Monday, March 27, 2017

It shouldn't take a $300 million man

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It shouldn't take a $300 million man

What has been will be again; what has been done will be done again. There is nothing new under the sun. Is there anything of which one can say, “Look! This is something new”? It was here already, long ago; it was here before our time. No one remembers the former generations, and even those yet to come will not be remembered by those who follow them. Ecclesiastes 1: 9-14.

The moment anyone begins to prognosticate about E. Hunter Harrison’s intentions for CSX, the conversation quickly leads to a recap of his recent accomplishments at Canadian Pacific, and possibly CN before that. Go even further back, before Illinois Central, to Harrison’s earliest moves as a railway official, and it becomes more apparent that he’s learned and executed a “less is more” strategy throughout his career.

Back in 1980, when Burlington Northern Railroad acquired the St. Louis-San Francisco Railway (better known simply as the Frisco), several key positions at BN became filled by former Frisco officials. Richard Grayson, President and Chairman at Frisco, wound up as President of BN’s newly-formed Transportation Division. The job of BN’s Vice President-Transportation (later to become V.P.-Service Design) ultimately fell to a rapidly rising, relatively young Hunter Harrison, who began as a carman/oiler for the Frisco in the mid-1960s.

When Harrison and his Frisco colleagues joined BN, the national economy was in recession. By the mid- to late 1980s, with a recovery under way and rail business increasing, there was still a sense of catching up with the economy in terms of controlling costs. As described in a cover story in the October 1987 Railway Age, BN President Darius Gaskins was implementing what he referred to as “Service by Design,” the details of which were strikingly similar to Harrison’s cost-cutting and streamlining playbook of today. Judging by the history that’s unfolded, and by the comments made since then by BN and BNSF officials both active and retired, the physical and operational changes that BN applied during the Gaskins administration (1985-1989) were largely influenced by former Frisco officials, Harrison among them, in BN’s Transportation Division.

Some of those late-1980s changes were centered around labor, both human and mechanical. When BN desperately needed new motive power to haul its growing number of coal and intermodal trains, it obtained 100 SD60Ms from EMD and 100 B39-8s from General Electric, both fleets being leased on a horsepower-per-hour or kilowatt-per-hour basis to spare BN the huge expense of buying them outright. EMD and GE personnel initially maintained those leased locomotives under contract, but the unions eventually negotiated for full or partial maintenance by BN employees.

One cost-cutting move that didn’t get off the ground was when BN formed a company called Winona Bridge Railway. The name came from a roughly one-mile piece of railroad dating to 1891 that amounted to little more than a bridge spanning the Mississippi River between Winona, Minn., and East Winona, Wis. BN had held partial ownership of WBR since 1970. After purchasing WBR’s remaining shares in 1987, BN had at its disposal a subsidiary that could provide the legal backdoor for introducing a new intermodal service between Seattle and St. Paul using non-union two-man crews. (Four-man crews were standard at that time on BN.) The plan received ICC approval in late 1987, but a court order killed it the following year.

During that same period, BN was on a campaign of downsizing its physical plant, shedding hundreds of miles of main track and sidings deemed redundant or non-productive. There were minor cuts in places like Minnesota, where ten miles of double-track between Big Lake and Becker got reduced to single-track in 1986; likewise for a stretch of double-track main at Minneapolis Junction. Six months of running single-track-only on the dual main line between Aurora and Galesburg, Ill., caused too many delays, so BN resumed double-track operations there.

But way out west there were massive reductions in BN’s route structure during the 1980s. Its alternate main line over the Montana Rockies via Homestake Pass closed in 1982. In 1986, it sold the eastern portion (150 miles) of its Stampede Pass route to short line Washington Central. In 1987, BN spun off more than 900 miles of its former Northern Pacific route across southern Montana to newly formed regional Montana Rail Link, and it abandoned more than 100 miles of its ex-Spokane, Portland & Seattle main line in southeastern Washington, a route with far superior engineering (faster, straighter, easier grades) than the former NP route across the same part of Washington, which BN chose to keep. Most of these lines—and more—were discarded during the period when Hunter Harrison held V.P. positions in transportation and service design at BN.

Shedding those routes made fiscal sense at the time and enabled BN to focus capital spending on other routes. But just a few years later, BN found that its Northern Corridor lacked much-needed capacity to handle the volumes of intermodal, grain and other business that were rising during the 1990s. In fact, not long after the BN-Santa Fe merger in 1995, BNSF spent some $150 million to reopen Stampede Pass, and more than a few BNSF officials said they wished dearly that the former SP&S line in eastern Washington was still in service. Some have gone so far as to say that the fortune BNSF has spent on Northern Corridor capacity improvements over the past 20 years has been mainly in response to the hundreds of miles of main track, second main and sidings that predecessor BN ripped up in the 1980s.

Harrison’s acumen for cutting costs and liquidating assets in order to generate cash and boost performance figures followed him from BN to Illinois Central in 1989, and then to CN (which bought IC) in 1998. Four years into his term as President and CEO of CN (2003-2009), Harrison had eliminated roughly 1,000 employees, increased annual revenue by more than $1 billion, and invested more than $1 billion (in 2007) in track and capacity improvements, a highlight of which was CN’s development of international container business through Prince Rupert, B.C.

