If veteran railroader E. Hunter Harrison finds his way to the top of CSX Transportation, industry analysts say CSX intermodal shippers should expect a lean, mean management style, less friendly service, and higher rates, all in exchange for better reliability.
His customer satisfaction ratings are low. He’s been called “the ugly American.” His colleagues have said he must be kept from shippers like an animal that must be kept in a cage. Major shippers declined to speculate with JOC.com on his potential new post because of the controversial figure he cuts. But industry insiders say, although shippers may not like the man, they like what he does.
“He saves them money, even if it comes at a price,” intermodal rail analyst Tony Hatch told JOC.com.
“He is blunt and he does dictate to the customer that if you’re going to get a superior service, you’re going to have to do your part,” said Frank Wilner, a retired railroad economist. “Yes, he is blunt, but how is that different from the customer saying, ‘If the railroad doesn’t provide the rates and service I want, I’ll go to truck.’? Hunter takes the same attitude in negotiating.”
Hatch, Wilner, and other industry analysts are wondering if that attitude is a good fit in an environment like CSX. The Jacksonville, Florida-based railroad is geographically, financially, operationally, and managerially unlike the two Canadian railroads and smaller US railway Harrison has helmed in the past.
The 72-year-old Harrison announced he would be retiring from Canadian Pacific Railway in January, after a lengthy career at multiple North American railroads during which he led two others — Illinois Central Railroad from 1993 to 1998 and Canadian National Railway from 2003 to 2009. Instead of retiring to his horse farm after CP, however, Harrison has teamed up with activist investor Paul Hilal and his firm Mantle Ridge in a bid to helm yet another railway, CSX.
It’s not the first time Harrison has made a play for CSX. While head of CP, Harrison, alongside activist investor Bill Ackman and his firm Pershing Square, attempted to woo the Florida railroad into a merger that never materialized owing to still-unclear reasons. His most recent play has met a far warmer response.
In a Feb. 16 response to Mantle Ridge’s overtures, CSX said, “The CSX board of directors is always willing to engage in constructive dialogue.”
Then on Feb. 21, CSX announced that chairman and CEO Michael Ward and President Clarence Gooden would be retiring at the end of May, calling the changes “part of an orderly transition of the company’s senior leadership that the board has been considering for more than a year.” CSX executive vice president Fredrik Eliasson was named president, but no CEO was identified, leaving the door open for someone like Harrison to step in.
Industry analysts say it’s not a matter of if Harrison takes that step; it’s a matter of when. What’s uncertain now is if Harrison will be bringing his bullish boardroom personality and dedication to “precision railroading” to Jacksonville. Analysts suggest that Harrison may scale back his approach and adapt his strategy, which could be good news for shippers worried about the “animal in the cage.”
“I think that it would be overly simplistic to sort of just directly map the results that were achieved at CN and CP and say, ‘Well there’s no reason he couldn’t get those numbers out of CSX,’” said Larry Gross, a senior transportation analyst at FTR Associates. “CSX is different. It’s shorter haul. It’s not a linear network like CP or CN. It’s much more a mesh than a string.”
“Precision railroading,” in the simplest terms, means parking locomotives (usually hundreds), cutting jobs (often thousands), and enforcing strict scheduling for the railroad and customer alike. It was an undeniable success for CN and CP, especially for shareholders that experienced profit margins widen.
Customers saw service improve, but rates increased and scheduling was stricter. “Precision railroading: if a customer is supposed to deliver a container or trailer at 7 o’clock and doesn’t deliver, the train is going to leave,” Wilner summarized.
CP and CN, though, operate in a much more linear network. The US East Coast rail network, divided between CSX and its archrival Norfolk Southern Railway, has been described as a “spaghetti bowl.” That makes it much more difficult to run trains at higher speeds to save money. CSX, in particular, has shorter lengths of haul that face stiff pricing competition from the trucking sector.
The railway cited that competition all last year as total intermodal volume growth struggled to say in the black. That started to improve by year’s end as total volume, including the extra business week in 2016, was up 4 percent year-over-year in the fourth quarter of 2016. Traffic for the full year was down 1 percent. Excluding the extra week, intermodal volume for the quarter and the full year were both down 2 percent.
On a conference call with investors and analysts at the start of the year, CSX CFO Frank Lonegro was explicit that volume declines were the result of “domestic competitive loss” last year.
“Their ability to price, especially on the shorter length of hauls that CSX operates in, it’s always going to be bumping up against the ceiling that over-the-road offers,” said Gross. CSX doesn’t operate against over-the-road carriers, he said, “It’s operating within an over-the-road environment.”
It may pose a challenge if Harrison intends to run trains faster and increase rates.
“He has never dealt with and he has never run a railroad that has the complexity of CSX, that would be in terms of shorter hauls, more divergent mix of commodities with different transportation requirements,” said Wilner.
“If you are expecting a lot of responsiveness out of the railroad in terms of meeting short-term requirements, changes, reactions, that’s not a good fit with the kind of institution Hunter wants to put into place,” Hatch said.
CSX is also not broken, added Hatch.
“Hunter had great timing when it came to CN and CP. Not only were they not operating well. They were operating poorly: 70-plus operating ratio,” said Hatch. CP’s operating ratio, a measure of profitability, in the last quarter was 56.2 percent and CN’s, 55.9 percent.
CSX has faced strong headwinds when it comes to building intermodal business and hitting a 65 percent operating ratio goal, Hatch said. “But I already thought that CSX was working better.” The Florida railroad’s operating ratio last quarter was 67 percent. Not as low as CP or CN’s but, as Hatch and other analysts have indicated, CSX’s network may simply not be geared to support trains turning that much of a profit that quickly.
“[CSX’s] operating ratio improvements have been pretty darn good given the situation they’re in,” Hatch said. “Can Hunter Harrison fix a railroad operating in the East? Can he get it to a 58 operating ratio? I don’t know and I don’t know if that’s appropriate.”
Even if Harrison pursues precision railroading at CSX without scaling back his strategy, Hatch said it will more than likely not affect the railway’s current business portfolio. They may not like working with the man, but Hatch wagers intermodal shippers will appreciate their ultimate logistics cost savings in exchange for higher rates. The question is, can Harrison onboard business that’s been riding the roads instead of the rails.
“Intermodal customers, I don’t think will walk away, but will enough of them walk on?” Hatch asked. “The question is, what about new business?”
Converting cargo from road to rail in this day and age has been a challenge with the low cost of fuel driving down comparably faster truck service. If Harrison increases CSX’s intermodal rates in his implementation of precision railroading, it could make that conversion an even tougher sale.
Hatch said he doesn’t anticipate Harrison hiking rates at CSX any more than any other rail executive. And Gross and Wilner said, if he does charge more, it will only be after he can make an improved service value proposition to customers.
“Part of the discipline that Hunter brings to these operations is a selectivity with regard to the business the railroad will do and at what rate. He puts a very high premium on matching what the railroad is capable of delivering efficiently and what the railroad sells,” Gross said.
“He can’t raise the rates unless he improves the service,” said Wilner. “The equation has always been price is heavily dependent on the quality of service. Shippers repeatedly have said if they had a superior service they wouldn’t oppose paying more.”
It’s going to be a test, not just for CSX shippers but for Harrison himself. The industry veteran has made a name for himself as a “change agent de facto” — in Hatch’s words — but at 72, tackling a business and a market he’s never played in before, Harrison may be more reserved and keeping his legacy in mind.
“It’s going to test his legend,” Wilner said.