What's ahead for CSX in the post-Hunter Harrison era

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CSXatMossRun
An eastbound CSX coal train descends Alleghany grade near Moss Run, Va. What's ahead for this major eastern freight carrier in the post-Hunter Harrison era?
Trains: Jim Wrinn
JACKSONVILLE, Fla. – In the wake of E. Hunter Harrison’s death Saturday, what’s next for CSX Transportation?

Acting CEO James Foote has been at CSX for only two months and inherits a railroad that is under increased regulatory scrutiny for service failures. The company also is likely to face shareholder lawsuits over hiring a CEO with known medical problems.

CSX has “outstanding team of railroaders” who will implement Harrison’s Precision Scheduled Railroading operating model, Foote said on Friday after CSX announced Harrison had been placed on medical leave.

Industry analysts expected Foote, who worked closely with Harrison at Canadian National, to be named permanent CEO.

“He is a competent, experienced railroader who is familiar with Precision Railroading,” says John Larkin, an analyst with Stifel Equity Research. “He has been in place for a couple of months and has a head start on any others. The company has underdone enough uncertainty over the past couple of years and needs some stability.”

Stability is key at a railroad that has undergone a management coup, mass management layoffs under former CEO Michael Ward, and major restructuring and sweeping operational and management changes under Harrison.

“We believe that Mr. Foote’s presence in the senior leadership team provides an important source of continuity,” Cherilyn Radbourne, a TD Securities analyst, wrote in a note to clients. “Our biggest concern is that Mr. Foote’s primary area of expertise is sales and marketing versus operations, and the senior management team now lacks a member with an operating background.”

Foote also is wearing three hats: Before being named acting CEO on Thursday, he was heading both operations and sales and marketing. Analysts say that’s too many roles to juggle and that Foote will likely name a chief operating officer from within CSX.

Harrison had brought in a dozen operating officials with Precision Scheduled Railroading experience and had identified “rock stars” from intensive training sessions called Hunter Camps. About 150 people at CSX went through Hunter Camps, the last of which was held just a week before Harrison fell ill and died from what CSX called unexpected complications.

Analyst Anthony Hatch of ABH Consulting said the only issue about who will become chief operating officer is “whether it’s a PSR vet from the outside or one of the rock stars.”

Larkin said it’s possible the role could go to Chief Financial Officer Frank Lonegro, the lone holdover from the previous management team. “It is significant to note that Hunter kept him and not the others in the C-suite,” Larkin says.

Although at least one analyst said it was possible that CSX would seek a merger in order to fill management holes and continue the transition to Precision Scheduled Railroading that Harrison began, others scoffed at the idea.
“Good God, no,” Hatch says of merger speculation.

“We think it is unlikely that anybody in the industry wants a merger right now,” Larkin says, noting that the Surface Transportation Board only has two of its five members. “CSX would need to stabilize its operations and repair relationships with customers and employees first. Foote actually may he less prickly than Hunter and more likely to repair these critical relationships near term.”

On Thursday, federal regulators asked CSX to provide more information about how it will provide consistent and reliable service in light of persistent complaints from shippers. It also requested a meeting with Foote, in a letter addressed to Harrison before his medical leave was announced.

Meanwhile, at least one law firm said it was investigating whether the CSX board of directors properly safeguarded shareholder interests when it hired Harrison despite being aware of his medical issues.

Harrison refused to take a company physical or allow an independent physician to review his medical records. The CSX board accepted a letter from Harrison’s personal physician, who said he was capable of leading the railroad.

Only later was it disclosed that Harrison had a medical condition that required him to use supplemental oxygen. CSX executives, and Harrison himself, said he was fully engaged in the day to day affairs of the railroad, even though industry sources say he was rarely present at the company’s Jacksonville offices.

“We are investigating whether there was any potential breach of fiduciary duty to the company in the hiring of Harrison or in the compensation awarded him,” said Jake Zamansky of Zamansky LLC, a New York law firm that specializes in investment fraud.

CSX shareholders in June overwhelmingly approved a resolution awarding Harrison and his hedge fund partner, Mantle Ridge, an $84 million reimbursement for salary and benefits Harrison forfeited by leaving early from the top job at Canadian Pacific. Harrison had threatened to quit if shareholders rejected the resolution.

CSX stock fell more than 7 percent on Friday, the day after Harrison’s leave of absence was announced. Shares stabilized today – they were up more than 1 percent when the stock market closed.

A CSX spokesman declined to answer questions about a timetable for naming a permanent CEO or whether the board acted properly in hiring Harrison.
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