March 9, 2017 / 6:30 PM / 5 months ago

New CSX CEO eyes yard closures, truckers' market share to lift profits

DETROIT/NEW YORK/MONTREAL, March 9 (Reuters) - Shortly after being named CEO of Canadian Pacific in 2012, Hunter Harrison hoisted himself onto a roof near a Montreal rail yard, pulled up a beach chair and timed the company's switch engines using a stopwatch and binoculars.

"I was seeing how long it took them to switch the cars," Harrison, who on Monday was named chief executive of CSX Corp , told Reuters when asked about the incident.

Harrison has already turned around three railroads - including Canadian National Railway Co and Canadian Pacific. For his fourth stint as CEO, Harrison plans to attack costs aggressively at CSX and says he believes he can deliver growth by taking freight business away from trucks - a strategy CSX and other major U.S. railroads have tried for years.

"We lost a lot of business to the highway," Harrison says. "There's the possibility that that shift could be swinging back."

The septuagenarian railroad legend's obsessive attention to detail - his Florida home was equipped with television screens displaying key switch points along CP's network so he could see problems immediately - is one reason investors lifted CSX's stock 35 percent from mid-January when activist investor Paul Hilal first floated the idea of installing him as CEO.

His ability to squeeze railroads' profits by shutting yards, cutting employees and driving efficiency using "precision railroading" is another, which is why Harrison, 72, will likely cost CSX $300 million for a four-year contract.

He takes the helm of America's third-largest railroad at a time when revenue from coal, CSX's most lucrative commodity, has fallen by a third from 2014 to 2016 and the company's cumulative job cuts since 2012 are approaching 20 percent of its workforce.

The question is whether he can work the same magic work a fourth time and also grow the railroad's business absent a coal rebound.

Just weeks before the company bowed to investor pressure this week and appointed Harrison as CEO, CSX announced it was cutting 1,000 of 4,500 management positions.

"The concern is they may already be cutting into muscle as well as fat," said independent railroad analyst Anthony Hatch.

Hatch lauds Harrison as a "de facto change agent" for turning around two Canadian railroads and the Illinois Central Railway until its takeover by Canadian National in 1998.

But Hatch also wonders if differences in size, shape, scale and population density between CSX and Canadian peers mean the Jacksonville, Florida-based railroad will be a tougher nut to crack.

"We don't yet know what he can do at CSX," Hatch said. "They've already done well operating despite losing more than a billion dollars in coal revenue."

Despite operating improvements, CSX remains the least profitable major North American railroad.

And in a sign of the challenges to come, CSX suffered two derailments within the first two days of Harrison's tenure.

Trains on Tv

Coal freight volumes at CSX and other U.S. railroads have picked up from a low base in recent weeks, but between 2014 to 2016 coal fell to about a fifth of CSX's business from a about a quarter.

Like the other major U.S. railroads, CSX has suffered as utilities switched to burning cheaper natural gas and the strong U.S. dollar hurt coal exports.

Harrison shrugged off the railroad's coal woes and said he'll work with what he's got.

"We're not traders," he said. "We're not investors. We're railroaders."

Morningstar analyst Keith Schoonmaker says as no new coal capacity is planned at this point, he believes "coal remains on a secular decline."

But he has also noted that Harrison, Morningstar’s 2013 "CEO of the Year," slashed Canadian Pacific's operating ratio - operating expenses as a percentage of revenue, a key metric of railroad profitability for Wall Street - to under 59 percent in 2016, from more than 81 percent in 2011.

CSX's operating ratio was nearly 70 percent in 2016.

"The rails compete with trucking, so offering high reliability, capacity, and decent speed make the value proposition stronger — this we think is where Harrison will focus energy," Schoonmaker said.

The concept of retaking market share from trucking is not new. Railroaders hope that by making their services more efficient and reliable, they can take share away from trucking companies, which are more expensive but often more dependable for individual loads.

Michael Ward, CSX's previous CEO, said much the same thing as Harrison during his 14-year tenure, citing an expected shortfall of truckers because of looming digitization of how they log their hours.

Aside from hoping to making CSX more competitive against trucking firms, Harrison told Reuters he has already heard of a large number of rail facilities in CSX's hometown of Jacksonville, which he deems "pretty expensive."

Harrison said he will probably close some yards, but doesn't want "to see anybody without a job who wants to work. They may have to move. They may have to do something different."

Even without new business, analysts say they expect Harrison's tenure as CEO will be marked in the short-term by increased profits.

"Over the next couple of years, we see efficiency gains and cost-cutting as the primary drivers of earnings growth at CSX under Hunter Harrison," said Bascome Majors, an analyst at Susquehanna. "That said, the pivot to top line growth could be critical 3 to 5 years down the road, as this is where the Canadian Pacific turnaround began to lose steam."

In the meantime, Hatch, the independent analyst, worries that cutting too many employees could benefit CSX's main rival, Norfolk Southern Corp.

"If CSX cuts too many people, that could give NS the opportunity to come in and say, 'If you feel you're not getting the service you deserve, we can help with that.'" (Reporting By Nick Carey; Editing by Nick Zieminski)

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