Old Man’s Folly? CSX’s Harrison Testimony Bolsters Calls for Stricter Rail Regulation

At the recent listening session about the service debacle at CSX Transportation, shippers gave the Surface Transportation Board (STB) an earful about how bad the situation had gotten by the end of the summer, along with their inevitable conclusion that getting back to the service levels of 2016 will be a long time coming. [MH&L was present at the session.]

Witnesses told of their railcars “ping ponging” around the CSX network. In one example, cars that were supposed to move only a few miles in a southern state traveled first to New York. Needed cars would never show up, or fewer than promised, and the delivery schedule for cars to be loaded would change from five days a week to three days without notice, and then wouldn’t show up.

Failed deliveries forced shippers to try to move heaven and earth—including resorting to expensive truck service—to make sure customers could keep plants operating. Sometimes these plants were forced to close for days, incurring big financial losses.

So many CSX employees were fired over this period that communications ceased because the people who worked closely with customers were no longer there. This massive failure in communications and service failures led shippers to lose business, some of it permanently, because unlike CSX their companies operate in a market where competitors can act quickly to take business away from them.

In an attempt to make do with fewer employees CSX has been regularly running three-mile long trains, creating safety concerns by putting undue strain on the brakes and coupling mechanisms. When these gargantuan trains are unable to move, whole communities are cut in two as if a Berlin Wall had suddenly appeared in their neighborhoods. In one town two schools were shut down because teachers and students couldn’t get to them.

These stories and more were heard at the STB “listening session” (not a hearing, the board chairman stressed), held Oct. 11 in Washington, DC.

The session started off with an appearance by CSX President Hunter Harrison, supplying another insight into why significant improvements cannot take place as long as he heads the railroad, and suggesting why the service debacle occurred in the first place.

Harrison turns 73 next month, and news reports from earlier this year revealed that he has been using an oxygen tank as the result of an undisclosed ailment. He was using the oxygen tank when he appeared at the STB. In addition, his physical appearance and the way he spoke made him appear to be much older than he is depicted in official photos.

(To view a video of the STB session, including Harrison’s appearance, see here.)

Harrison’s mind wandered at times. He would give long, rambling replies to questions put to him by the commissioners, sometimes failing to address the question he was asked. On occasion he would stop while trying to find the next words to say, and some of his phrases seemed rote and out of context.

Normally, pointing out that an aging executive was not at the top of his game might seem simply ungracious and unkind, but in this case it is highly relevant to knowing how CSX got to where it is today, and where it is heading under his leadership.

Last July during an earnings conference call, Harrison—who joined CSX last spring—told Wall Street analysts and investors, “I’m a short-timer here. I’m the interim person that’s going to try to get this company to the next step and good foundation.”

Wall Street View Changing

It was this short-timer’s attitude that caused him to rush into reorganizing the railroad around his pet concept, which he calls Precision Scheduled Railroading, three words he kept repeating like a mantra during his testimony. Shippers testified that the service breakdowns they suffered stemmed from his failure to take the time to more carefully plan and execute the changes, and to communicate with customers about these changes in advance—something professionally run companies do routinely.

The board of CSX paid $300 million earlier this year to lure him away from Canadian Pacific and sign him to a four-year contract as CEO, expecting that Harrison’s management model would drive down costs, lower the railroad’s operating ratio and boost earnings.

Late this summer when shippers were publicly complaining about service failures, Wall Street remained bullish on CSX under Harrison, but that may be changing. CSX will report third-quarter earnings on Oct 17. Citing the recent hurricanes and softness in the auto market, which represents a big chunk of the railroad’s business, Zacks Equity Research said, “Recently encountered service disruptions by the company also do not bode well for its future and might hamper results in the quarter.”

Securities analyst Marshall Hargrave of Activist Stocks said the initial wave of investor enthusiasm after it became known Harrison would join CSX drove its stock price up to as high as it is likely to get. “I remain skeptical of what he can do with CSX,” he wrote on Sept. 22.

