The new leadership of CSX Transportation intends to slash costs by firing thousands more employees, shedding equipment and rail lines, and ending or severely curtailing spur service.
At a March 1 shareholders meeting, President James M. Foote made it clear that he will do everything in his power to shrink the railroad’s operating ratio from 67.9 at the end of 2017 to 60 by 2020.
At the end of 2016, CSX’s OR was figured at 69.4. That was before Foote’s late predecessor Hunter Harrison spent three quarters of last year firing 4,300 employees and contractors, closing rail yards and sidelining 1,000 locomotives and about 60,000 freight cars.
Harrison also was blamed for a pandemic of service failures that seriously harmed the businesses of its customers and which drew scrutiny from Congress and federal regulators (AA, 12-31-17, P. 1).
All of Harrison’s efforts appear to have accomplished nothing more than the reduction of the rail company’s OR by a whopping 1.5%.
Foote and his executive team promised to follow through on their commitment to Harrison’s Draconian operating model called Precision Scheduled Railroading (PSR), which Wall Street investors credit for boosting the company’s share value – more for its perceived promise than any actual accomplishments at CSX.
Foote told the shareholders meeting, “We are picking up right where Hunter left off, and we are going to deliver, just as he envisioned.”
According to Foote, this includes cutting 2,200 more jobs by the end of this year and elimination of an additional 4,000 jobs by 2020, which he says will be accomplished through both firings and attrition.
CSX also plans to raise rates and demurrage fees. But Foote said it won’t invest the company’s $3.6 billion tax reform boon in capital improvements. In fact, it plans to shrink average annual capital investment through 2020 to about $1.6 billion. The company spent about $2.7 billion in 2017.
In February, CSX said it was increasing its $5 billion stock buyback program by 10%, along with raising company’s quarterly dividend, which is likely to make shareholders happy.
However, it has been reported that CSX borrowed the money for the stock buyback. Remember that debt is not included in figuring a company’s OR, which is simply a crude measurement of operating expenses subtracted from net revenue.
It is surprising that investors bought the OR promise, given that CSX customers who can have been fleeing for the exits since last September.
After the jump in share value that followed last year’s announcement of Harrison’s hiring, some investment analysts now believe that whatever boon can be obtained for shareholders by implementing PSR has already happened and is unlikely to improve significantly, no matter how deeply Foote cuts operating costs.
Shippers observed that they ended up paying for many of the cost reductions in the form of service deterioration that damaged their ability to deliver goods and eroded their capacity to compete effectively against competitors who were not dependent on CSX.
Some critics of the hasty push to adopt PSR suggest that it may be at least partly to blame for a spate of train accidents, both large and small, that plagued CSX since Harrison came on board.
Although a direct connection has yet to be drawn between the rushed and chaotic implementation of PSR and a decline in safety, CSX has experienced a rash of accidents since it was launched, including a derailment last year that took place not far from the company’s Jacksonville, FL, headquarters.
On Feb. 4 a deadly collision between an Amtrak passenger train and a CSX train killed two and injured more than 100 in South Carolina.
Although no official cause has been reported by federal investigators, it appears that a CSX employee left a switch open that allowed the Amtrak train to enter the track where the CSX train was sidelined.
According to a Feb 26 Wall Street Journal report, top executives at both CSX and Canadian Pacific also have been traveling on “an apology tour” to repair their railroad’s broken relationships with customers following Harrison’s tenure at each. (He headed CP until January 2017).
"I get on an airplane, go to someone's office with my hat in my hand and say, 'I'm sorry about last year, we screwed up and we didn't do a really good job for you,'" Foote was quoted saying.
In addition, Harrison’s adamant refusal to reveal the nature of the illness that left him dependent on an oxygen tank (no cause of death has been reported) spurred the CSX board to adopt a new policy requiring that senior executives undergo regular medical examinations.