Inflation and Data Alert! A dive into week 28 rail traffic and earnings from Union Pacific and CSX, update on Chicago embargo, and the STB chairman steps into the fray.
First, the week 28 data for rail:
https://www.aar.org/news/rail-traffic-for-the-week-ending-july-17-2021/
Traffic is definitely up compared to pandemic compressed 2020. 2021 is closer to 2019 than 2018 though. However, I think this comes down to employment and the earnings calls from CSX and Union Pacific speak to this:
Lance Fritz -- Chairman, President & Chief Executive Officer (Union Pacific):
That's a great question, David. And I certainly hope we do end up with a better volume environment, and it just forces us to keep bringing more resources. Let's start with labor, right now, we're really not seeing substantial problems hiring labor. We've got a couple of issues with very different skill sets, most of those are in our non-agreement workforce, like data scientists or machine learning scientists.
But when it comes to hire and TE&Y, the core team that actually runs our transportation product, there might be a spot like LA where it's relatively harder to hire than somewhere else. But it's not -- we're not yet in a place where we think that's an impediment. We don't have to do anything at this moment special to try to attract people to the jobs.
Now, longer-term, for sure, we do have initiatives and understand that we've got to make our jobs more attractive over time, so that we can continue to attract a really big pool to our jobs. And that includes our national negotiation on right now, where we think taking somebody out of a capital locomotive and putting them on the ground, actually makes the job more attractive. It makes it a job that stays at home and turns it into shift work. So that kind of answers your labor question.
Hmm, Union Pacific seems a little blase about the whole matter. I wonder if CSX feels the same way?
CSX
Now moving down to the specific expense line items for Q2. Labor and fringe was up 18%. Higher volume and inflation together drove a $75 million increase in expense. Additionally, incentive compensation increased $60 million on higher projections for award payouts this year, coupled with prior year downward adjustments related to COVID impacts.
On the cost side, about two-thirds of the expense will be MS&O. About one-quarter of it is split between labor and fuel with the rest hitting depreciation and rents.
Wage increases and fuel inflation increasing expenses for them by 25%.
Allison Landry -- Credit Suisse -- Analyst
Good afternoon. Thanks. I was hoping you could maybe talk about the underlying pricing environment, specifically what you're seeing on contract renewals, even if just directionally from Q1? And then just given the myriad of inflationary pressures and very tight truck capacity, do you think there is, scope for a more rapid acceleration in core price when you see the cost cycle? Thank you.
Kevin Boone -- Executive Vice President of Sales and Marketing
Hey, Allison, this is Kevin. In terms of price inflation today and cost inflation, what we're seeing and I'm keeping close with Sean and staying close to that, so we can be transparent with our customers and explain to them what we're seeing in the market, none of that is a surprise to them. They're seeing it in their business. They certainly understand the pressures that are out there in terms of labor and other material costs. What we're really trying to do is see if some of these things are transitory or whether they're really here for the long term and we'll continue to evaluate that throughout the year.
When you look at generally our contracts, we have a lot of those renewals that occur in the fourth and first quarter, they are concentrated in those quarters and really it represents about 70% of our annual contract renewal activity. So we'll continue to look at that. We're communicating transparent with our customers and expect to obviously achieve that cost inflation through our pricing.
Wow, Kevin (and I am assuming other company leaders in America?) grappling with if inflation is transitory or not. I find them a fascinating use case since their renewals are for the 1st and 4th quarter, and by all sounds of it, they have price increases baked in for quarter 4 and moving forward?
Ken Hoexter -- Bank of America Merrill Lynch -- Analyst
Hey. Great. Good afternoon and congrats on the solid results. Just wanted to talk a little bit about the congestion that's going on. So obviously you just had a couple of questions on employees and the ability to handle it. We've seen the two Western rails kind of do embargoes on traffic. Maybe talk a bit about -- we've seen your metrics kind of come down in terms of on-time performance, talk about if you're starting to see any of that spread to the Eastern network? Is there different congestion points that, especially what's going on in Chicago, that you fear is starting to create any larger backlogs?
