The fund run by Paul Hilal wants Harrison to bring his operational acumen to CSX, much as he did at CP, according to a report published Feb. 10 in The Wall Street Journal (below). It is also seeking several board seats.
Harrison in January gave up tens of millions in compensation in exchange for waiving a non-compete agreement.
Any valid nominations will be voted on at the company’s annual shareholders meeting.
Following is the Feb. 10 Wall Street Journal report.
Railroad Veteran Faces Challenges in U.S.
By Paul Ziobro, Jacquie McNish and David George-Cosh, The Wall Street Journal, February 10, 2017, page B3
Railroading veteran Hunter Harrison has turned around Canada’s two biggest freight carriers with tighter schedules and rigorous cost discipline. But his operating philosophy could face its toughest test in the crowded Eastern U.S. rail network.
Investors have rallied to the idea of Mr. Harrison teaming up with an activist investor to shake up CSX Corp., the Jacksonville, Fla.-based company that operates one of the two major freight railroads east of the Mississippi River. CSX shares are up about 30% since The Wall Street Journal first reported he was exploring joining the railroad.
The two sides have been negotiating whether Mr. Harrison might join the company as its CEO, people familiar with the matter said. Activist investor Paul Hilal is pushing for Mr. Harrison and the appointment of several new directors ahead of a Friday deadline for board nominations at CSX. The railroad’s directors haven’t approved Mr. Hilal’s demands. CSX declined to comment for this article, but has said in the past it supports the company’s current strategy.
At its core, Mr. Harrison’s “precision railroading” strategy seeks to run fewer trains and stick to schedules, ensuring more timely deliveries and better use of locomotives. Cutting trains reduces congestion as well as equipment and labor expenses. Some customers and workers, however, say much of the gains come at their expense.
Doug Finnson, president of the Teamsters Canada Rail Conference, which represents locomotive engineers and conductors, said Canadian Pacific Railway Ltd. is “a shell of its former self” five years after Mr. Harrison took over. Regulators have also raised safety concerns about CP and its rivals following high profile derailments in Alberta and Quebec.
A CP spokesman said the company’s operational efficiencies have enhanced its safety performance and noted it has been the safest North American railroad for 11 straight years in terms of train-accident frequency.
At Canadian Pacific, Mr. Harrison cut the total workforce to 11,700 from about 19,500, parked as [many] as 500 locomotives, sidelined 12,500 railcars and shut down railcar sidings and rail yards in several of CP’s U.S. and Canadian hubs.
Mr. Harrison’s leaner version of CP ended the last fiscal year with an operating ratio — a measure of expenses as a percentage of revenue — at 58.6%, a [dramatic] improvement from the 81% when he took over in June 2012. Meanwhile, the railroad’s share price has more than doubled.
Railroad analysts say the strategy does have limits, working best when rail stops are 100 miles or so apart. That was mostly the case when Mr. Harrison managed CP, Canadian National Railway Co. and Illinois Central, a smaller player that primarily ran from the Great Lakes to the Gulf of Mexico.
The Eastern U.S. networks are different. The region’s freight railroads run through such an intertwined thicket of connecting routes and shorter hauls that it is sometimes referred to as the “spaghetti bowl.”
[Railway Age Capitol Hill Contributing Editor] Frank N. Wilner, who has written several books on railroad economics, said the eastern networks tend to carry a greater diversity of cargo [and] have their own complexities.
“He has never managed a complex rail network like we have in the United States,” Mr. Wilner said. “It will challenge the legend of this man.”
Mr. Harrison has told associates that the key to unraveling the spaghetti bowl is forging greater industry cooperation to speed up bottlenecks when freight trains move through different rail networks. He believes his close ties to his former employer CP will help CSX in key hubs such as Chicago, where both [railroads] have routes and terminals.
Mr. Harrison sees room to apply his strategy at CSX because many of its terminals are located in Rust Belt cities such Buffalo, N.Y., Pittsburgh, Cleveland, and Detroit, according to a person familiar with his thinking.
The 72-year-old believes these terminals should be de-emphasized, and CSX needs to beef up its capacity south of Nashville, Tenn., to take advantage of shifts in manufacturing and shipping and the population, this person said. There also is less competition in the southeast corridor, which creates the opportunity to raise prices.
Other railroads already have adopted certain aspects of precision railroading.
Jim Squires, chief executive of Norfolk Southern Corp., which also operates in the Eastern U.S., said it already runs a scheduled rail service. It is also cutting hundreds of millions in costs, with the largest savings coming on labor.
Some railroad workers have a different view of precision railroading. They see it is as a broad culling of jobs and steamrolling of longstanding scheduling practices that has allowed companies to cut costs at the expense of service. Mr. Harrison has pushed to eliminate wages based on the type of work and encouraged office workers and management staff to learn how to drive locomotives and operate trains at a rail yard.
“What [Mr.] Harrison’s administration has done is cut a lot of jobs, which eventually will reduce our ability to service industry,” said Cameron Slick, a CP conductor in Minnesota.