Monday, January 19, 2015

2015 Railroader of the Year: Hunter Harrison, Canadian Pacific

Written by  Willaim C. Vantuono, Editor-in-Chief
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Now a two-time recipient of the industry's most prestigious award, this giant of railroading tackles the questions, where are we going, and how are we going to get there?

It has often been said that many railroaders, especially those who have made a mark, never really leave the industry they love. Railway Age's 52nd Railroader of the Year, Canadian Pacific Chief Executive Officer E. Hunter Harrison, who came out of retirement in June 2012 to lead a remarkable turnaround at CP, is such a railroader.

Prior to Harrison's arrival in Calgary following a contentious proxy battle, CP had been lagging in last place among North America's "Big Seven," in terms of performance. Under Harrison's strong, highly focused leadership, CP has posted record revenues and earnings, a record-low operating ratio, and a stock share price that has more than tripled. With favorable long-term growth prospects, CP has become one of Wall Street's most favored investments in the rail sector.

Regarded as one of the best all-time operating executives, Hunter Harrison has been railroading for more than a half-century. Born in Memphis, Tenn., in 1944, he began his railroad career at 19 as a carman-oiler for the St. Louis-San Francisco Railway while attending college in Memphis. He was later promoted to railroad operator with the Frisco and, later, with Burlington Northern following BN's 1980 acquisition of the Frisco. Rising steadily through the ranks, he served as BN's Vice President of Transportation and Vice President of Service Design. In 1993, he joined Illinois Central, where he served as Vice President, Chief Operating Officer, Senior Vice President of Operations, and finally as President and CEO. In 1998, CN acquired Illinois Central and appointed Harrison Executive Vice President and COO, a post he held until 2003, when he was named CN's President and CEO. Railway Age named Harrison Railroader of the Year for the first time in 2002.

Harrison also served on CN's Board of Directors for ten years. He retired from CN in 2009—a move that proved only temporary, when the opportunity to take the throttle at Canadian Pacific came along in late 2011.

In a Dec. 15, 2014 interview, Harrison spoke candidly with Railway Age Editor-in-Chief William C. Vantuono about his career, and how he sees the future of the North American railroad industry.

RAILWAY AGE: Hunter, on behalf of Railway Age magazine and Simmons Boardman Publishing Corp., we want to congratulate you on being selected our 52nd Railroader of the Year. You are one of the few people who has won the award twice. Congratulations to you.

HUNTER HARRISON: Thanks very much Bill. I'm thrilled and honored and I'd like to take this opportunity to thank you and all the staff at Railway Age for this recognition.

RA: Let's talk a little about your background. You started on the Frisco as a carman-oiler back in . . . ?

HH: 1963, I'm afraid. It's been a long road. I started off there and got a few breaks and opportunities along the way. And then from the Frisco I went to the BN with the merger in 1980 at then left and went to Illinois Central in '89. And then, after a nice run with Illinois Central, we did the transaction with CN. I had a two-year respite, in which I couldn't sit still, and then I came back and re-entered the fray if you will, in 2012 with CP.

RA: You had such a great career, you did so many terrific things right up to the CN, you retired—and you came back! What motivated you?

HH: I think I underestimated how much I would miss the business, and I thought we had accomplished a lot of things, but I got a couple of phone calls. My wife had been pretty encouraging as far as retiring and taking it easy. I got off the phone with one of those calls, and she said, "You should go back to work." I said, "What brings that out?" and she said, "Well, I've never seen you passionate or enthusiastic about anything for the past couple years. Obviously you miss this and you're in good health, so . . . go for it!"

RA: From my experience, you get into this industry and it just gets in your blood. Few people really retire, they keep their hand in it in some way, you know.

HH: Clearly.

RA: I wanted to ask you about you. You have been written about by so many people. You've been described in so many ways by different journalists, yours truly included. You're defined in so many ways, but how would you define yourself? Who is Hunter Harrison? If you had the chance to just say, "This is who I am, this is my philosophy on life," who do you say Hunter Harrison is? Never mind what everybody else says.

