US Economy

Consumers Will Pay the Price If Rail Industry and Unions Can't Agree on Labor Deal

Just about every industry could be affected because so many businesses need railroads to deliver their raw materials and completed products

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Consumers could see higher gas prices and shortages of some of their favorite groceries during the winter holiday season if railroads and all of their unions can't agree on new contracts by an early-December deadline that had already been pushed back.

The likelihood of a strike that could paralyze the nation's rail traffic grew on Monday when the largest of the 12 rail unions, which represents mostly conductors, rejected management's latest offering that included 24% raises. With four of the 12 unions holding out for a better deal, it might fall to Congress to impose one to protect the U.S. economy.

The Retail Industry Leaders Association said a rail strike “would cause enormous disruption to the flow of goods nationwide,” although retail stores are well stocked for the crucial holiday shopping season. It’s not clear what a strike would mean for packages because FedEx and UPS, which both rely on rail to some degree, haven’t commented in detail.

“Fortunately, this year’s holiday gifts have already landed on store shelves. But an interruption to rail transportation does pose a significant challenge to getting items like perishable food products and e-commerce shipments delivered on time, and it will undoubtedly add to the inflationary pressures already hitting the U.S. economy,” said Jess Dankert with the group that represents more than 200 major retailers.

Even getting close to the deadline could cause problems because railroads will freeze shipments of chemicals and perishable goods ahead of time. And commuters could be stranded if there is a strike because so many passenger railroads operate on tracks owned by the freight railroads.

Just about every industry could be affected because so many businesses need railroads to deliver their raw materials and completed products. And there aren't enough trucks to pick up the slack.

AUTO INDUSTRY

Nearly all new vehicles that travel more than a couple hundred miles from the factory to their destination are shipped by rail because it’s more efficient, said Michael Robinet, an executive director for S&P Global Mobility. So it’s almost a certainty that new vehicles coming to the U.S. from Mexico or other countries will be delayed, he said.

Automakers might be hampered in building vehicles, too, because some larger parts and raw materials are transported by rail. But Robinet said automakers will go to great lengths to get the parts to keep their factories running as much as possible.

Mike Austin, senior mobility analyst for Guidehouse Research, said the strike could make new vehicles even more scarce, driving prices up beyond current record levels. That could raise inflation “as other goods aren’t moving through the rails.”

Carlos Tavares, CEO of Stellantis, said Wednesday at the Detroit auto show that his company will wind up apologizing to customers because their orders may not arrive on time.

ENERGY

A strike could have a significant impact on the energy industry, and could hurt consumers who would likely end up paying more for gasoline, electricity and natural gas. Refineries might have to halt production if they can’t get the deliveries they need, or if they don’t have access to rail to ship gasoline.

No one wants to risk leaving flammable chemicals stranded on the railroad tracks if a strike occurs. That’s why railroads began curtailing shipments of hazardous materials on Monday to protect that dangerous cargo.

Roughly 300,000 barrels of crude oil move by rail each day, which could supply about two mid-size refineries, according to AFPM. And about 5 million barrels of propane, representing a third of U.S. consumption, are moved by rail monthly, the group said.

Roughly 70% of ethanol produced in the U.S. is shipped by rail, and ethanol accounts for about a tenth of U.S. gasoline volume, according to S&P Global Commodity Insights. Nearly 75% of the coal moved to electric utilities in the first half of 2022 was moved by rail, the group said.

AGRICULTURE

Livestock producers could see problems almost immediately if shipments of feed abruptly ended, according to the National Grain and Feed Association.

Meat and poultry groups noted the reliance on rail for shipments of feed and called for a quick resolution of the rail dispute. Every week, the nation’s chicken industry receives about 27 million bushels of corn and 11 million bushels of soybean meal to feed chickens, said Tom Super, senior vice president of the National Chicken Council.

RETAIL

Experts say retailers have been shipping goods earlier in the season in recent months as a way to protect themselves from potential disruptions. But this buffer will only slightly minimize the impact from a railroad strike, which is brewing during the critical holiday shipping season, said Jess Dankert, vice president of supply chain at the Retail Industry Leaders Association, a retail trade group that counts more than 200 retailers like Best Buy as its members.

