Railroad companies such as Union Pacific (NYSE:UNP), CSX Corporation (NYSE:CSX) and Norfolk Southern (NYSE:NSC) have been charged with claims that they billed surcharges that were unrelated to fuel costs. It is charged that the companies colluded to inflate fuel surcharges, thereby collecting billions of free dollars. The litigation has recently been converted into class action status. 
The railroad industry was deregulated back in 1976. But, in 1995, the U.S. Department of Transportation founded the Surface Transportation Board (STB) to help resolve railroad rate and service disputes and to review railroad merger proposals. In 2005, railroad companies instituted a fuel surcharge program after which their profits started to soar. Over the past 5 years, their margins have continuously increased.
- CSX’s Q3 2016 Earnings Review: Cost Reduction Partially Offsets Impact Of Lower Revenue
- CSX’s Q3 2016 Earnings Preview: Weakness In Shipment Volumes And Fuel Surcharge Revenue To Weigh On Results
- How Would CSX Be Impacted By A Potential Decline In Coal Shipments With The Implementation Of The Clean Power Plan?
- Which Are The Areas Of Rail Shipment Growth In A Year Of Declining Overall Shipments ?
- CSX’s Q2 2016 Earnings Review: Lower Shipment Volumes And Fuel Surcharge Revenue Negatively Impact Results
- How Do Union Pacific, Norfolk Southern, And CSX Compare In Terms Of Efficiency Of Their Rail Networks?
The companies are alleged to have billed unreasonable surcharges between 2003 and 2008, not reflecting the actual fuel price hikes. In January 2011, the STB held hearings to determine whether it should review the exemptions, which is expected to continue in 2012. Revoking the exemptions would potentially impact railroad pricing flexibility, posing downside to the margins.
There are potentially two impacts.
First, if the allegations are proved to be true, the railroad companies will need to shell out penalties which will hamper their cash position as well as valuation. Second, if the exemptions over fixing railroad service rates are waived off, the companies will see their margins sliding south.Notes:
- UPDATE: Class-Action Status Granted in Fuel-Surcharge Case against Railroads, nasdaq.com, June 28, 2012 [↩]