HH: It's not a question I spend a lot of time on, and maybe you should ask others, but I would say I'm a hands-on type. I'm hopefully flexible in that regard. I think that I've learned through a lot of my career in trying to lead people that you have to be flexible, and certain environments call for certain actions. Clearly, I'm intense, passionate about this business, very competitive, and I want to do well, and all those things to some degree you can describe as good qualities. But at the same time you have to keep them in a certain balance, harmony, or they can become a detrimental force. So that's a little bit about Hunter Harrison.

RA: Some people would describe you as a "tough guy." Personally I don't see you that way at all. I just see you as someone who is very focused, very determined. You know exactly what you want to do, and you know how to get it done.

HH: Well, it's kind of a matter of semantics. Sometimes, you might call it tough. But I think there are times, when you're trying to lead and motivate people, when they need a kiss on the cheek and a hug, and sometimes they need a kick in the ass. So people kind of describe that as tough. I think it's a case where somebody has to do it. And, you know, some of those things are distasteful. Some are not. I don't know any of us that get pleasure of doing those things, but they need to be done at times.

RA: What did you see when you had the opportunity to join the CP—the great Canadian Pacific, with such a great history, great tradition, really one of the railroads that built Canada? What opportunities did you see there, going in when you did your personal due-diligence —"OK, this is what I've got to work with, what do I want to do here"?

HH: As you well described, it was a great railroad steeped in tradition that really opened Canada up, in the development of Canada. But what I found was a lot of frustration for whatever reason. People were frustrated; they were being called the worst railroad in North America. Nobody wants to be the worst.

RA: Worst in terms of what?

HH: I think worst in terms of operating. Worst in terms of service. Worst in terms of financial performance, you know, given evidence of the proxy battle. But there was one thing that I have the ability to do because I understand the business from the ground up: see that there was a lot of talent there. If you could uncover the mud and get to the people, give them an opportunity to get back to railroading again, they could surprise you with their performance. And I was right about that. We discovered a lot more talent than people had given the organization credit for. So far, this two-and-a-half-year journey has been quick and successful, and it's really the result of the whole team pulling together. No one person can take an organization and turn it around. You just have to be kind of the key to the door, and open doors of opportunity for them, and let them run with it.

RA: You brought some good people with you, when you came on board.

HH: I did! Absolutely. I think that if I've had any success in the business, it's that I've tried to surround myself with smart, bright, hard-working people, because I found early on that, in my view at least, the key to success in business—I don't care what business you're in—is people. So we did bring on some talented people that I had been exposed to before, and some that I hadn't been exposed to. If you look at the makeup of the team now—there's some in-house, there's some [from outside], there's some former, and we put that together—all of us collectively have worked to create a certain chemistry, a certain esprit de corps that has been pretty motivating to all of us.

RA: Keith Creel (CP President and COO) is one of them. You and Keith worked together at other railways for a long time.

HH: Keith joined my team in about '95 at Illinois Central, as an assistant trainmaster, in Memphis. Hard working, energetic, probably the brightest young man in North America, in my view, certainly on the operating side of the business. I quickly picked up and saw the talents that he brought to the business. As we were looking at a succession, I'm not going to be around forever, I just had a big, big birthday, so  . . .

RA: What birthday was that if you don't mind me asking?

HH: The big 7-0! So 7-0 is big; now we're working on 8-0, and I don't think we'll be done at Calgary hopefully, but I think that's just one example of bringing in Keith and everything he has brought to the organization. Once again, that's 20 years of working together, understanding each other. It's kind of like a quarterback and a wide receiver working together. You know, you go back to pass and you don't have to wonder where he's going to be. You know it, you sense it. He can do the same thing with me, and that's pretty powerful when you can develop those types of combinations with individuals.

RA: One of the areas that CP has been known for is excellence on the engineering side and on the R&D side. You've done some innovative things, like distributed power, running very long trains, working with the National Research Council of Canada—those sorts of things. Besides those, what else do you think sets CP apart, makes it distinct, makes it unique?

HH: Well, Bill, as such a historian as you are of the rail industry, you know some of the physical conditions of the planet, and the Rockies and the Spiral Tunnels and some of the engineering marvels that people created to get across the Rockies and get to the West Coast and open up those opportunities. And I was amazed, being a quote "flat-lander" originally from Memphis, Tennessee, to see what could be done. I had been a proponent early in my career of running larger trains successfully, but I don't think I ever thought we'd see trains running the size that we're running in a safe manner with distributed power exceeding 20,000 tons. When I entered the business, if a train was 4,000 tons it was a big one! So you can see the economy of scale and what that brings to us. At the same time it creates challenges with track/train dynamics in a lot of areas that I would have to say that CP was certainly ahead of the curve in the industry, and was ahead of my curve. I really didn't have much to do with that. It was there and I think we've leveraged it a little better and it's been a big plus for us.

