Thursday, December 21, 2017

CSX: Illinois Central Version 2.0?

Written by 
West Tennessee and ICG trains meet in ICG’s Iselin Yard in 1985, marking the new railroad’s 1,000th outbound revenue carload. With two former GM&O main lines intersecting in Jackson, the western Tennessee city was the epicenter of ICG/IC's abandonment program.

The death of E. Hunter Harrison caught much of the railroad industry by surprise. His passing guaranteed that CSX’s corporate makeover will be the rail industry business news story of 2017. It may also be the biggest rail industry story for several years to come.

Harrison’s passing was noted by scores of comments, each reflecting an individual’s or an organization’s position on Harrison’s controversial pursuit of Precision Scheduled Railroading. In an email to CSX employees, Acting CEO Jim Foote said, “We are immensely grateful for the opportunity to have worked with the railroad legend.”

On the other end of the spectrum was Railroad Workers United. In the second sentence of an email noting Harrison’s death, the labor organization took a swipe at Harrison’s brief tenure for creating “sever (sic) traffic snarls and disruptions” and noted that Canadian Pacific’s unions “were enraged by the thousands of job reductions he ordered.”

Harrison’s unexpected passing has triggered one of the biggest rail industry guessing games in memory. All CSX stakeholders—customers, employees, on-line communities—are wondering if the current management, handpicked by Harrison, will fully and completely stay the course?

Foote appears fully committed to Harrison’s plan. His employee email concluded, “We will honor his legacy by staying focused on the Precision Scheduled Railroading operating plan he laid out and by aligning our work with the guiding principles he established in the industry years ago.”

There are, however, larger questions surround the long-term viability of the CSX brand. Since Harrison arrived in Jacksonville earlier this year, veteran railroad managers—those of us who thought an SD50-2 was the greatest locomotive we’d ever see—have wondered if Harrison’s Precision Scheduled Railroad concept was really not just a Version 2.0 of Harry J. Bruce’s Illinois Central Gulf/Illinois Central downsizing scheme. That Bruce-initiated/Harrison-completed crash-diet for the ICG began in the mid-1980s and was completed by Harrison when he took over as IC CEO in 1993. In the 1990s, value was measured by stock price.

At the time, Harrison was seen as a loyal Harry Bruce acolyte. Today, in the wake of Harrison’s death, it’s a fair question to ask if CEO heir-apparent Foote will be as loyal to Harrison as Harrison was to Bruce. If the answer is “Yes,” will Foote and the new Harrison-anointed management team continue loyally executing the late EHH’s business strategy, which pursues maximizing shareholder value?

There is an even bigger question. What is the end game Harrison had charted for CSX?

A re-examination of the Harry Bruce-initiated and Harrison-completed business strategy at IC may once again prove that the past indeed is a prologue. Indeed, when you look behind the headlines and into the history books, there are remarkable similarities between CSX’s 2017 strategy and that of the ICG/IC in the mid-1980s and 1990s.

Harry Bruce’s Railroad Transformation Strategy Version 1.0 included controversial line sales, service changes, and a ferocious abandonment blitzkrieg that surprised customers, irritated local and state governments, caught economic development agencies off-guard, and left the Interstate Commerce Commission with few capabilities to preserve rural and light-density rail service. From three decades ago, here’s a look back at what Bruce started and Harrison finished.

Everything is for sale

Bruce and ICG, and later Harrison at IC, operated under a business strategy that said “everything is for sale at the right price.” In a few short years, ICG spun off a half-dozen new regional and a dozen new short line railroads. Some spin-offs, like MidSouth Rail, were successful. Some, like the Gulf & Mississippi, were disasters.

In 2017, we heard the same statement from Harrison and CSX. The old New York Central’s Water Level Route recently was floated as a sale candidate. Shedding that key route would be roughly akin to ICG’s sale of its Chicago to Omaha and Sioux City or the Meridian to Shreveport routes. Today, speculation also swirls around the longevity of legacy coal field routes, including the old Clinchfield, Corbin-Harlan and Corbin-Etowah-Cartersville main lines.

With numerous sale rumors circulating, existing short line conglomerates and several new industry entrants are busily lining up capital and putting together business plans in case CSX does begin line sales. Back in the 1980s, it was local governments and states, working with entrepreneurs, which went into overdrive developing short line promotion programs.

Looking ahead: Will 2018 or 2019 see similarly successful small railroads begin serving Knoxville, Erwin, and Etowah? Do potential operators (G&W, Watco, new companies) possess sufficient capital to close seven- and eight-figure deals?

Change operating patterns

In the mid 1980s, Bruce suddenly shifted most ICG thru freights to IC tracks. Old GM&O routes were left to handle low-revenue local traffic. Shorn of profitable long-haul traffic, Bruce could justify reducing maintenance. It wasn’t long before the parallel GM&O main lines digressed into 25 mph secondary routes increasingly beset with slow orders. Existing customers complained about slower service. New industry went elsewhere. In 2017, Harrison quickly closed hump yards, shut down the old Clinchfield, and began wholesale trip plan and train reroutes.

Looking ahead: CSX’s network is not beset with the closely-parallel routes of the ICG. Harrison likely asked, and Foote may elect to answer questions like, “What’s the best way to get from Cincinnati to Waycross?” Or, “Do we really need two eastbound routes out of East St. Louis?” The answers may reshape many states’ rail services.

