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Biden's Intervention Averts Rail Strike: An Analysis

On Dec 2, President Joe Biden signed the resolution to avoid a rail strike, thereby bringing relief to the U.S. economy, which is already reeling under high inflation and supply chain issues. Unions and railroad companies like Union Pacific UNP, CSX Corporation CSX and Norfolk Southern NSC had time till Dec 9 to iron out differences and reach an agreement to avoid a strike. With the President signing the bill that would make a rail strike illegal, that damaging possibility has been put to rest.

All the abovementioned stocks currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

We remind investors that stocks in the railroad space have been hitherto hit hard by headwinds like supply-chain woes, labor woes and high fuel costs. Due to supply-chain disruptions and slower network velocity, overall volumes declined 2% year over year at Norfolk Southern in third-quarter 2022.

While releasing the third-quarter 2022 results, management at Union Pacific trimmed its carload growth (volumes) outlook for the current year to around 3% from the 4-5% band expected earlier. The high inflation-induced rise in interest rates, which may lead to an economic slowdown, resulted in the outlook cut. Also, now UNP expects 2022 operating ratio (operating expenses as a percentage of revenues) to be around 60%. Earlier the expectation was for the ratio to be around 58%. Lower the ratio, the better. The unfavorable forecast can be attributed to economic uncertainty. Supply-chain woes and escalated expenses on fuel also resulted in the deterioration of the operating ratio at another railroad operator — CSX Corporation — in the September quarter.

If thestrike had materialized, the supply-chain woes would have been further aggravated, in turn, dealing a huge blow to customers already suffering from sky-high inflation. A nationwide railroad strike would have hit the economy very hard. The work stoppage by railroad workers was estimated to have cost the already fragile economy more than $2 billion a day.No wonder, the President was a relieved man, before signing the bill he said, “The bill I’m about to sign ends a difficult rail dispute and helps our nation avoid what, without a doubt, would have been an economic catastrophe at a very bad time in the calendar.”

With the damaging strike being averted let’s have a look back and recapture the related events.

A strike by U.S. railroad workers had been looming large ever since workers at the largest rail union in the United States voted against a provisional deal reached in September this year. The rejection was due to the absence of a clause pertaining to granting of paid sick leave to workers in the railroad industry. The deal, however, included 24% compounded wage hike over the 2020-2024 period and five annual lump sum payments amounting to $1,000, per a Reuters report.

With the specter of a rail strike looming, that would cripple the economy, the President intervened to thwart that damaging possibility. Accordingly, the House voted 290 to 137 on Nov 30 for imposing the tentative deal reached in September. The same was passed by the Senate (80-15) a day later. Following approval by the House and the Senate, the President signed the legislation to block the rail strike. However, the Senate failed to approve a measure pertaining to paid sick leave.

What’s Ahead?

While it is clear that there will be no rail strike, the fact remains that the major area of dispute – regarding paid sick leaves, is still unresolved. However, on the contentious issue, the President has said "That fight isn't over."

While unions demand the presence of paid sick leave, railroad companies like UNP, CSX and NSC are totally opposed to the inclusion of the clause as it would increase their labor costs, Given this backdrop. we expect investors to follow the updates on this burning issue in the coming days.

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