Hunter's triumph from the grave

Posted by Fred Frailey
on Saturday, October 27, 2018

Hunter’s triumph

from the grave

 

Every big railroad is either following his game plan or under

pressure to do so. Will that really change railroading?

 

In the year since Hunter Harrison’s death, Precision Scheduled Railroading, or PSR, has progressed from crackpot railroading (in the eyes of some railroaders and shippers) to the gold standard. And it happened so fast we are still trying to wrap our arms around what it means for the future of this industry.

The facts are these: Canadian National, Canadian Pacific, and CSX Transportation have been put through Harrison’s PSR wringer, emerging in every case much leaner in terms of productive assets—cars, locomotives, trackage, and employees. That meant tons of savings to hand to investors. Interesting to me is what happened after that. CN, which Harrison ran as president or CEO from 1998 through 2009, went on a growth spurt in that period that continues to this day. Revenue ton miles at CN—the most basic measure of what a railroad does—rose 48 percent between Harrison’s retirement in 2009 and 2017. So it’s clear that downsizing the railroad’s assets didn’t inhibit Canadian National’s growth, because no other railroad even approaches what it accomplished during this period. Revenue ton miles rose slightly during Harrison’s tenure at Canadian Pacific and are now rising faster. His successor there, Keith Creel, says CP is game to grow. That’s the same story coming from Jim Foote, who succeeded Harrison late in 2017 at CSX.

Harrison’s impact on the other railroads of North America is palpable. The man was scarcely buried before financial analysts forgot the chaos he unleashed in his hurry to implement PSR at CSX and began asking other railroads why they weren’t more like CN, CP and CSX. Union Pacific, the oldest surviving nameplate in American railroading, capitulated and began implementing PSR practices last October on the eastern part of the railroad, with a goal of expanding the transformation to the entire system within several years. Chief Executive Lance Fritz insists this isn’t a case of PSR Lite.

Norfolk Southern in rewriting its entire operating plan, beginning with improving terminals. Chief Executive Jim Squires, being purposefully vague, says, “We will implement PSR principles where they lead to a better result for customers and shareholders.” Translation: “We’re not going down the PSR route yet, but I realize there’s a gun to my head.” Kansas City Southern CEO Pat Ottensmeyer said in late October that his railroad was looking into “elements of Precision Scheduled Railroading that make sense” and also indicated it may follow UP’s lead in this direction. That translates: “Talk to me later.”

This leaves only BNSF Railway, which is wholly owned by conglomerate Berkshire Hathaway and supposedly immune from the financial community’s obsession with PSR and how-low-can-you-go operating ratios. But things are changing there, too. Chairman Warren Buffett is age 88 and early in 2018 named two new vice chairmen who will probably compete to be his successor. One of the appointees, Greg Abel, oversees all of Berkshire’s non-insurance subsidiaries. Now instead of writing Buffett a quarterly letter, BNSF Executive Chairman Matt Rose answers directly to Abel, and my sources say Abel is fascinated by the profits enabled by Precision Scheduled Railroading. Abel perhaps forgets that Rose took BNSF from No. 2 in carloads, revenues, and profits versus Union Pacific to number one in each category, as of 2017. One is forced to conclude that pressure from Abel contributed to Rose’s decision to retire early in 2019. BNSF’s chief executive, Carl Ice, may have little choice but to join the PSR bandwagon, thereby making Hunter Harrison’s triumph all but complete.

I’m continually asked two questions. First, can a railroad like Union Pacific (or BNSF or KCS) successfully implement Precision Scheduled Railroading and reap its financial rewards without it being done by Harrison or one of his disciples, such as Creel? Second, if you have an entire railroad industry marching to the PSR beat, what does this portend for the future?

The answer to the first question is, not easily. To change the railroad, you must change the culture. Harrison did it in every instance by force majeure—if you didn’t embrace his plan, goodbye. Who will change the culture at Union Pacific? I am at a loss to know. My sources say the impetus for PSR came not from within the railroad, but from the board of directors, which puts Lance Fritz in a thankless position. He must lead the effort, but this isn’t his idea, and morale in management ranks is low to begin with. His chief operations officer is new to the job, and nothing in the man’s background shouts to me that he is up to this

Yet there are a lot of smart people at Union Pacific, and no company of its stature launches something of this magnitude with a will to fail. I am heartened that UP began by pruning its management ranks—in 2017 it counted 3,678 executives, officials and staff assistants, versus BNSF’s 1,511. (In fairness, BNSF outsources its information technology, whereas UP does not, accounting for some of the difference.) UP revealed in late 2018 it would eliminate 500 nonunion jobs by year’s end, plus 200 contract workers.

But let’s face it: As done by Harrison, you begin the PSR process by stripping a railroad to its underwear. At CSX it meant cutting every conceivable cost, denuding the railroad of field supervisors and just about everything else, until it began to be dysfunctional. That’s when he knew he had cut enough and could add back assets to make the railroad workable. This method is like becoming pregnant; there is no half way. Union Pacific began Precision Scheduled Railroading with a go-slow approach, not wanting to punish shippers and arouse regulators. Hmm. The way to looks to me now, UP may achieve some good financial results but not the sort that Hunter Harrison could or that its directors might expect. It would be a lot easier for UP to simply buy Canadian Pacific and let Keith Creel, a Harrison acolyte who knows PSR inside and out, come in as an outsider and do the dirty work. And if the process will be hard for Union Pacific, imagine the barriers to PSR in front of BNSF, KCS, and NS, all under pressure to walk the walk but so far unwilling to do so.

That brings me to the other question, whether a Precision Scheduled Railroading world would be a better one. It depends on how you define better. I’m an old-fashioned Rob Krebs-type guy. Like Matt Rose, his successor at BNSF, Krebs (CEO 1995-2001) sought to bake a bigger and more profitable pie by striving to be 99 percent dependable in delivering intermodal business, which is BNSF’s linchpin. Do that, he said, and customers will come to you. In other words, please the customer, and you will succeed.

By its very definition, PSR requires that you get rid of assets until you size the railroad to its current volume; otherwise, you are throwing away money. That implies that a PSR-designed railroad could not grow. Yet Canadian National proved you can add back locomotives and cars and people in a PSR environment.

That’s part of the deal, but I come back to pleasing the customer. To quote one well connected railroad consultant who I cannot name: “I don’t know in my heart that any railroad cares about customer service. They’ve all improved their operational costs and grown their businesses at the same time that service parameters are bad across the board. If you want to be more than a profitable land-barge system, which combines high efficiency with low on-time results, you’ve got to grow with the economy, and that it not happening.”

I guess I’m saying that good customer service that will entice more business is possible with or without Precision Scheduled Railroading. In other words, PSR is irrelevant in that regard. So to repeat what I’ve said it before: If you want to attract satisfied customers, then align the compensation of your people to that end. We will all follow the money. Make right-day delivery of whatever piece of the business is important a part of everyone’s bonus and stock grant, and you will see miracles occur here on earth. Who is doing that in a serious manner? Maybe nobody. So Hunter wins, and it doesn’t matter.

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