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UPDATE 1-CSX's new CEO eyes yard closures, truckers' market share
March 9, 2017 / 11:21 PM / 8 months ago

UPDATE 1-CSX's new CEO eyes yard closures, truckers' market share

(Adds quotes from Harrison)

By Nick Carey, Michael Flaherty and Allison Lampert

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 was named chief executive of CSX Corp on Monday, told Reuters in an interview. Harrison’s appointment came amid shareholder pressure that was led by activist investor Paul Hilal of Mantle Ridge LP.

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.

“We lost a lot of business to the highway. There’s the possibility that that shift could be swinging back,” Harrison said, in his first comments on CSX opportunities since taking the role.

Harrison’s 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 CSX’s stock rose 35 percent since mid-January when 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.

Now, 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 CSX bowed to investor pressure and appointed Harrison as CEO, the company 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.

But Hatch questions whether the 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 .

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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 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 problems. “We’re not traders,” he said. “We’re not investors. We’re railroaders.”

But Harrison did acknowledge efficiency challenges posed by CSX sharing tracks with commuter trains and Amtrak on its 21,000 mile network along the U.S. east coast.

“It can complicate things,” Harrison said. “I don’t think if you were able to do it all over again, you’d mix freighter and commuter lines.”

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 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.

Aside from hoping to make 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 does not 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.” (Editing by Nick Zieminski and Diane Craft)

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