By Zsana Joyelle Hoskins and Sade Ajishegiri
Howard Center for Investigative Journalism, University of Maryland
Investment firms are quietly taking greater control over America’s railroad industry, accumulating large stock positions in railroad operators and buying up companies that lease and manage rail cars or provide an array of rail services. These firms are cutting operating costs in a way that’s reshaping one of the country’s critical industries — a trend that’s raising alarm bells.
Since the industry was deregulated in 1980, the government has had few tools to intervene, leaving much of the industry’s future in the hands of investors who often prioritize short-term profits over long-term rail infrastructure.
Martin Oberman, former chairman of the Surface Transportation Board, the federal agency that oversees freight rail financial matters, has been warning for years that some investment firms — hedge funds, activist investors and private equity firms — are pushing railroads to thin workforces and delay safety upgrades while using the savings to enrich investors.
“The industry as a whole has followed the path of being under pressure from Wall Street,” said Oberman, adding investors are pushing railroads and related companies to slash resources, which has led to “higher dividends and payouts for stockholders.”
Oberman, who retired from the board at the end of 2023, isn’t against Wall Street. He said investors are essential to the growth of American industry and often have a positive impact on the economy. But he said they shouldn’t have such leverage over railroads, which serve a public good.
“The difference between railroads and most other private businesses that are invested in is that the railroads have a public interest mandate under the law,” Oberman said.
Hedge funds, private equity firms come for the railroads
Hedge funds and private equity firms have permeated just about every corner of the American economy, including affordable housing, hospitals, nursing homes, newspapers and even daycare centers. Some of their investing strategies are considered passive, buying stocks and companies with the expectation the investments will increase in value long term.
But some of their moves are controversial, due to tactics critics view as predatory. In an increasingly common practice, private equity firms and hedge funds become activist investors where they seek control of companies, shake up management, cut costs, strip out assets and transfer cash to shareholders.
“They’ll be able to make a quick hit of cash, but somebody else might have to deal with the consequences,” said Brendan Ballou, former special counsel for private equity in the U.S. Department of Justice’s Antitrust Division and author of “Plunder: Private Equity’s Plan to Pillage America.”
In the railroad industry, hedge funds and activist investors have wrestled with giant railroad operators by buying large amounts of common stock in the companies, using their influence to gain seats on the board and then pushing for changes.
Private equity firms more often buy entire companies, often smaller or mid-sized companies that supply the railroad industry, then load them up with debt, reduce the workforce and extract large fees for themselves. After several years, they exit from the company, either by selling it to another company or taking it public via an initial stock offering.
The investment firms say their goal is to make the target companies operate more efficiently, which is good for the industries and the overall economy. But critics argue the activists are draining money from operating companies and leaving them less competitive and sometimes drowning in debt.
Railroads become oligopoly
Before the railroad industry was deregulated, there were about 70 railroads, including about 40 “Class 1” railroads, and hundreds of suppliers. After numerous railroad mergers, the number of Class 1 freight railroads operating in the U.S. declined to just six: BNSF Railway, CSX Corp., Canadian National Railway Co., Canadian Pacific Kansas City LTD (which owns Canadian Pacific Railways and Kansas City Southern), Norfolk Southern Corp. and Union Pacific Railroad Co.
Soon there could be just five. In July, Union Pacific and Norfolk Southern announced plans to merge in an $85 billion deal that would create the first U.S. railroad that can operate coast to coast. The companies said the merger, if approved by government regulators, would make shipping more efficient.
The government defines Class 1 railroads today as those that generate more than $1 billion in annual revenue. As of 2023, they accounted for about 90% of freight revenue in the country.
The small number of Class 1 freight carriers has created a market economists call an oligopoly, where a small number of large companies dominate an industry, which can lead to reduced competitive pressures that allow operators to raise prices, decrease service and cut operating costs, in part, by reducing the workforce.
In a Surface Transportation Board hearing on Sept. 16, 2024, Mark Wallace, national president of the Brotherhood of Locomotive Engineers and Trainmen, testified the business model used by Class 1 carriers has led to gains for investors and higher pay for executives but has resulted in “a culture of profits over safety, customer service and the lives of railroad workers.” When reached recently, Wallace stood by his comments and said they are “even more true today.’’
Warren Buffett led the way
Investors began eyeing the railroad industry in 2010 after Berkshire Hathaway Inc. — a holding company based in Omaha, Nebraska, and controlled by legendary investor Warren Buffett — purchased BNSF Railway, which operates mainly in the Midwest and West. Buffett has a reputation of being one of the savviest value investors on Wall Street, meaning he finds stocks trading below their intrinsic value. He buys them expecting the stocks will eventually rise in value. (Buffett announced in early May he plans to step down as Berkshire Hathaway’s CEO at the end of 2025.)
A few years after the BNSF purchase by Berkshire Hathaway, New York-based hedge fund Pershing Square Capital Management, controlled by Bill Ackman, followed Buffett, according to numerous news reports, and began investing in railroad stocks including Canadian Pacific Railway. The railway is based in Calgary and operates a vast system along the entire U.S.-Canada border, parts of the U.S. Midwest and through New York state.
After acquiring millions of shares in Canadian Pacific stock, Pershing Square became an activist investor in 2012 and led a high-profile proxy battle against the company, resulting in the ousting of the railroad’s CEO. He was replaced with E. Hunter Harrison, a renowned railroad executive who introduced a strategy called “precision scheduled railroading,” or PSR.
Advocates claim PSR makes railroads run more efficiently by operating on a fixed schedule with fewer workers, faster inspections and running fewer but longer trains, which reduces operating costs. But critics argue the practice raises safety concerns.
