KCS eyes smaller locomotive fleet under shift to Precision Scheduled Railroading

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Kansas City Southern
ORLANDO, Fla. — Kansas City Southern will be able to park at least 10 percent of its locomotive fleet as it moves tonnage on longer trains under its shift to Precision Scheduled Railroading.

KCS rostered 1,100 locomotives at the end of 2018 and has identified 75 older units that will be stored, sold, or returned to lessors this year.

“Our goal is to be less than 1,000,” Chief Financial Officer Mike Upchurch told an investor conference on Monday. “I think we can actually do better than that.”

KCS will receive 50 new locomotives from Wabtec Freight this year. As part of that order, it’s trading in 33 units, Upchurch says, so the net gain is only 17 locomotives.

KCS began making PSR-based operational changes late last year. It has already eliminated nearly 100 crew starts per week across its system by combining trains, mostly in Mexico where KCS is blending merchandise and intermodal traffic.

There were doubts that PSR would work on a complex network like CSX Transportation’s, Upchurch noted.

“It’s pretty obvious that that railroad has delivered tremendous success and that’s what we want to replicate,” he says.

What KCS does not want to replicate: The disruption, shipper complaints, and regulatory scrutiny that accompanied E. Hunter Harrison’s implementation of his operating model at Canadian National, Canadian Pacific, and CSX.

“First and foremost, we want this to be a customer-focused initiative,” Upchurch says. “At the end of the day, if we don’t improve our customer service we’re not going to generate the growth opportunities we have at Kansas City Southern.”

PSR-based operational changes can create capacity that will allow KCS to better handle growth in unit-train traffic such as petroleum products exports from the U.S. Gulf Coast to Mexico, Upchurch says.

KCS is seeing early operational improvements, Upchurch says.

The railroad’s yard in Monterrey, Mexico, was plugged in August and September. Now the yard is fluid, operating with just half the volume of cars it held in the fall, Upchurch says.

The result is that traffic is moving more quickly, which reduces car cycle times.

The improvements in terminal dwell at Monterrey and Sanchez Yard in Nuevo Laredo, Mexico, are among the reasons why KCS has been able to reduce the number of cars online by 5,500 this year, roughly a 9 percent decline from the average of 61,000 cars online last year.

KCS expects to have a smaller workforce by the end of the year, but Upchurch offered no specifics.

Upchurch compared KCS’s cost structure and operating ratio to its larger Class I railroad cousins. Although KCS enjoys lower labor costs due to its Mexican operations, it trails its peers in equipment costs due to slower cycle times.

KCS trails an adjusted industry operating ratio average of 63.5 percent by 0.8 points, a gap that grows to 3 points when the yardstick is CSX, CP, and CN, the railroads with the best operating ratios.

KCS is evaluating key metrics to measure operational progress under PSR. Targets have not yet been set, Upchurch says, but the key measures include gross velocity, terminal dwell, train length, cars online per revenue carload, fuel efficiency and monthly carloads per full time employee.

The gross train speed measure, he noted, includes trains held for crews, power, or other reasons and are a true indication of velocity. KCS’s gross velocity last year was 11.1 mph versus the 26.9 mph reported to the Association of American Railroads.

Upchurch spoke at the Raymond James 40th Annual Institutional Investors Conference.
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