Can Harrison improve CSX Transportation?

Yes, analysts and industry insiders say, citing his success at Illinois Central, Canadian National, and Canadian Pacific
RELATED TOPICS: CSX | EHH | CLASS 1 FREIGHT RAILROADS | PEOPLE
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JACKSONVILLE, Fla. — E. Hunter Harrison has punched his ticket to Jacksonville.

But in several respects, the trip to CSX Transportation will be different than his moves to Canadian National and Canadian Pacific, where he led dramatic turnarounds.

Analysts and industry insiders say that leading CSX will pose some new challenges for Harrison, the widely respected operations man who takes a hands-on approach as chief executive.

And they point out that the CSX today is not the CP of 2011 or the CN of 1998.

But they say that Harrison will likely be able to improve operations, cut expenses, and boost profitability at CSX, which has been stung by the decline of coal traffic.

At CN and CP, Harrison was able to rely on a cadre of key executives who followed him from railroad to railroad. Harrison’s separation agreement with CP bars him from poaching CP executives, aside from his chief of staff, so unless he taps retired executives, he may be more of a one-man show as he tries to change the corporate culture in Jacksonville.

From an operations standpoint, CSX’s spider-web network is far more complex than the relatively linear systems of CP and CN. The complexity of CSX will make it more difficult — but certainly not impossible — for Harrison to implement the precision railroad operating model he developed at Illinois Central, another linear railroad, in the 1990s.

“I wouldn’t bet against the guy,” one industry veteran says.

CP and CN both run long trains over long hauls. The typical train carries three or four blocks of traffic that make tight connections with other trains at terminals en route. This works well on the Canadian roads for a few reasons.

First, they run relatively close to on-time, which is essential. Second, the long hauls give local operating people lots of visibility into the traffic that’s headed their way. That gives them time to prepare and to respond to problems. Third, the linear networks mean that if a block misses a connection it likely can be added to a subsequent train through the terminal.

In contrast, CSX operates shorter trains over relatively short hauls in the densely populated East. Its typical train consists of just one or two blocks of traffic, running over just a few subdivisions. This provides local operating officials with less visibility and only a few hours to respond. CSX has struggled with on-time performance: A third of its trains arrived late in 2016. Still, that’s an improvement over 2015, when half of its trains arrived late.

Late trains create operating headaches. A train that arrives late at Avon Yard in Indianapolis, for example, may carry traffic destined for several points on the compass. So missing connections likely means this traffic sits until the next day’s train departs.

Another wild card is that CSX is far more dependent on connecting traffic — from Class I interchange and its shortline and regional partners — than either CP or CN. That leaves a significant amount of traffic outside of CSX’s direct control, and subject to the whims of connecting railroads.

Exactly how Harrison will approach these problems is unclear.

But there is consensus among analysts and industry observers that Harrison will make CSX a more efficient railroad.

“I haven’t found a rail leader who would deny that EHH and precision railroading would cut costs at (any) U.S. carrier,” says Anthony Hatch, an independent analyst at ABH Consulting.
During CP’s failed Norfolk Southern merger attempt in 2015 and 2016, the railroad said Harrison would wring $1.2 billion in savings at NS by improving its operations. Harrison planned on parking a third of the NS locomotive fleet, shutting down some hump yards, and cutting employment levels.

CP made it clear that Harrison believes his operating model can work anywhere.

“Precision railroading is a set of non-discriminating principles that can be effectively applied to any railroad in the world,” CP argued in a white paper laying out the case for operational improvements at NS. “Geographic, network, and business mix differences are irrelevant in the application of the underlying principles that guide day-to-day decisions.”

Those underlying principles include Harrison’s “five foundations” of improving customer service, controlling costs, optimizing asset utilization, operating safely, and valuing and developing employees.

“These five foundations can be applied to any railroad with the same result,” according to CP’s white paper, which reads like a condensed version of the two books that Harrison wrote while CEO of CN.

Harrison and his team made quick work of making CP more efficient, raising revenue, and boosting profitability. Harrison also drew the ire of rail labor in Canada, both for the railroad’s cutbacks and for its discipline of employees.

CSX, however, is not the industry laggard CP was when Harrison came out of retirement to become its CEO in 2012.

CSX’s operating ratio of 69.4 percent for 2016 is on par with rival Norfolk Southern’s 68.9. BNSF Railway, Union Pacific, and Kansas City Southern are all in the mid-60s. And Canadian National and Canadian Pacific are both in the 50s. In contrast, CP’s 2011 operating ratio stood at 81.3 percent, well above the industry average at the time.

CSX has not reached its long-stated goal of an operating ratio of 65 percent. But that’s largely because the railroad has been hurt by the punishing decline in coal traffic. CSX’s coal revenue has plunged by nearly $2 billion since 2011, falling to just $1.8 billion in 2016.

“In the face of that headwind, a killer 100-year storm that would have sunk CSX or any [railroad] a decade ago, they have actually performed well,” Hatch says.

CSX slashed costs by a record $430 million in 2016. The railroad in February announced it would eliminate nearly 1,000 management positions — or 20 percent of the management ranks — to further cut costs by $175 million annually.

Stuck with a coal franchise that’s not likely to grow amid a glut of cheap natural gas, CSX under former CEO Michael Ward aimed to pull what remaining levers it could: increase volume and pricing in its merchandise and intermodal business segments.

It’s unclear whether Harrison will follow this CSX of Tomorrow strategy, which aimed to gain service-sensitive intermodal and merchandise traffic while cutting expenses and operating more efficiently.

Under CSX of Tomorrow, the railroad planned to ramp up capacity improvements on its high-density outer triangle of main routes linking Chicago, New Jersey, and Florida, while cutting spending on its hard-hit Appalachian coal network and lighter density feeder lines.

Last week, in an internal memorandum, CSX announced a sweeping operational realignment that reflects the blueprints of its CSX of Tomorrow strategy. Operations management was shuffled, with leaders named for three corridors and the local service network.

NEWSWIRETrains News Wire

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