Rail and Intermodal

In January 2017 E. Hunter Harrison, then 72, left the chief executive's job at Canadian Pacific, and an activist fund called Mantle Ridge, led by Paul Hilal, built a stake of about 5% in CSX, the railroad that runs much of the network east of the Mississippi (reported). Hilal's thesis was simple: CSX's problem was cost, not demand, and the method that Harrison had used at Illinois Central, Canadian National and Canadian Pacific could take about ten points off its operating ratio. CSX's ratio was about 69% in 2016, the weakest of the large US railroads, while the Canadian roads Harrison had run were in the high 50s to low 60s (reported). The board yielded rather than fight a proxy contest. Harrison became chief executive in March 2017, and shareholders later approved, in a non-binding vote, about $84 million of reimbursement for the compensation he had forfeited at Canadian Pacific (reported).

He imposed precision scheduled railroading (PSR) within months. CSX closed or flattened most of its hump yards, where cars are sorted by gravity, ran fewer and longer trains to fixed schedules, stored hundreds of locomotives and thousands of cars, cut management layers and thousands of jobs, and dropped intermodal lanes (reported). Service collapsed in the summer of 2017: trains slowed, cars sat longer in yards, and shippers complained to the Surface Transportation Board, which demanded weekly performance data and held a listening session. Hurricanes Harvey and Irma hit the southern network during the transition. Harrison ran the railroad through daily operations calls while in poor health, often on oxygen (reported). He took medical leave on 13 December 2017 and died on 16 December. His chief operating officer, Jim Foote, succeeded him.

By CSX's own measures service recovered by late 2017 and improved beyond its earlier levels in 2018, and its operating ratio fell to 60.3% that year, a record for a US Class I railroad at the time (company). The share price rose, capital spending fell and buybacks rose. Union Pacific announced its own PSR plan, "Unified Plan 2020", launched on 1 October 2018 with a target ratio of 60% by 2020 and 55% in the long term; Norfolk Southern followed in 2019, and Kansas City Southern after it. This chapter explains why North American railroads are among the most profitable transport businesses in the world and among the least loved by their customers, what PSR bought and what it cost, and why the industry's next chapter is a merger.