What Hunter will do at CSX

Posted by Fred Frailey
on Thursday, March 9, 2017

Hunter Harrison and his partner Paul Hilal, who runs a hedge fund called Mantle Ridge, didn't just decide one day that it would be nice if Harrison ran CSX Transportation. Rather, they studied the company and all its moving parts the way an army's general staff examines a likely battlefield opponent. To hide their intent from CSX, they hired other investment companies to recruit as paid consultants retired or former executives of the railroad, the better to know what makes the railroad tick, which assets are underperforming, where the keys are to every secret closet and of course where the unspeakable truths are hidden. It's probable that before their intent was publicly revealed in January, they knew the pluses and minuses of everyone from assistant vice president on up--who could stay, who would go. And they had a strategic plan ready to put in place.

It was a bloodless war. CSX didn't really put up a fight, and Hunter (as I can't help but call him) became chief executive officer this week. Expect him to waste no time putting his imprint on the railroad. Act one was to put on hold voluntary and forced buyouts by operating department employees. CSX had put in place a reduction of 1,000 management jobs, but those in transportation positions he wants to personally evaluate. As one insider puts it: "Hunter wants to know who at CSX both understands railroading and knows what a five-star general looks like." Those who pass both tests won't be shown the door.

it so happened that CSX had its regional and short line partners in Jacksonville Monday and Tuesday for meetings and speeches. Two attendees used the same term to me to describe it: surreal. "You'd be talking to a CSX officer in the hall and five minutes try to find him, only to be told he'd answered his cell phone, learned his buyout had been accepted and left to clear out his office," reports one source. Even the most senior people, I was told, have no idea whether or how they'll fit in with the Hunter administration. 

Hunter's first emissary on CSX property was his trusted assistant Mark Wallace, the only person he was allowed to hire away from Canadian Pacific. Clipboard in hand, Wallace was collecting asset values of various properties. Very quickly, some big assets that are either underperforming or judged to be outside the railroad's core will go on the block. I hear from reliable sources these include the wholly owned Indiana Rail Road, the majority-owned Paducah & Louisville, the 40 percent-owned New York, Susquehanna & Western, most of the railroad's trackage in Michigan plus some of its lines in Pennsylvania. Together they could net CSX half a billion dollars in cash that Hunter can apply to restructuring the remaining pieces of the property. Expect a chunk of the coal-gathering network in Kentucky and West Virginia to also be disposed of in some manner.

Then comes Hunter's trademark blocking and tackling. It starts with intensive utilization of assets--routes, locomotives, equipment and people. The key to this is balance. Always operate the same number of trains in each direction and run them all seven days of the week. Try to avoid extra trains on busy days and don't annul trains on slow days. Instead, adjust to volume by raising and lowering rates. That way you'll always have just enough equipment and people and the excess can be stored and furloughed.

Next, simplify the system. Handle cars in yards the absolute minimum number of times. I predict some large terminals will be mothballed or even torn up. For example, the need for the big yard in Waycross, Ga., seems obvious. It processes everything going into and out of Florida. But what of Queensgate Yard in Cincinnati? Is it really necessary in its present form? Ditto the adjacent yards in Cumberland and Brunswick, Md.--maybe the railroad needs one but certainly not both--and Rocky Mount, N.C.

A cardinal rule of Hunter's is never let grass grow beneath the wheels. If train A is leaving Chicago and can handle those 50 cars that the previous train couldn't take, tack 'em on the rear, even if it's only to advance them a couple hundred miles. Run as few specialty trains (autos, oil, phosphate) as possible and instead makes trains multi-purpose (this remains the rule at Canadian National seven years after Hunter's "retirement"). Don't assemble unit trains unless they both load and unload promptly--again, the goal is to keep everything moving.

I predict bright futures for CSX people who maintain track and locomotives. You cannot run a Hunter Harrison railroad with poor track condition or unreliable locomotives. I also predict poor futures for transportation field managers. Under Hunter, Canadian Pacific practically denuded the money-making but mountainous western half of its railroad of trainmasters, road foremen of engines and other supervisors. Union employees, be forewarned that Hunter will fire you for the slightest infraction of the rule book. At CP, according to Canada's Globe and Mail, the policy was zero tolerance, down to and including failure to immediately report a sprained ankle.

What Hunter will not do is increase the level of business handled by CSX. He says he is customer-focused but the facts (and the stories we all hear from shippers) suggest otherwise. He boosted CN's book of business largely by buying adjacent regional railroads. Canadian Pacific's volume is the same as it was when he arrived five years ago. I suspect the reason for this is that the man is so focused on operations he forgets what it's all about.

Amtrak passengers, relax. Hunter Harrison has no use for passenger trains. But then neither did pre-Hunter CSX. The truth is that Canadian Pacific under Hunter had one of the best on-time records for Amtrak and CSX the worst. CSX is famous for playing Lucy to Amtrak's Charlie Brown--that is, removing the football in front of the kick. I'm not saying things will get better for Amtrak at CSX, but they could scarcely get worse  

Finally, it is simply inconceivable that E. Hunter Harrison will be satisfied just refocusing CSX. His belief that railroading is a network business and that the bigger the network the better is well known. He signed a noncompete clause before leaving CP that appears to prevent him from approaching BNSF and Union Pacific to discuss a merger for three years. But his employment agreement with CSX is for four years. So expect some fun in year four. I offer this unsolicited advice to Jim Squires, the CEO of CSX rival Norfolk Southern: Pick your western partner soon, before Hunter gets in front of you and robs you of that choice.

With that, I'm ready for whatever happens. And Hunter: I really do wish you well.--Fred W. Frailey

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