Expectations High as Harrison Assumes Leadership of CSX

Norm Betts/Bloomberg News

This story appears in the March 13 print edition of Transport Topics.

CSX Corp. appointed E. Hunter Harrison to its CEO post and, based on his success at other railroads, analysts predict he will turn the sprawling, underperforming, historic Class I railroad into one that is faster and more punctual, with better service and higher rates.

But first, he wants to be reimbursed $84 million.

CSX, which traces its beginnings to 1827 and the charter of the Baltimore and Ohio Railroad Co., has asked shareholders to approve the multimillion-dollar amount to cover the compensation and benefits Harrison forfeited as a result of his separation from his previous position as CEO of the Canadian Pacific Railway. (Harrison also served as CEO of the Canadian National Railway and, earlier still, the Illinois Central Railway.)

No shareholders meeting had been scheduled as of the March 6 announcement. But CSX said it will be held no later than June 15; without such approval, Harrison has said he will resign, according to CSX.

Harrison joins CSX at a time when its operating ratio of 69.4% “is the worst in the industry,” Justin Long, an analyst with Stephens Inc., told Transport Topics.

“The lower the OR, the better. They have historically talked about a long-term target of improving the OR to the mid-60s, but with Harrison on board, I think the opportunity could be much better,” Long said.

Operating ratio is derived from operating expenses as a percentage of revenue.

Other experts were optimistic about the chance for positive change, too.

“A railroad is a railroad. There is an operating set that makes it work correctly and a set that makes it work incorrectly. [Harrison] doesn’t make too many mistakes,” said Ronald Sucik, president of RSE Consulting.

One difference now, compared with the others Harrison has managed, is CSX is a more far-flung system, Sucik said, “like the spider web of the South and Southeast.”

CSX Transportation Inc. — CSX’s principal operating subsidiary — is a 21,000 route-mile rail network that serves major population centers in 23 states east of the Mississippi River, the District of Columbia and the Canadian provinces of Ontario and Quebec, the company said. It also serves thousands of production and distribution facilities through track connections to 240 short-line and regional railroads, it said, and has access to 70 marine terminals.

Possible first steps in Harrison’s reorganization of CSX, Sucik suggested, could include relocating the headquarters to a more central location from Jacksonville, Florida, changing the routing of certain trains and deciding what to do with all its excess coal trains.

CSX shipped 838,000 carloads of coal in 2016, down 21% compared with 1.06 million carloads a year earlier — costing it $470 million in revenue, the company said.

Donald Broughton, chief market strategist with Avondale Partners, said Harrison will implement better service and that, over time, will attract more volume and better pricing.

“Hunter focuses on velocity, on picking up things on time and delivering things on time. The fastest and easiest way to improve the financials of an asset-intensive company is to improve the rates of asset utilization,” Broughton said.

There is plenty of room for improving asset utilization at CSX.

In 2016, CSX picked up 84% of its freight on time, an improvement of 25% year-over-year, and delivered 65% on time, an increase of 27%, the company said.

Harrison created and still adheres to an operational philosophy termed “precision scheduled railroading,” and he has applied it to boost performance everywhere he has been, Broughton said.

For instance, after he instilled it at Canadian Pacific, the company increased its market capitalization by $19 billion in his first 19 months there, Broughton said.

Meanwhile, in 2016, CSX reported revenue of $11.1 billion, setting the stage for similar but much bigger gains, he said.

“Canadian Pacific’s revenue is less than half of what it is at CSX, so the upside potential is greater. That’s the thing that is most misunderstood,” Broughton said. “We are talking about $40 billion of shareholder value.”

CSX also said in a statement that Harrison received options to purchase 9 million shares of CSX stock. The stock reached $49.79, a 12-month high, on March 6. Plus, he will join the board.

In addition, Harrison ally and shareholder Paul Hilal, the founder of activist fund Mantle Ridge, which lobbied for Harrison, will join the 13-member board as vice chairman. CSX’s current presiding director, Edward Kelly, will become chairman.

Separately, CSX in February announced plans to lay off 1,000 managers by the end of March as it debated whether to hire Harrison. At the same time, it said Chairman and CEO Michael Ward and President Clarence Gooden would retire, although Ward will serve as an adviser.


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