Is CSX Hunter Harrison's Waterloo?

For the better part of two decades, E. Hunter Harrison enjoyed a robust tailwind as he rebuilt the flagging fortunes of Canada's two top railroads, Canadian National Inc. and Canadian Pacific Railway.

CN and CP operated largely linear networks, with trains flying across hundreds or thousands of miles of flat terrain, often through wilderness with no physical impediments in sight. The climate was ideal for Harrison to execute his model of "precision scheduled railroading," which adds fluidity to a network by pinpointing exactly how and when trains move from start to finish. This enables the operation of fewer but longer trains moving freight faster. It is also supported by fewer "hump" yards, huge, artificially built facilities that use the force of gravity to switch isolated cars onto tracks for the building of trains. The darker side for employees is that it usually requires fewer workers to oversee and maintain the network because there is less equipment to manage.

Harrison, 72, left both railroads far more efficient and profitable than he found them. In the process, he vastly enriched their shareholders, though he didn't necessarily endear himself to shippers, some of whom thought he didn't need or care about them, or to labor that thought Harrison was profiting on their backs.

When Harrison bolted CP in March to become president and CEO of Jacksonville-based eastern railroad CSX Corp., he took over a different operation. CSX's network was more challenging, running shorter distances through congested areas, or through small, one stop-light-type towns where trains would be required to slow their speeds.

Moreover, CSX was the amalgamation of multiple railroads that were involved in various mergers over the past 30 to 35 years, and were all not natural fits. Through the decades, various management teams poured massive amounts of capital into restructuring efforts to realize the vision of simplifying a network that had become known, without affection, as the "spaghetti bowl."

CP and CN were "set up to run well," said Lee Clair, a long time rail consultant. All Harrison had to do at both carriers was to "clean up" the operations, Clair said. By contrast, the complexities of the CSX network were daunting, he said.

The prior CSX management "actually was doing a good job managing the operations given what they had to work with," he said.

Clair said Harrison now has to "build the car as he drives it," meaning he needs to change CSX's operations and understand how to change the infrastructure at the same time. Added Charles W. Clowdis, who heads the global transport practice at consultancy IHS Markit, Harrison "thinks his system is universal, but in reality, he has never seen an east coast, shorter length of haul, terminal-intensive rail network until now."

So far, precision railroading on the CSX system has been the rail equivalent of a square peg in a round hole. Since early July, shippers have complained about increased transit times, unreliable switching operations, and inefficient car routings. In a report published Aug. 1, Jason Seidl, managing director at investment firm Cowen & Co., said 80 percent of respondents surveyed have experienced service issues with CSX since it began implementing Harrison's plan.

About 40 percent of the respondents have switched some of their shipments to CSX rival Norfolk Southern Corp., and 67 percent have moved shipments to truckers, a viable modal alternative in many of CSX's northeast and southeast markets, Seidl said. About 24 percent of the respondents described CSX's service as "poor," Seidl said. In similar surveys, no other railroad received poor ratings from more than 6 percent of shippers, he said.

The Rail Customer Coalition, an assortment of trade associations representing industries that are heavy rail users, urged Congress last week to open an investigation into CSX's service issues. That sparked an angry reply from Harrison, who called the coalition's concerns "unfounded and grossly exaggerated," and said CSX would not discuss its shipper relationships with the group because "coalitions do not have service issues."

CSX's problems have also raised the ire of the Surface Transportation Board (STB), the federal agency that regulates the railroads. After receiving what it called "informal" complaints from CSX shippers starting in mid-July, the agency later that month took the unusual step of directly contacting Harrison about the service problems stemming from his operating plan's implementation. Over the next three weeks, the Board requested that CSX supply operating metrics covering eight key subjects. It also set a deadline of the close of business today for CSX to submit a detailed schedule of the plan's execution for the balance of 2017.

Rob Doolittle, a CSX spokesman, said today the company expects to meet the deadline, and has already begun submitting documents in compliance with the STB request.

According to CSX's metrics, average train velocity, which measures the time to move a train from origin to destination, came in at 13.1 mph for the week ending Aug. 18, significantly slower than the 17-mph average reported in the spring. Terminal dwell times, the time a car sits in a terminal waiting to depart, averaged 12 hours as of the end of last week. In the spring, dwell times were reported at about 10 hours.

In an article in the influential trade publication Railway Age, Jim Blaze, an independent rail economist, said train speeds have greatly improved for some customers on CSX's main lines. However, intermodal traffic being carried on unit trains—equipment that moves from the same origin to the same destination without being split up or stored en route—is moving much slower, Blaze wrote. "That doesn't translate into a likely huge intermodal growth scenario," he said.

Harrison acknowledged the rocky start to his four-year tenure, but pledged service would improve starting with the post-Labor Day holiday period, and would continue to strengthen as his plan fully takes shape. Indeed, Seidl said that the railroad's recent productivity metrics were solid, and that shipper outcries stem more from a reduction of service offerings than from performance issues.

Harrison has blamed part of the problem on insufficient buy-in to the precision railroad concept from a portion of the workforce. Since Harrison joined, CSX completed a round of 1,000 layoffs that began under the prior management. The railroad is also considering another 700 layoffs, though it hasn't provided details.

Layoffs can affect employee morale and performance, which is critical to sustain a demanding model like precision railroading across a multistate network like CSX's where much of the work goes unsupervised. "Everyone has to be singing from the same hymnal when a massive change in operations is implemented," said John G. Larkin, lead transport analyst at Stifel, an investment firm. "That isn't yet the case at CSX."

Given Harrison's track record, no one is selling him short. Seidl of Cowen said the service issues are temporary, and within 12 to 18 months shippers will be happy with the carrier's operational performance. Larkin added that Harrison will prove the critics wrong as he has done in the past, as long as his health—which has been an on-going concern for all CSX stakeholders—holds out. Harrison is reported to be suffering from an undisclosed medical condition, and has been seen using supplemental oxygen at company events.

Clair, the consultant, said CSX's current problems are not the central issue. What is the issue, he said, is whether Harrison's plan is sound and how the network will run "when the work is done and the change complete?"

The corollary question, said Clair, is "could they have ever gotten there without the change?"