RA: Aside from moving crude oil, which of course has been a huge boom, one of your other main commodities is grain. That's heavily regulated in Canada, and the relationship with the government has been difficult. Have things improved?

HH: I think so. There's basically two big players in Canada, CN and CP. I might be a little biased, but I've said to the regulators and legislators in Ottawa that you've got the finest rail system in the world here in Canada. You've got the two top railroads. Don't mess too much with a winning combination. We had [service problems] because of a lot of reasons last year.

RA: Bad weather being one of them.

HH: Yes, weather, the worst in 75 years, and coming off floods. At the same time a record crop year that was something like 30% higher than any crop year before, so there were some real challenges. Now, I think as the dust has settled, both carriers have gained a little more respect from Ottawa. I think we've had some good exchanges with the regulators, and I feel very comfortable going forward that the situation will not stand in our way; it will just open more doors of opportunity.

RA: The regulatory situation in Canada is a bit different than in the US. There is some form of open access, to a very limited extent, and you don't seem to have a problem with that. Some of the U.S. railroads are fighting that tooth and nail. What's the difference? How's it work?

HH: It's called inter-switching, which relates to some degree to the U.S.'s old reciprocal switching, pre-Staggers. It's one of these regs that are in place, but people don't really take advantage of it, because there's no need to if the individual carriers do their job. It's kind of something that could be called a lever that you have over here, if it needed to be used. My view is, for years a lot of railroaders had been scared of the term "open-access," and I don't know why. What that says to me is, all we're going to do is open up more competition, and with a very limited number of players in North America now, it's important to keep that competitive balance. And if an individual carrier, CP included, provides the right type of service for the customer, at an appropriate fair price, we have nothing to worry about. If we do not provide the service, we should not be resistant to someone [else] coming and providing that servicem. So I think it's different, its change, and people, generally speaking, their normal reaction is to resist those initial change efforts. But I think if we would look back here in 20 years, most of these things are going to be behind us, and we're going to be settled down with those types of issues.

RA: Transcontinental mergers: Now, you did approach CSX, and it wasn't the right time for a merger, but you seem to be pretty determined that it's the right thing to do at some point. Why do you feel that way?

HH: Let me kind of separate myself from my CEO job at CP. I originally did some work on this while I was retired, doing some consulting. And I made the observation that there needs to be, and there will be in the future, transcontinental mergers in the U.S. Now I'm in Canada, effectively so, but if you look at it, particularly in the Eastern U.S., there's no more room for infrastructure. There are people begging for more commuter rail, people begging for more [intercity] passenger rail, people begging for more freight on different routes because of sensitivity to crude or hazmat, whatever the case may be. We've got that situation in Chicago. So how are you going to deal with those capacity issues, to be able to deal with growth, to deal with the commuter situations, to deal with communities that want re-routes? If you don't sit back and take a look at the industry first and how it could be modeled and then be sure that nobody is disadvantaged competitively, then you could create a lot of capacity just with mergers and some transparency there. We try to do the interchanges effectively at the Mississippi River as you know, up and down the river. And now a high percentage of it is in Chicago—the most populated city we have from a rail standpoint, with the most interchange. We're trying to cram everything through Chicago and it just doesn't make sense. So there are some efforts under way now from an industry standpoint that I feel very encouraged about, that they are taking place.

RA: The CREATE Program being one of them.

HH: Yeah, but it's even beyond CREATE. When you get a lot of committees and ad-hoc committees on top of that, and then you get some lobbyists involved, all you've done is created a program that's not going to be successful. There are some efforts led by some people behind the scenes that will get recognized one day, that are bringing together some retired individuals who don't have their old logo attached to them anymore, who are coming in as industry observers, saying OK, if you were given the situation of "what would you do in Chicago" and all you have to worry about is conceptualize, there's some pretty exciting work going on. Now, I'm trying to make some efforts to keep the other folks away from them, keep the politicians away, keep CREATE away and keep the AAR away. Let them do their thing and let's see what could happen because if that would come together, it could have some very positive impact on the industry. But the only reason for the mergers was to say you effectively have two duopolies, one in the East and one in the West. The competition between them is effectively non-existent. But if one of the carriers in the East married one in the West, I promise you they wouldn't route their traffic through Chicago. And I promise you when their train left LA and was headed for the Florida coast there would be a plan that's different than today. The service would be better, the cost would be lower, they'd need less infrastructure. If that's not good, then I don't know what I'm doing.

