Acting CEO says CSX can thrive in Harrison’s absence

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JACKSONVILLE, Fla. – CSX Transportation can continue to make operational and service improvements in the absence of CEO E. Hunter Harrison, acting CEO James Foote told Wall Street analysts on Friday morning.

Foote would not answer a question about whether he and the board expect Harrison to return from a medical leave that was announced on Thursday night. And despite months of concerns about Harrison’s health, Foote said it was too early to discuss succession plans.

Last week Harrison conducted a multi-day operations management training session, then fell ill shortly after the Hunter Camp and experienced medical complications that led to his taking medical leave, Foote says.

But Foote says that CSX has an “outstanding team of railroaders” who will implement Harrison’s Precision Scheduled Railroading operating model.

“I do not see any reason to diminish our expectations concerning the pace and magnitude of our future progress,” Foote says.

But the stock market reacted negatively to the news about Harrison, sending CSX shares tumbling 12 percent in early trading on Friday.

The heavy lifting has been done regarding major operational changes, Foote says, and the focus now is on daily execution of the operating plan.

“There is still much more work to be done here, but, again, everyone is focused,” Foote says. The railroad will continue to seek ways to turn cars and locomotives faster, tweak train and network performance, and improve service as a way to grow the business, he says.

Operational improvements have been accelerating, with average train speed up 19 percent and terminal dwell down 13 percent versus the average for 2016, Foote notes.

CSX’s on-time performance also has improved over the past two weeks, according to the railroad’s weekly reports to federal regulators. It now stands above last year’s levels, but has not yet topped the 81-percent level recorded in the second quarter.

Harrison brought in a dozen operating people with Precision Scheduled Railroading experience and mentored about 150 mid-level managers through Hunter Camps. “They’re doing an exceptional job every day,” Foote says.

Major changes to the intermodal network also are complete, Foote says. CSX jettisoned its hub-and-spoke strategy in favor of a traditional point-to-point system that focuses on high-density routes. But it also has blended intermodal and merchandise traffic to more efficiently move intermodal loads in low-density lanes.

“We’re now in a much better position to take advantage of market opportunities than we were before,” Foote says.

Foote was chief marketing officer at CN while Harrison was CEO. Foote was brought on board at CSX as part of an Oct. 25 management shakeup that involved the dismissal of the railroad’s top operating, marketing, and legal officers.

Last month, Harrison told an investor conference that the hiring of Foote is one part of a succession plan. Harrison has a four-year contract and who will succeed him became a greater concern for investors after October’s management changes.

Harrison, 73, has an undisclosed medical condition that requires him to use supplemental oxygen. Concerns over Harrison’s health were an issue in the events leading up to the hedge-fund orchestrated management coup that brought him to Jacksonville in March.

Harrison’s health initially was a sticking point in negotiations between CSX and Mantle Ridge, Harrison’s activist investor partner. CSX wanted to have independent physicians review his medical records, but Harrison refused. CSX’s board ultimately said it was satisfied that Harrison was up to the task of running the railroad.

Harrison said at a Nov. 29 investor conference that he planned to step back a bit to let Foote and his operating and marketing teams develop.

As chief operating officer, Foote had responsibility for both operations and sales and marketing. Foote says he was spending 70 percent of his time on the sales and marketing side, but in Harrison’s absence he will be dividing his time evenly between operations and sales.

“There’s only one genius in the room at all times that knows the railroad business like nobody else does. We all know that, we all appreciate his vision,” Foote said last month.

John Larkin, an analyst with Stifel Equity Research, says that while operational changes are largely complete, CSX’s corporate culture is not yet where Harrison expects it to be.

“Jim Foote should be able to continue on the redirected trajectory and finish up the cultural transition,” Larkin says. “His expertise is marketing, which is Hunter’s weakness. So maybe this transition is functionally appropriate, albeit on a bit of a more rushed schedule than originally planned.”

Harrison’s absence poses three critical questions, says independent analyst Anthony Hatch of ABH Consulting.

Has CSX gone far enough in implementing Precision Scheduled Railroading? Likely yes, Hatch says, given the swift operational changes that include idling eight of the railroad’s dozen humps and revamping the intermodal network.

Is the “plan bigger than the man”? Harrison would say yes, Hatch says, but CSX lacks “a true, experienced” chief operating officer.

And what is the post-Harrison era going to look like? This has been a key question, Hatch says. Canadian National thrived after Harrison left in 2009 and evolved into the world’s best freight railroad. Canadian Pacific, which Harrison left in January, appears to be an emerging success, he says. And Foote, a marketer at heart, impresses Hatch.

This story was edited Dec. 15 9:45 a.m. Central to add Hatch's remarks.

NEWSWIRETrains News Wire

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