the larger market but could mean a serious threat
to railroads. Especially when economic uncertainty is generating
poor volumes and pricing has become a dominant factor for the
recovery of the industry.
We have our long-term Neutral recommendation on Union Pacific,
Norfolk Southern and CSX Corporation. For the short-term (1-3
months) these stocks hold a Zacks #3 Rank (Hold).
CSX CORP (CSX): Free Stock Analysis Report
NORFOLK SOUTHRN (NSC): Free Stock Analysis
UNION PAC CORP (UNP): Free Stock Analysis
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