Inside the mind of Michael Ward

Posted by Fred Frailey
on Wednesday, April 20, 2016

Sometimes you wonder why you ever wanted the job. What a fix your company is in today. And it’s not just about CSX Transportation. You could as easily be Lantz Fritz or Jim Squires or the chief executive of any other U.S. Class I railroad. We’re all running enterprises that are in a world of hurt—running on fumes, even. The bottom has fallen out of your businesses. What in the heck are you going to do?

You have done all the easy things. You laid up locomotives (and gosh does it hurt to take delivery on new $4 million engines you ordered ages ago when you have hundreds of others stashed in storage). You have trimmed capital spending, slashed the crew boards, consolidated divisions, lengthened trains, and raised rates to the point customers are in mutiny.

But for all that, you are still swimming against the tide. Just look at the latest weekly numbers for CSX: Coal off 33 percent versus a year ago, petroleum products 41 percent, metallic ores 25 percent and so on and so on. Even intermodal—your salvation, you keep telling yourself—is off 5 percent the latest week. Look longer term? The year-to-date numbers are even worse, an unbroken string of minuses, commodity by commodity, except for autos, waste and (barely) intermodal.

When you suggest to your marketing people that they ease up on rate increases and accept new carload business on lower profit margins, your CFO threatens to quit, arguing that rate hikes and higher margins are the only thing you’ve got going for you. You’ve hounded the intermodal guys so hard they run at the sight of you, but look what good that does. The truckers are in a slump, too, and with cheap diesel fuel their rates are as low as yours in some instances. That means you have nothing to offer them that would entice their boxes onto your trains. You envy the western railroads and their long, long hauls.

You put your strategic planners to work on how a Conrail-type combination of your coal franchise with that of Norfolk Southern might work. That is, put the coal businesses of both railroads together and spin them off to shareholders or as wholly owned subsidiaries, to market coal in any direction, not just established routes. But the Coal Department got wind of this and isn’t cooperating, insisting the business will come back. You got your start in the Coal Department and think otherwise, but it goes to show how hidebound railroads are—throw out any new idea and you get ten reasons why it won’t work and none why it might. Think outside the box? Your people are so terrified they can’t even think inside the box.

The other day you got to thinking. CSX is one big jumble of underused assets: cars, locomotives, freight yards, people, you name it. Why not go on a carload sales blitz and bring in anything that covers avoidable costs or better? This is business it won’t cost a penny of capital to get because you’ve got capacity to spare. The operating ratio would go up, but so would earnings, and isn’t the bottom line what this is all about? Send the marketing boys and girls into the field and, prospect by prospect, customer by customer, put those assets of yours back to work. Canadian Pacific just did this—3,000 cold calls in three months.

You’re so pumped up by this idea that you’re actually smiling when you go down to the marketing floor to lay things on the table. But by the reception you get, you’d have thought you had announced CSX wanted to merge with Canadian Pacific after all. We can’t lower our rates or accept thinner margins, you were told, because that would undercut our existing rates with some of the same customers.

But you’re proud of yourself, because you fought back with your marketing people. Not just coal, but our whole base of business is shrinking, you argued. We’ve got to replace what goes away or we may as well go out of business. And it’s your job to find these customers, you said, even if we have to accept slimmer profit margins. Get out there in the field! I’ll cover your backs with investors, you told them.

And do you know what they said? Boss, we don’t have anyone in the field. We’re all here in Jacksonville. We phone the big accounts and once or twice a year we tell everyone what the next rate increase will be. That’s what we call marketing these days. So Mr. Ward, your idea of a sales blitz can’t happen because nobody knows how to beat the bushes.

You retreat, deflated, to the executive floor and close the door. What other options for reviving your railroad do you have? Well, there’s always Hunter Harrison at CP. For just an instant you think of having your assistant get Hunter to the phone. But then you remember: Even if you were serious about making a deal with CP, it will never fly. You and Fritz and Squires poisoned the waters about mergers with the politicians, regulators, and customers. They bought your hype so completely that you’ve made it impossible for anyone to suggest one now.

You wonder about the box that you and your contemporaries at the other railroads now occupy. The relentless focus on lowering the operating ratio has everyone slashing costs, raising freight rates on existing business and setting rates on new carload business that sometimes exceed what truckers charge. How to get out of this box?

Well, that’s for another day. Or for divine inspiration. Again you ask: What to do?

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