RA: If and when a transcontinental merger happens—and if one goes through then eventually everyone else will fall into place—do you think there's going to have to be some kind of give-back in terms of regulation, whether it's reciprocal switching or whatever?

HH: That was part of the misunderstanding of our initial efforts. All we were saying is, it looks like there is potential there. There could be an opportunity to, number one, enhance shareholder value, and number two, create more capacity and avoid Chicago and improve service. That seems all good to me! But if you end up with two major railroads in the U.S., clearly you're going to have to have access. You're going to have to have a case where if railroad A is not doing the job for the industry, then railroad B can come over and serve them, to keep competition, both from a service and a price standpoint. We ought to do that! Competition is good! This industry grew up for the first 150 years heavily regulated. We weren't ready to deal with deregulation. I would say, shame on us, we've done really well, but it's been a hard learning experience for some people—to get out of some of that traditional overhang from regulation of the long haul. Those things should become part of history, a thing of the past. That's one of the things we talked about. We were going to open things up, let everybody have a shot. So yeah you'll have to do some things that way, appropriately.

RA: There seems to be, at least in my perception, on the part of not only regulators, but a lot of politicians, that the railroads shouldn't be allowed to make a good healthy profit. Why do you think that is?

HH: They're misguided.

RA: Making too much money? Where does that come from?

HH: We have a little overhang, both in Canada and in the U.S.

RA: What do you mean by overhang?

HH: Well, I think from the old days, when they viewed railroads as a utility, that we all kind of own them. That CN should still be a Crown Corporation. And so as a result, as I said earlier, for the first 150 years, never did any carrier come close to making its return on capital, as far as investments. We came to the Staggers Act in 1980. We were deregulated, and then due to our own fault we saw rates decline from '80 to 2000 on about a 45-degree slope, which no sector did during that time. So we went from the start of [deregulation] to 2000 and nobody made any returns. And you know what we went through in the '60s and '70s with bankruptcy and railroad infrastructure crumbling.

RA: Talk about nationalization.

HH: Absolutely. And then we hit in 2000. And now the rails have gotten their act together, they're providing a better service to the customer, they're being rewarded and making some returns and doing well in the market, and people say, "They're abusing things." And the people that argue the most that we should be regulated and that we make too much money are the ones in their own industry, if you raised those issues, would be squealing all the way to Washington. So I think, once again, it's the political pressures that push and say "Here's why the grain rates are up." There's a lack of understanding of markets and how markets move. You go with grain and you say: "You're doing well with the grain. Much better than last year." Well, the market's soft, nobody wants to ship any grain. But I know one thing that's happening: Grain's going to move every year. People are going to eat every year, eventually. The world market is not good and people are sitting on grain and holding it. But when the market opens up, everybody's going to want to go at once! That's a huge cost in assets and human resources. So, working with shippers, as they become and we become more sophisticated about markets, they understand more about our issues. I think you're going to see a lot of those things go away. And I think one day, Washington might be a non-event when it comes to railroads. And I will dance at the foot of the White House that day!

RA: I'd like to see you do that! Final question: When the history of the railroad industry in the 21st Century is written, how would you like to see yourself portrayed? You and your colleagues are the people who are shaping the industry now, but 100 years from now in the history books? What do you think?

HH: Once again, maybe I'm not the right one to answer the question, but, I just think if they said, "They made a difference." That the teams I've been associated with, that have put together this so-called scheduled precision railroading, call it what you'd like, has had an influence on the industry. I'm not telling you it's the answer to all issues or problems. If we addressed some weaknesses we had in the past, I think it made us stronger. I think it's influenced other organizations. And I think if we could look back and say we had some influence there, in showing people that those concepts would work and could create value, it'd be very nice to know!

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