And then just on that note, your cost per employee really scaled. Can you address, kind of, if there is anything in that that we should look at going forward? Thanks.
James M. Foote -- President and Chief Executive Officer
Yeah, Ken, it's Jim. I'll make quick comment and then I will let Jamie follow up with any details if things are necessary. We've been very, very, very committed to making sure that this railroad runs well. It has been an unbelievable challenge. I have never seen any kind of a thing like this in the transportation environment in my entire career where everything seems to be going sideways at the same time. Despite all that, we have been able to keep our terminals open in Chicago and I hope we can continue to do that.
In January when I got on this call, I said we are hiring because we anticipated growth. I fully expected that by now we would have about 500 new T&E employees on the property. No way did I or anybody else in the last six months realize how difficult it was going to be to try and get people to come to work these days. It is an enormous challenge for us to go out and find people that want to be conductors on the railroad, just like it's hard to find people that want to be baristas or anything else. It's very, very difficult. Nor did we anticipate that a lot of the people were going to decide they didn't want to work anymore. So our attrition was much higher in the first half of the year than what we had expected. So even though we brought on 200 new employees, we fell short of where we thought we would be by now going into the year because we anticipated that there was going to be strong demand. We continue to expect there to be strong demand. And as long as there continues to be the forecast for demand, we are going to continue to hire employees, because you need employees to run a railroad. That's what we're managing this Company to do is to serve our customers' needs and we will bring on the assets and put them in the places where they need to be so we can move our customers' freight, simple as that.
Jamie Boychuk -- Executive Vice President of Operations
I mean -- I think Jim's comments really nailed it with respect to some of the headwinds that we've faced here with respect to the metrics and where they sit. I'm proud of what this team has been able to do under the environment we've been at. Quite confident that in the environment we're in that Kevin and his team is providing us with some great numbers of what we need to look for going forward into the next six to eight months as far as we can in this industry. But we know we can do better on these metrics. And that's what I think is the great opportunity as an operating team as we look forward. We've got the rolling stock that we need. We've got the assets that are sitting there. It's people, to Jim's point, and I think it was mentioned by Amit, was 8% is what we look at for our attrition, which means we're going to be hiring for attrition, but we're going to be hiring for above attrition as well.
Sean Pelkey -- Vice President and Acting Chief Financial Officer
Yeah, Ken, just quickly on that. So if you're looking year-over-year there's a few things to think about. First is the incentive comp, I called out. You've got inflation on the labor side and then we've got a little bit of hire over time versus last year as we were obviously scaling down over time with the plummeting volumes.
Just the other factor from last year. You remember we had those emergency reserve boards. So we had about 300 employees who didn't have significant wages along with their emergency status there. So looking from the first quarter we're actually down a little bit sequentially, reflecting some normal seasonal trends.
Amit Mehrotra -- Deutsche Bank -- Analyst
Right. But then on the labor side, I think there is 6% to 7% of the workforce that attrits [Phonetic] every year. So when you're talking about growth in sequential labor or headcount, is that a net number or a gross number, net of attrition, if you can just provide a little bit of color on that as well?
Sean Pelkey -- Vice President and Acting Chief Financial Officer
Yeah. So, I mean we're going to continue hiring through the rest of the year and as long as we need to in order to move the volume and increase fluidity. I would expect sequential headcount is probably going to go up a little bit on a net basis, both in the third quarter and the fourth quarter.