If you can’t sell it, abandon it ... or give it away

In the 1980s and 1990s, ICG/IC conducted an aggressive abandonment program. It seemed for a time as if ICG/IC lawyers had set up a satellite office on Pennsylvania Avenue, in the Interstate Commerce Commission building’s basement. The volume of abandonment cases caught the ICC, which was in the process of shutting down, by surprise. Similarly, local and regional industrial development agencies and state transportation departments also were caught off guard.

Bruce’s ICG abandonment and line segment program created three new short lines in Tennessee. A vigorous small railroad promotion program by the state’s Department of Transportation saved 126 miles of unwanted ICG (mostly ex-GM&O) routes. The ICG’s line sales did create some outstanding short lines. Two of them, the West Tennessee and TennKen, were, and still are, definite winners.

There were also many market consolidation or “service swap” deals. Under these arrangements, rural communities served by ICG/IC and another railroad (most often CSX or one of its predecessors) agreed to transfer ICG/IC customers to the other railroad. ICG/IC was then able to quickly abandon and sell its line.

Looking ahead: Will the Bruce/Harrison railroad makeover model result in CSX abandoning markets and industries via service swaps? In 2018, 2019 and beyond, will the Surface Transportation Board have the administrative mojo to handle the service issues and regional economic challenges likely to arise from CSX’s metamorphosis?

Eliminate low-volume O-D pairs

Harrison recently eliminated or revised service plans for numerous low-volume intermodal services. In the 1980s, intermodal and container traffic was not so prevalent. And IC was known as a “wood railroad.” But ICG applied approximately the same strategy with its service to the paper industry that dominated the landscape in Mississippi and Alabama. Back then, ICG “de-marketed” service to dozens of small wood yards in favor of large-volume wood pulp and wood chip producers. The ICC was administratively and functionally powerless to address shipper and community complaints.

Looking ahead: In 2018 and 2019, what commodities, industries or geographic areas will CSX decide are no longer profitable? Again, will the STB be up to the task of handling the service-related complaints CSX’s makeover inevitably will present?

Cut personnel

I recall a personal account, told in the mid-1980s at the Thanksgiving dinner table by a relative, about a difficult ICG staff meeting he had just attended in Chicago. This long-retired relative was a life-long ICG employee and had risen up the ranks in the Stations and then Auditing and Accounting departments. Harry Bruce had taken to the podium and told the 40 or so accounting personnel, “Look to your left … Look to your right … And then look at yourself. In two years, two of those people you just looked at will be working somewhere else.”

CSX’s recent layoffs of managers, operating crews, mechanical staff and maintenance-of-way forces seems to eerily resemble Bruce’s approach to ICG’s headcount.

Looking ahead: In the coming years, will railroad labor organizations be able to protect their memberships from layoffs and benefit reductions (and themselves from loss of membership) due to asset (route) sales?

Shareholder value comes first. And second. And third

Growing value, as measured by stock price, was the goal of Bruce’s business plan, Version 1.0. Looking ahead: In 2018 and 2019, will Foote and his Harrison-selected management team at CSX focus on quarterly earnings and the operating ratio? Will they measure success solely on beating analysts’ expectations and, ultimately, growing the share price? Nothing suggests that Harrison’s goal, and that of his successor, are any different.

So, will the Bruce/Harrison model repeat itself? Today’s CSX’s customer base is vastly different than the family-owned wood yards, co-ops, grain elevators and small manufacturing plants that dotted the ICG/IC and its ex-GM&O lines in the 1980s and 1990s. Recent news reports and STB filings have documented continuing rail customer service disruptions that seem only to have eased slightly since Harrison began his hurried Precision Scheduled Railroading implementation. For example, CSX’s “service adjustment” at a Cheerios factory appeared to be a “one-off” and did not give numerous other complaining industries cause for cheer.

Long-time industry observers, including me and many of my grey-haired colleagues, wonder if the final chapter of CSX will be written when Foote & Company complete their downsizing and sell the remaining assets to another Class I railroad?

After all, that’s exactly what happened to Illinois Central in 1998.

1988 GM STARKVILLE

Short-lived regional: The Gulf & Mississippi was one of several unsuccessful ICG regional railroad spin-offs. A short GMSR local passes the Sturgis, Mississippi, woodyard in 1988. Small woodyards like this were not in ICG/IC’s service plans.

1988 ICG HENDERSON TN

Train speeds, track condition, and locomotive maintenance all declined as ICG cut back maintenance on its unwanted routes in the Mississippi Valley. In 1988, a train of well-worn locomotives and woodrack cars move north at 25 mph through Henderson, Tenn. Signs of reduced capital spending are clearly evident on this one-time 60 mph main line that ran between Jackson, Tenn., and Corinth, Miss.

1985 WTNN KENTON

Short line success story: A West Tennessee Railroad train passes new grain elevators in Kenton, TN, in 1985. The WTNN was one of the most successful short lines borne of ICG’s downsizing and aggressive abandonment program. 

1992 SR ABANDONMENT 1 CR

SouthRail abandonment of the former GM&O Waynesboro-Mobile main line.

Art Miller

Arthur J. “Art” Miller, Jr., is an award-winning railroad safety and regulatory compliance manager with numerous citations for creating innovative safety and training programs. Art has more than 60 film credits as a Railroad Coordinator working on Hollywood blockbusters like Schindler’s List and The Fugitive. Miller's resume also lists stints at the U.S. Railway Association, in Washington D.C. as a Congressional staffer, and a current Part 240 Engineer certification.

Get the latest rail news

Rail news and analysis from Railway Age, IRJ and RT&S by email