Mounting service failures at CSX Transportation spurred a highly unusual intervention by the Surface Transportation Board.
Operational changes made by CSX Corp. Chief Executive Officer Hunter Harrison also impacted the company’s stock because shippers are shifting freight to Norfolk Southern.
The STB met with senior CSX officials in late July A week later, on July 27, the board sent a letter to Harrison that telling him to call the board on a weekly basis to discuss the railroad’s performance issues and how CSX management is working to resolve them.
The STB said it received complaints from CSX customers and industry stakeholders regarding increased transit times, unreliable switching operations, inefficient car routings, poor communications and coordination with CSX customer service, and acute disruption to customers’ business operations.
"We are very troubled by the apparent lack of communication with customers and urge your immediate attention to remedy this situation," the board wrote to Harrison.
CSX must provide STB officials with data regarding yard congestion, interchanges with other Class I railroads, and equipment and manpower availability, local spot and pull reports, and service to customers with critical needs.
In an Aug. 2 email Harrison apologized to shippers and blamed the railroad’s employees. "The pace of change at CSX has been extremely rapid, and while most people at the company have embraced the new plan, unfortunately, a few have pushed back and continue to do so," Harrison wrote.
CSX union leaders strongly objected to the letter. One told a newspaper reporter that the workers were “disgruntled and tired” because of Harrison’s schedule changes.
Since taking charge earlier this year, Harrison has slashed 2,300 jobs and sidelined 900 pieces of rolling stock. He projects additional cuts of 300 more jobs and 100 pieces of equipment by the end of the year. The railroad started the year with 12 hump yards and could end with three, according to Harrison.
Although intermodal freight saw increases in the second quarter, it is expected to suffer in the future from the operational changes. Among those currently hurting are bulk commodities shippers like coal producers.
Robert Murray, chairman of Coal producer Murray Energy Corp. told the STB, "This situation has become absolutely intolerable and must be resolved immediately."
Arch Coal Inc., the nation’s second largest coal producer, also was fed up with poor CSX service.
"Frankly, the problems have gotten worse in the last 10 days," Chief Operating Officer Paul Lang observed during a July 27 corporate earnings conference call. He also said CSX service issues have begun impacting export coal shipments.
When Harrison was hired earlier this year for $300 million in compensation after heading Canadian Pacific, it was with the expectation that he would improve CSX earnings. It seems to have worked in spite of the pain to employees and customers.
In a July 19 teleconference, he reported that the CSX operating ratio had declined from 69.4 for all of last year to 67.4 for the quarter, while revenue climbed 8%. The company’s second quarter net earnings were $510 million, $65 million more than the same quarter last year.
"I'm a short-timer here," the Harrison, 73, said during the call. "I'm the interim person that's going to try to get this company to the next step and good foundation," a remark that sent CSX stock lower.
How Bad Is Service?
A recent survey of rail shippers shows that many are fed up and seeking to switch to Norfolk Southern where it is possible for them to do so.
The global financial research company of Cowen & Co. poll of CSX shippers found more than 80% saw service decline after Harrison took charge.
"Shippers are moving or have already moved freight off of CSX where they can," Cowen observed. Nearly 40% of those polled say they switched some freight to Norfolk Southern and 67% have transferred freight to a trucker.
But the situation is actually worse than that. For those shippers that are not captive, nearly half are moving a piece of their business to NS. When you exclude the shippers that cannot truck their freight, then 76% report that they are switching at least some freight to truckers.
"We expect NS to show additional market share gains in in the third quarter," Cowen said, estimating that NS could divert as much as 5% of CSX’s traffic.
As one shipper summed it up for the researchers, "This transition has been a complete disaster in regard to CSX's operational service."