Posts tagged ‘Burlington Northern’

What Musicians and ExxonMobil Have in Common: Both Get "Ripped Off" By Consumers

We have all heard that artists make very little money from their songs, and get "ripped off"by record labels and other folks in the chain.  I have always had mixed reactions to this.  I have no doubt that, with zero power and a burning desire to "make it big", young acts sign uneven deals with record labels.  However, I find it hard to believe that Beyonce is getting hosed in that negotiation.

I saw this chart in TechDirt about where the money consumers spend on music goes (I think this is for a CD sale):


So the performers themselves get about 9% of the retail price after everyone in the chain is paid.  That certainly seems paltry -- after all, they are the owners and creators of the music.  Everyone else is just in the service chain to make sure the music reaches the customers, all the accounting is done, the legal documents are correct, etc.

But it turns out that they may not be doing that badly.  I am a shareholder of ExxonMobil (XOM).  I own a piece of all the oil that XOM owns and controls, along with all the other shareholders.  Think of us as the band, though a really big band with lots of players.   That oil we own, like the band's music, has a ton of value.  When sold as raw crude, it goes for $40-$60 a barrel nowadays.  When sold in pieces (such as gasoline, or asphalt, or lubrication oil) it can sell for hundreds of dollars a barrel.

But out of those proceeds, we have to pay people to help us.  We have to pay managers, and lawyers.  We have to pay oilfield services companies and equipment companies and transportation companies.  We have to pay retailers.  When all those payments are made, before taxes, in 2014 we were left with just under 8% of every dollar we sell.  We own all this oil and we are not even getting as much as a musician!

And XOM shareholders do pretty well.  Owners of Wal-Mart only get about 3% of every dollar they sell.   In my company, I get about 5% of every dollar I sell.   And those evil health insurers?  Their shareholders get just over 2% of every dollar sold (all based on 2014 full-year financials).

Does that mean that Exxon shareholders are getting "ripped off" by Haliburton and Burlington Northern?  Is Wal-Mart getting ripped off by Proctor and Gamble?  Is Humana getting ripped off by GE imaging?  No?

I will reveal the ugly secret:  There is one person who is "ripping off" all of these folks, from Exxon to Rihanna to me.  That person is.... the consumer.  Yep, there are certainly many examples of people signing bad contracts in all these businesses, but the only entity systematically and consistently ripping all these folks off is us.  Because in a capitalist economy, we have the ultimate power.  We drive down the street to get the gas that is 10 cents cheaper, we now shop for our books and TVs at Wal-Mart and Amazon rather than at Borders and Best Buy, and we buy 99-cent individual songs on iTunes instead of buying a whole CD of songs we don't want for $14.99.

Great Moments in Labor Relations

My previous post joking about potential union opposition to unmanned military aircraft reminded me of one of my favorite labor relations stories.   Until just the last few years, most railroads continued to pay a "fireman" to ride in the cab of their diesel locomotives, despite the fact that the role of the fireman to shovel coal into a steam boiler was totally obviated fifty years ago by diesel technology.  How this came about is an interesting story.

Railroads were the first heavy or large industry in this country.  For years, if you were to talk about "big business", you were really talking about railroads.  So it is not surprising that when the government succumbed to the pressure of interfering legislatively into the relationship between employer and employee, their first target was the railroad industry.  In a sense, the US has two bodies of labor law.  The first body of law is railroad labor law, and the second is the law that applies to every other industry. 

As much as we can complain about the labor law most of us operate under, it is nothing compared to the hash that the government made of railroad labor law.  From an early stage, details about work days and work rules that would normally be part of a private labor contract between a company and their union or employees were actually embodied in the law.  For example, back in the steam-engine era when trains moved fairly slowly, a full "day" for a train crew was defined by statute as 100 miles (about the distance a steam engine could go without taking on more water).  Once a train crew had traveled that distance, they were owed a days pay.  Other portions of the law gave the unions incredible power, such that the bargaining table at every negotiation with management was always tilted, by statute, in their favor.

Beginning in the late 1930's, but really gaining momentum in the late 1940's, railroads began to replace steam locomotives with diesel engines.  Diesel locomotives were more reliable, easier to maintain, easier to operate (no coal to shovel) and could go much longer distances without service (steam engines stopped frequently for more water).  As this transition occurred, railroad companies very reasonably sought to eliminate the position of "fireman" on diesel trains.  After all, without a boiler and coal to shovel, the fireman role was totally redundant on a diesel engine.  Railroad unions were nothing if not gutsy, and in response they argued that not only would they not accept elimination of the fireman position, but they campaigned for an addition of a second fireman on diesel engines.  Railroads found themselves in the position of actually having to fight a nearly successful effort to increase the number of firemen on crews.  As a result, they ended up accepting the fireman role, and generations of railroad men cruised about the country on engines for the next 40 years, doing virtually nothing for their pay.  Railroads were still fighting to eliminate the fireman in the 1990's.  In some cases, railroads were actually forced to pay "lonesome pay" to some engineers when the firemen were removed from their crew.  LOL.