Dankert noted that retailers began making contingency plans in September like turning to trucks to pick up some of the slack. However, there are not enough trucks and drivers to meet their needs. That scarcity will only drive up costs and make inflation worse, she said.

“As we have seen in the past two and half years, if there is a breakdown anywhere along the supply chain, one link falters, you see that ripple effect pretty quickly and those effects just spread from there,” Dankert said.

WHAT'S NEXT

There's no immediate threat of a strike even though four unions have rejected the deals that the Biden administration helped broker before the original strike deadline in September. Those unions agreed to return to the bargaining table to try to hash out a new agreement before a new Dec. 5 strike deadline. But those talks have deadlocked because the railroads refuse to consider adding paid sick time to the five-year deals they've offered, which feature 24% raises and $5,000 in bonuses.

Railroad engineers voted Monday to join seven smaller unions in approving their deal, but the biggest union that represents conductors rejected its contract, joining the three unions that previously voted no.

It appears increasingly likely that Congress will have to settle the dispute. Lawmakers have the power to impose contract terms if both sides can't reach an agreement, and hundreds of business groups have urged Congress and President Joe Biden to be ready to intervene.

Workers frustrated with the demanding schedules and deep job cuts in the industry pushed to reject these contracts because they wouldn't do enough to resolve workers' key quality-of-life concerns. The deals for the engineers and conductors did include a promise to try to improve the scheduling of regular days off and negotiate the details of those schedules further at each railroad. Those two unions also received three unpaid days off a year to tend to medical needs as long they were scheduled at least 30 days in advance and the railroads said they wouldn't penalize workers who were hospitalized under their strict attendance policies.

The railroads also lost out on their bid to cut crew sizes down to one person as part of the negotiations. But the conductors in the Transportation Division of the International Association of Sheet Metal, Air, Rail and Transportation Workers union still narrowly rejected the deal with roughly 51% voting against it. A smaller division of the SMART-TD union that represents about 1,300 yardmasters did approve the deal.

“The ball is now in the railroads’ court. Let’s see what they do. They can settle this at the bargaining table,” SMART-TD President Jeremy Ferguson said. “But, the railroad executives who constantly complain about government interference and regularly bad-mouth regulators and Congress now want Congress to do the bargaining for them.”

The railroads maintain that the deals with the unions should closely follow the recommendations made this summer by a special panel of arbitrators Biden appointed. That's part of the reason why they don't want to offer paid sick time. Plus, the railroads say the unions have agreed over the years to forgo paid sick time in favor of higher pay and strong short-term disability benefits.

The unions say it is long overdue for the railroads to offer paid sick time and that the pandemic highlighted the need for it.

The group that negotiates on behalf of the railroads said Monday that the unions that rejected their deals shouldn't expect to receive more than the Presidential Emergency Board of arbitrators recommended. The National Carriers Conference Committee said businesses could start to be affected by the threat of a strike even before the deadline because railroads will start curtailing shipments of dangerous chemicals and perishable cargo days ahead of the deadline.

“A national rail strike would severely impact the economy and the public. Now, the continued, near-term threat of one will require that freight railroads and passenger carriers soon begin to take responsible steps to safely secure the network in advance of any deadline,” the railroads said.

It's unclear what Congress might do given the deep political divisions in Washington D.C. and a single lawmaker could hold up a resolution. But the head of the Association of American Railroads trade group, Ian Jefferies, said "if the remaining unions do not accept an agreement, Congress should be prepared to act and avoid a disastrous $2 billion a day hit to our economy.”

Republicans might try to impose a deal that includes only what the Presidential Emergency Board recommended, while Democrats who still narrowly control the House and Senate during this lame-duck period might try to force the railroads to make additional concessions.

The unions that announced their votes Monday represent more than half of the roughly 115,000 rail workers involved in the contract dispute with Union Pacific, Norfolk Southern, BNSF, Kansas City Southern, CSX and other railroads.

The Associated Press/NBC
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