Pershing Square sold its nearly 10 million shares in 2016 and earned a profit of about $2.6 billion, according to news reports. But five years later, Pershing Square returned to Canadian Pacific with a new stake and reported owning 2.8 million shares by the end of 2021, according to a regulatory filing. A spokesperson for Pershing said the investment firm recently sold its stake in Canadian Pacific.
CSX Corporation, a large railroad based in Jacksonville, Florida, that services the Eastern U.S., has also been targeted by activist investors. In 2017, the hedge fund Mantle Ridge LP purchased over $1 billion in CSX stock and started a proxy fight to install Harrison as CEO.
According to The Wall Street Journal, Harrison immediately implemented PSR, closed facilities, ran fewer but longer trains, idled hundreds of locomotives and laid off thousands of employees. Harrison died nine months into the turnaround. Two years later, after CSX’s stock price doubled, Mantle Ridge sold most of the stock.
The aim of activist investors is to “squeeze shippers … squeeze labor and then make a quick buck,” said Arnav Rao, a transportation policy analyst at the Open Markets Institute, a think tank in Washington that studies market competition. He said these activities “are contributing to the degradation of rail safety and the ability for the freight network to grow.”
Data calculated by the Surface Transportation Board estimated that from 2010 through 2021, railroad owners have brought in $183 billion in dividends and stock buybacks that benefited investors — far more than the $138 billion spent on infrastructure.
A more recent example of an activist investor going after a railroad involves Norfolk Southern Railway, the company responsible for the devastating 2023 derailment that unleashed toxic chemicals in East Palestine, a small Ohio town.
In early 2024, investors led by Ancora Holdings Group, a Cleveland-based wealth advisor and money manager, took an estimated $1 billion stake in Atlanta-based Norfolk Southern, and started a proxy battle to overhaul the railroad’s board, boost returns and replace top executives. Ancora scored a partial victory and was able to replace members of the board, but it didn’t have enough votes to replace management, although a new CEO was eventually named.
According to The Wall Street Journal, Norfolk Southern and Ancora had different positions on how to implement PSR, the strategy used to boost profits by running trains more efficiently and reducing costs. Ancora was pushing for more aggressive cost-cutting than Norfolk Southern preferred.
Greater efficiency or “pillaging’’
Rao said Ancora has “pillaged” Norfolk Southern, and argues that has hurt not just the company and its workers but also shippers that depend on the railroads to move cargo.
“If you keep shrinking and shrinking … as Norfolk Southern has done in response to Ancora, the network loses its value and the remaining customers on the network are the ones that can’t go anywhere else and are subsequently then just squeezed for higher and higher and higher margins,” Rao said. “So that’s what we mean by pillage.”
Ancora characterized Open Markets Institute’s criticism as “misguided.” Paul Zickes, an Ancora vice president, said his firm’s engagement with Norfolk Southern has been successful and noted the railroad’s accident and worker injury rates have declined in the past year.
“The results at Norfolk Southern are reflective of the true intentions of the creators of PSR — a systematic approach to operating best practices, resource allocation, and safety,” Zickes wrote in an email.
Staffing levels at railroads have declined even as railroads take on more hauls. In April, the number of railway workers had declined to 153,800, according to the U.S. Bureau of Labor Statistics. The employment levels in the rail industry are the lowest they’ve been since 2005, according to the bureau’s data.
“Our members are tired of being asked to do the work that was previously done by two or three people,” Wallace said during the September 2024 Surface Transportation Board hearing. “It’s not safe, it’s not good for shippers, it’s not good for consumers and it’s not sustainable.”
For railroad clients facing higher and higher shipping fees, there is minimal recourse. The Surface Transportation Board has little authority over rates, although in some cases it can hear complaints from shippers and weigh in on whether the rates are “reasonable.”
Banks, investment firms buying up rail cars
Meanwhile, as hedge funds have been going after the railroads, private equity firms have been gobbling up companies that support and supply services to the railroads, including firms that lease rail cars or own rail construction and maintenance companies.
Jeffrey Hooke, a professor at the Johns Hopkins Carey Business School, said private equity firms are attracted to the railroad industry because they have fixed assets that can be used as collateral for loans. (Private equity firms often use debt to purchase companies.) In addition, he said railroad companies have a good track record for making money, in part due to their oligopolist position.
Most rail customers, Hooke said, are strong companies with good credit. Because the industry is so old, there are many small owner-operators that private equity can “roll up,” a Wall Street term that means buying several similar companies and merging them into one larger company.
One example where roll-ups are occurring is the rail car leasing business, where companies rent their rail cars to shippers that need to transport goods. There are about 1.6 million rail cars in operation in the U.S. and the largest owners are the nation’s biggest banks. But investment firms are getting into the business in a big way.
American Industrial Transport Inc., known as AITX — a unit of New York investment firm ITE Management LP — leases and repairs rail cars. In late 2023, AITX purchased 50,000 rail cars from SMBC Rail Services, bringing AITX’s fleet to nearly 120,000, according to a company news release. AITX didn’t respond to several questions, including whether they’ve purchased additional rail cars since 2023.
In May, banking giant Wells Fargo & Co. sold 105,000 railcars for $4.4 billion to a joint venture owned by GATX Corp. and Brookfield Infrastructure Partners. Brookfield also acquired Wells Fargo’s rail finance lease portfolio of 23,000 rail cars and 440 locomotives.
GATX is one of the biggest owners of freight rail cars, which it leases to factories, farms and other shippers. It owned the rail car that caused the 2023 derailment in East Palestine, although an Ohio jury in April determined Norfolk Southern, not GATX, was responsible for the accident.
Constance Mitchell Ford, a lecturer specializing in business reporting at the Philip Merrill College of Journalism at the University of Maryland, contributed to this story.
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