Jamie Boychuk -- Executive Vice President of Operations
On the labor side, I have been working really close with our HR department, Diana Sorfleet and her crew. In the last eight months, it's been difficult. There is no question about it. We've gone through some ebbs and flows with our applications that have come forward, making sure we get the right people to work in new jobs. Just recently, there is a couple of things that we've done that's helped us. We've come up with a deal with our conductor SMART-TD for an availability agreement, which allows us to work closer with our conductors and make sure that their availability is better than it has been. So that agreement has been successful here over the past couple of weeks since it's kicked in. And believe it or not being a fourth generation railroader, I'm a believer that sometimes the best people you get for railroads that stick around are actual people from railroad families. I think there's a few others around this table in the same situation.
We have put a referral program together offering incentives to our employees to refer people to our railroad to work for CSX. And we went from application of just a few hundred people to I would say within a two-week period well over 1,000 applicants that we're going through right now to bring on as conductors. So the pipeline has gotten very strong and this program has helped out. And of course the referrals will then help people stick around until they understand what the job is and know what it's about and understand the lifestyle. So this program is really going to help us move forward as we continue to do our hiring.
Ravi Shanker -- Morgan Stanley -- Analyst
Thank you. Good afternoon everyone. Couple of follow-ups. Jim, I wanted to follow up on your comment earlier that now throwing money is not going to solve the labor problem, which doesn't make sense, given some the structural issues. But in the near term, I think a lot of the other industries are throwing money at the problem, whether it's trucking or fast food or retail or whatever. So I mean, are you saying that you're not going to go down that route at all or at what point do you do that? And also, kind of, how do we think about revenue per employee in the back half of the year?
James M. Foote -- President and Chief Executive Officer
Well, I personally think that, as I said, we need to look at, fundamentally look at what we need to do to make sure that we have a content happy workforce over the long period of time. And so that's what we're trying to do. I think that's kind of the plan in most businesses, whether it's bringing on to work or whatever it is you might need to do to make your job more fulfilling, that's great. If I'm a trucking company or an intermodal company and I decide that the smart thing to do is to pay my truck driver a $0.25 million [Phonetic] a year to drive a truck and then as always happens in the trucking business, not maybe next year, but the year after, when the bottom drops out and there is excess capacity all over the street and people are driving trucks for rates in order to put gas in the tank, the business model doesn't work so good. So we try to take a longer term more holistic approach to managing our workforce.
Ok, this increasing headcount thing to meet demand is really rich. Especially since industry-wide, they have been working to slash headcount for years going into this!
Before the railroads blame the cut in the workforce today on the pandemic, letโs point out that by February 2020, just before the pandemic really got going, their headcount stood at 127,634. February 2019, they had 145,800. They had already trimmed 18,166 (14%) before the pandemic even started. For reference, only 12,000 workers were cut during the pandemic.
Covid has seen some of the workers were put on furlough. However, it turns out, not all of them are eager to return to work on the conditions offered by the railroads--as pointed out by the needing to improve work-life balance as called out above by Jame Foote.
These cuts in the workforce, and now the scrambling to hire people amid self-created โlabor shortages,โ is contributing to issues in meeting heavy transportation demand: Union Pacific temporarily suspended traffic from Los Angeles into Chicago and getting called out by customers (the lobbyist representing and slinging for shit is quite effective).
On the suspension front, the embargo was not extended and service has been allowed to resume.
However, the railroads aren't out of the woods yet.
Surface Transportation Board Chairman Martin Oberman
Surface Transportation Board Chairman Martin Oberman asked the Class I railroads Thursday to provide information on congestion at inland intermodal terminals, where international containers are stacking up faster than customers can receive them.
โI am particularly concerned about significant increases in container congestion at key U.S. terminals, and substantial charges being levied by the railroads for container storage at these terminals,โ Oberman wrote in a letter to the chief executives of all seven Class I systems.
Oberman further went on the offensive in the Wall Street Journal telling them:
โThe railroads cannot strip down to bare-bones operations,โ and โItโd be like a professional football team only having one quarterback.โ
It looks like the Railroads profit and chasing the bottom line is starting to catch customer and regulator ire. The real question is will anything be done about it?
