Four major U.S. railroads -
Union Pacific Corporation
Norfolk Southern Corp.
) and Burlington Northern Santa Fe - have appealed against the
class one action after the District of Columbia court granted class
action status to a price fixing lawsuit.
The U.S. district judge, Paul Friedman of the DC court, brought
forward the case of eight shipping companies that accused these
railroads of imposing a series of price increases between 2003 and
A class action lawsuit would now imply that the railroads have
to defend themselves from collective charges brought by the
shippers under Federal Rules of Civil Procedure Rule 23 and 28
U.S.C.A. § 1332(d).
The carriers, which dictate more than 90% of the freight
revenues in the industry, have stated that the court decision could
cost approximately $10 billion or more in claim settlements,
causing a significant financial burden. Lawyers supporting the
railroads have argued that the case should be dismissed due to the
lack of proper evidence.
The pricing practice of the U.S. freight railroads is a major
cause of friction with captive shippers that 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 with respect to freight pricing with less
regulatory constraints, more freedom in collective ratemaking as
well as entry and exit of companies from the industry.
The Staggers Rail 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 the
Interstate Commerce Commission. Additionally, the rise in
automobile and truck freight market greatly affected the rail
business. Hence, the Staggers Rail Act remains an important
milestone in the history of the rail industry for its recovery.
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 has also hurt consumers. Customers
have accused railroads of extracting more fuel surcharges from them
as well as indirectly charging for other costs that have raised
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 an 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
will continue as long as matters regarding price fixing by the
railroads are 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 bring
good news 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) Norfolk Southern and CSX Corporation hold a Zacks #3 Rank
(Hold). Union Pacific has a short-term #2 Rank (Buy).
CSX CORP (CSX): Free Stock Analysis Report
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UNION PAC CORP (UNP): Free Stock Analysis
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