Harrison’s reign at Canadian Pacific (2012-2016) has become the template that many folks assume will be applied at CSX. However, Harrison’s turnaround of CP presents a somewhat skewed set of metrics because he arrived there just as the railroad was emerging from a period of widespread service disruptions and property damage due to winter avalanches and spring flooding, and while much of the world was still struggling to recover from the 2008 recession. Prior to the recession, CP’s annual revenues were rising steadily toward the $4.8 billion mark, with an operating ratio trending downward into the low 70s. But after natural and economic disasters knocked CP off its feet, there was nowhere else for it to go but up.

In 2012, Harrison walked into a CP that had revenues of $5.7 billion, net income of $484 million, $93 million in free cash, an operating ratio of 83.3%, and that moved roughly 254 billion gross ton-miles of freight aboard trains averaging 6,709 tons, 5,838 feet, and 24.4 m.p.h., with average terminal dwell time of 17.6 hours, using a workforce of about 14,500 employees.

In 2016, CP reported revenues of $6.2 billion, net income of $1.6 billion, $1 billion in free cash, an operating ratio of 58.6%, and moved roughly 243 billion gross ton-miles of freight aboard trains averaging 8,614 tons, 7,217 feet, and 23.5 m.p.h., with average terminal dwell time of 6.7 hours, using a workforce of just under 12,000 employees.

During that four-year period, Harrison also shut down four of CP’s hump yards, closed or combined various intermodal terminals, put some $2 billion in “non-core real estate assets” on the chopping block, placed more than 500 locomotives in storage while making no significant purchases of factory-new motive power, removed certain sidings while lengthening others, and added more than 20 track-miles of new capacity each year 2012 through 2015. In 2016, CP added only two miles of new capacity.

With Harrison at the helm, CP’s stock value skyrocketed from $70 per share in 2012 to a high of $214 in 2014. But it sank sharply to $104 in early 2016 before stabilizing at around $147 (a decline of 31% from the peak) in August 2016. That’s the same month when Pershing Square Capital’s Bill Ackman—who fronted the 2012 takeover of CP and appointment of Hunter Harrison as President and CEO—cashed out his remaining shares in CP for an estimated $1.5 billion.

To quote the Calgary Herald, Harrison is “… a polarizing figure, admired and loathed in seemingly equal parts.” Some say he knows how to squeeze the highest performance and most profitability out of a leaner and more focused operation. Others say he squeezes the lifeblood out of any company he touches, letting investors walk away with the spoils. When Norfolk Southern rejected CP’s merger bid in December 2015, NS President and CEO Jim Squires said, “We believe that Canadian Pacific’s short-term, cut-to-the-bone strategy could cause Norfolk Southern to lose substantial revenues from our service-sensitive customer base. We also believe the proposed transaction risks harm to vital transportation infrastructure and the communities we serve.”

It takes a certain level of testicular fortitude for a rail executive to fire hundreds of employees and remove hundreds of miles of track if they believe the end will justify the means. CSX no doubt saw such writing on the wall, and the looming specter of Harrison (and activist investor Paul Hilal of Mantle Ridge LP, the behind-the scenes orchestrator of Ackman’s conquest of CP) on the horizon, when it eliminated some 800 positions earlier this year. Not that a 69% operating ratio for 2016, a mere 1% above the industry average, should have been perceived as some sort of bull’s eye on CSX’s back.

No, for Harrison, grabbing hold of CSX is a bit more personal, having failed previously to merge it or NS into CP. But it must not be forgotten that the successes of leaders like him would not have been possible without the tough decisions and bold investments made by other leaders before them. CP spent more than $640 million between 1977 and 1989 (that’s more than $1.2 billion in today’s dollars) on projects to double-track and reduce gradient to 1% on all of its westbound mountain grades, including a new 9.1-mile tunnel beneath Rogers Pass.

Even Fred Green, CP’s President and CEO prior to Harrison, instituted cost-cutting measures and operating improvements of his own. Under Green, CP used modern distributed power technology to increase train length, invested $160 million toward additional capacity improvements between Calgary and Vancouver (the 2005-2006 Westcap program), and earned rapid, sizeable gains in stock value heading into 2011.

A Railway Age profile on Green’s CP in September 2011 reads much like a Harrison-era success story, except with less carnage at the personnel level.

None of this is rocket science anymore. The widely varying models for reducing expense, increasing performance, and growing the business have all been demonstrated by railway leaders going back as far as one cares to look. Study their actions, compare the results both in the short and long term, and take note of any remedial changes that had to be made by executives who came next.

Harrison’s strategy is, by now, plainly obvious throughout the industry, which might explain why some have questioned the astronomical price tag for his four years of pending service at CSX (total compensation has been estimated at somewhere between $200 million and $300 million). Whether Harrison does a textbook overhaul of a not-so-broken CSX or accomplishes an historic international union between it and CP, either course could have been charted by CSX on its own, utilizing Harrison’s methods or anyone else’s, if that were truly where they wanted to go. Instead, CSX has decided it wants Harrison to lead them down that path, his way.

Editor’s note: Newly installed CP President and CEO Keith Creel is reversing some of Harrison’s disciplinary measures that have been deemed overly harsh. Click HERE for Contributing Editor David Thomas’s report.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bruce E. Kelly, Contributing Editor

Railway Age Contributing Editor, Bruce Kelly, has produced photography and writing for rail publications since 1982. He was associate editor of Railfan & Railroad magazine 1988-1996. Since 1997, he has worked in the digital prepress department of a commercial printing company in northern Idaho.

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