| DETROIT/NEW YORK/MONTREAL, March 9
DETROIT/NEW YORK/MONTREAL, March 9 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
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
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
"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
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
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
"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)