CSX makes it official by naming Harrison its CEO

Eastern rail giant CSX Corp. did late yesterday what everyone had expected it to do: Name E. Hunter Harrison its CEO.

Harrison, 72, takes over immediately, replacing Michael Ward, who announced his retirement on February 21, and will become a consultant to CSX, effective immediately, the Jacksonville, Fla.-based company said.

Also as expected, Harrison said CSX would implement a practice known as "Precision Scheduled Railroading" that he has mastered. Utilized by all railroads to some degree, the model drills down into shipment scheduling patterns so a railroad knows exactly which trains, yards, and connections are involved, as well as the precise time a shipment is to arrive at the customer or interchange location. Executed effectively, precision railroading allows a railroad to budget for the exact assets that are needed to fit its plan.

The announcement is a victory for Paul Hilal, CEO of private equity firm Mantle Ridge LP, which invested 4.9 percent in CSX with the objective of installing Harrison as CEO. Harrison abruptly resigned as CEO of Calgary-based Canadian Pacific Railway (CP) in January to join forces with Hilal. Before starting his own firm, Hilal had been second-in-command at hedge fund Pershing Square Capital Partners LP, whose head, William A. Ackman, was instrumental in luring Harrison out of retirement in 2012 to run CP.

Under the four-year deal, Harrison will receive options to purchase nine million shares of CSX stock at its current trading price, which as of the close of trading Monday was $47.79 a share. The options will vest over the four-year period, with half of the total based on performance and the other half on years of service.

One potential sticking point is a request by Harrison that he be reimbursed by CSX for $84 million in CP compensation that he forfeited by leaving, as well as certain tax indemnifications. Harrison has indicated he would resign after the CSX annual meeting in May if both conditions aren't met.

Harrison and Hilal will join three other new directors on CSX's reconstituted board. Edward J. Kelly III, CSX's presiding director, will become chairman, and Hilal was named vice chairman.

Harrison will take over a company with a slimmed-down corporate hierarchy. Last month, CSX said it would lay off about 1,000 employees, most at its Jacksonville headquarters. The layoffs are expected to be completed by the end of March.

Harrison's primary objective is to accelerate the reduction of CSX's industry-lagging operating ratio, the measure of operating expenses compared to revenues and a key metric of a railroad's efficiency. Last year, CSX's ratio stood at 69.4 percent after being in the 70s for several years. It has a long-term target of driving down its ratio to the mid-60s.

During his near five-year tenure at CP, Harrison presided over a dramatic decline in operating ratio, from about 80 to 59.4 percent as of the end of last year. The improvement meant that CP went from spending 80 cents of every revenue dollar to run the railroad to a level of less than 60 cents of every revenue dollar.