When a Norfolk Southern freight train jumped the tracks in East Palestine, Ohio, last year, it produced a mushroom cloud of toxic chemicals, traces of which could still be found months later in 16 states, according to a recently published study. The accident was in the news again last week when the National Transportation Safety Board presented its final findings on the derailment’s causes.

Yet unless you read deep inside the business pages, you are unlikely to know about the role that institutional investors are playing in undermining the safety and reliability of America’s railroads. Nor about how such management appears to be harming not merely public safety but also efforts to rebuild America’s industrial base and decarbonize the economy.

To understand the larger story, start with the fact that while Norfolk Southern was dealing with investigations of the East Palestine crash, it was also fighting a proxy battle with an activist hedge fund called Ancora. Though the railroad’s incumbent management managed last month to beat back the proxy challenge, it did so only by promising institutional investors that it would return to an operational strategy that goes by the Orwellian label “precision scheduled railroading,” or PSR. 

Pioneered in the 1990s by railroad executive E. Hunter Harrison, PSR calls for boosting short-term profits through deep cuts in service and personnel and gutting investments in locomotives, rolling stock, and infrastructure. Enticed by the short-term profits, hedge funds replay the same basic script at all four of the largest U.S. railroads over the next two decades.

After the industry-wide implementation of PSR, the stripped-down railroads consistently lost market share, decreasing from 48% to 36% of the freight market from 2010 to 2022. Freight instead flowed to large trucks, which have a much bigger carbon footprint than trains and are also far more dangerous, routinely killing or injuring more than 150,000 people a year in the United States. The degradation of the U.S. rail network also contributes to the fragility of supply chains, and has left a growing number of communities without service.

Norfolk Southern implemented PSR in 2019. Its new operating plan went well enough at first because the demand for freight transportation plummeted with the arrival of the pandemic. But as soon as the economy recovered, the railroad’s downsized network faced severe delays and backlogs.

Backups at Norfolk Southern’s intermodal terminal in Memphis, for instance, prevented Louis Dreyfus, Staple Cotton Cooperative, and Olam Cotton from delivering exports to the ports of Charleston and Savannah. Meanwhile, backups at terminals in Chicago and Kansas City prevented intermodal boxes from reaching manufacturers and end customers. The overall effect was enormous. Even though there was a 21% spike in intermodal traffic from U.S. ports, rail’s share dropped more than 16%.

Recognizing the pitfalls of aggressive PSR, new CEO Alan Shaw introduced a new resiliency-focused operating plan. Under this plan, Shaw aimed to stabilize the cycle of furloughing and rehiring and aggressive cost-cutting. Shaw argued that consistent capital investments and a stable workforce would provide a superior service product that could win back business from trucking.

Shaw’s resiliency plan earned the buy-in of management, unions, and regulators, and it started to show positive results. The accident in East Palestine notwithstanding, Norfolk Southern had the largest drop in the number of mainline accidents of all the largest U.S. railroads last year. Key railroad operating metrics such as dwell time, train velocity, and intermodal plan compliance improved, giving shippers a reason to shift business back to rail. Resiliency showed its benefits. When a ship knocked down a key bridge in Baltimore in March, blocking access to the city’s port for weeks, NS was able to swiftly set up alternative routing for coal shipments.

But by making the investments necessary to improve service quality and win back market share from trucks, NS once again became a target for hedge fund “rationalization.” In response to Wall Street grumblings, Shaw and his team felt they had no choice but to boost short-term profits by returning to the old PSR operating model. One of the first actions took place in February, when NS canceled three service routes to Bethlehem-Allentown from Kansas City, Memphis, and St. Louis, affecting nearly 40,000 domestic intermodal containers annually. Later that month, NS cut intermodal service to New Orleans and the publicly funded Birmingham, Alabama, intermodal terminal. 

Ancora demanded more. To further raise its margins, Norfolk Southern hired John Orr, a Hunter Harrison protégé who swiftly cut 30 additional intermodal lanes, representing 15% of the railroad’s total network. Going forward, NS will likely concentrate on only high-margin business not subject to competition from trucks, primarily hauling grain, chemicals, and above all, Appalachian coal. The rest will be ceded to polluting, highway-clogging trucks.

To prevent further destruction of the nation’s rail system by financiers, and the overuse of the nation’s highways, policymakers must begin exploring ways to restore sensible regulation to railroads. This should include a requirement that they operate as common carriers in the public interest. As bad as the crash in East Palestine was, failure to address the larger wreck of the national railroad system will bring far more dire consequences.