Other labor statutes and work rules prevented full use of the diesel's capabilities.  For example, the 100 mile rule was now absurd - an inter-modal or other long-distance freight train could cover this in less than two hours.  But US law still insisted that railroad workers be paid a full days pay for 100 miles.  By 1990, after four decades of lobbying and negotiation, the 100 miles had been increased all the way to ... 108 miles.

This article from Regulation is a bit dated, but it still gives a good overview of some of the historical insanities in railroad labor.  An excerpt:

The rail unions deserve the labor equivalent of an Oscar for best sustained performance in reducing industrial efficiency. Restrictive work practices are legendary from firemen on diesel locomotives to train-limit laws. During the 1980s the railroads made minor progress against these practices, but they still have a long way to go. Some crews receive an extra day's pay every time they turn a locomotive around (yard and line haul crews have rigid separations of duties despite identical skills). Carriers are forced to employ three- to five-person crews, while nonunion carriers (Florida East Coast Railway and regional and short-line carriers) use two people. Crew members receive a full day's pay after a train moves 108 miles, even if the trip requires only a few hours. (The current three-member board appointed by Congress may impose a 130-mile rule by 1995.) Some union members have guaranteed lifetime incomes and must only work a few days per month. Some engineers receive "lonesome pay" for giving up the full-time company of a fireman. Until 1987, some Burlington Northern crews received "hazardous pay" for traveling through Indian territory in Montana. Management studies show that work forces could be cut in half, and according to some estimates, labor restrictions cost the industry some $4 billion a year. Despite union concessions on work rules, shippers continue to complain about the carriers' inability to achieve efficient and economical labor contracts. Overall, the RLA and its government-backed unions combine to double labor costs and therefore drive up freight rates from 20 to 25 percent, a very serious handicap in the competition with trucks and barges.

One railroad stood up to the union, and eventually won, but had to withstand a violent 11-year strike, all the while the taking continuous grief in the union-friendly press:

The Florida East Coast Railways, a line long known as "America's most efficient railroad," highlights the woeful labor inefficiencies of the major carriers. Its primary operation is transporting freight from Jacksonville to Miami. When Edward Ball took over the operation in 1961, the unions required the use of three five-man crews-each receiving a day's pay for each 100 miles traveled on the 366-mile trip. Ball failed to see the sense of this scheme and decided to try th change it. Union officials could not see the sense in any change and called a strike in 1963. The violence and vandalism that continued for eleven years demonstrated to other carriers the cost of defying the unions. The railway won, however. The company used two-man crews who were "cross-trained" and paid them a day's pay for eight hours' work rather than for 100 miles traveled. During the 1970s, the railroad's labor costs were 40 percent of total costs compared with 64 percent for all class I railroads, and Florida East Coast Railway earned the highest return of any class I railroad. In addition, the railway consistently won safety awards that fended off another pretext for government control and continues to retain customers while other railroads lose out to trucks.

Read the whole article.  If you have ever read Atlas Shrugged, you will find that a lot of the outrageous legislation in that story that seemed too stupid to be true actually have a basis in the history of US railroad law.  Even the "railroad unification act" that seems totally over-the-top toward the end of the book is based on actual railroad law after WWI:

The Transportation Act of 1920 gave the Interstate Commerce Commission complete control over pricing, issuance of securities, expenditure of proceeds, consolidations, and the construction, use, and abandonment of facilities. The act set up a Railway Labor Board to mediate disputes. Its "recapture" provision required a portion of a company's earnings in excess of an allowable "fair return" to be diverted to railroads with relatively low earnings. Except for the most routine administration, almost everything owners might do was subject to federal regulation or dictation.

More on the transition of steam to diesel here.  I am not very well versed on the subject, but apparently this specialized railroad labor law was later applied to airline pilots, with predictable results.  It is interesting that the two industries covered by the RLA (railroads and airlines) have both seen every major carrier in their industry bankrupted over the last 50 years.

Update:  I have been a fan of railroads for years.  One of my frustrations with my current house is a don't have room for a model railroad layout.  I had one back in St. Louis, where I had a basement, but there are not very many basements in Phoenix.  Here are some photos of that old layout, which was still under construction when I had to tear it down and move.