“Before Harrison announced plans to join CSX as CEO, shares were trading at $37,\; they now trade at $49—that’s near $11 billion in value that Harrison has created before even joining the company,” Hargrave said. “In large part, a lot of any efficiency improvements that Harrison might bring have already been baked in.”

He pointed out that CSX currently trades at 26 times earnings, while CP is at 18 times and Norfolk Southern trades at 19 times. “Meanwhile, CSX's returns on equity and operating margin are already in line with Norfolk Southern—both of which operate on the East Coast and have to deal with the maze-like routes through cities,” Hargrave noted.

Unable to Accept Criticism

Harrison’s response to the criticism of the service failures due to his hasty implementation of Precision Scheduled Railroading has been to dismiss the complaints from shippers and critics as exaggerated, place much of the blame on recalcitrant CSX employees, two derailments and “bad luck”—only grudgingly admitting and apologizing for what has gone wrong.

At the STB session he alluded to pressure from investors to press forward quickly with the reorganization, coming so soon after the battle by a hedge fund to force CSX to hire him and dismiss the previous top management. “You wouldn’t want to start at any company with a proxy battle,” he said.

According to Harrison, the situation turned around after Labor Day and has steadily gotten better, a view that was vigorously contradicted by his own customers who were at the session. The only mistake he admitted to making was closing one of the several CSX yards he shut down this summer that had to be reopened because of the chaos that ensued.

Since taking the helm at the railroad, he has mothballed about 1,000 locomotives and 60,000 freight cars from service. The company also slashed 2,700 jobs as well as another 1,000 contractors and consultants.

At the same time, the company is spending $1.85 million on improvements to the executive offices at its Jacksonville, Fla., headquarters, including upgrading C-suite offices and conference rooms, building a recording studio, a café and a warming kitchen. The office suite improvements appear to be for CEO Hunter Harrison and two other top executives. Their offices are near the almost 1,200-square-foot boardroom.

Several shipper witnesses at the Oct. 11 session bristled at Harrison’s Aug. 16 letter in response to a formal complaint from the Rail Customer Coalition in which he dismissed their observations of service deterioration as “unfounded and grossly exaggerated,” and then asserted, “Since coalitions do not have service issues, we do not intend to continue a discussion with you about the service we provide to our customers.”

This arrogant attitude sparked a simmering outrage in the shipper community that surfaced several times during the session. Harrison’s initial refusal this summer to supply the STB with the standard rail performance metrics it ordered CSX to provide, substituting his own self-serving set of measurements, was one reason the STB originally scheduled the listening session. Since then Harrison apparently has relented and is making those reports, although some shipper witnesses questioned their accuracy.

Based on their communications with Harrison and other CSX executives, STB Acting Chairman Ann D. Begeman and Vice Chairman Deb Miller opened the session by praising CSX for the recent improvements it had made and agreeing with Harrison’s assertions that the railroad had turned the corner and entered the sunlit uplands of acceptable service levels. Once the session got underway shipper witnesses quickly disabused them of this notion and said the railroad still has a long way to go to return to acceptable service levels.

Although Harrison admitted that there were things CSX management could have done better and apologized for the service breakdowns that occurred, nothing seemed to dent his apparent imperviousness to the reality of how badly shippers continue to suffer. “I’m extremely proud—and there are some things I’m not proud of—that the railroad is back running better than it ever has,” he stated. “The best is around the corner.”

He also refuses to believe there could be anything wrong with the Precision Scheduled Railroading concept. Citing the closure of one hump yard that had to be reopened as his only mistake, he admitted, “One thing we have not been able to program into the model are mistakes.”

Shippers Offer Clear Picture

Shippers detailed the extensive damage the CSX service meltdown did to their ability to service their customers, damaged their ability to compete and drove some business permanently to their competitors. This is in addition to the massive direct costs they have sustained because of having to close plants and arrange for other rail or truck transportation in the rare situations where they could do so.

In many cases the shippers have no recourse—they must transport their products by rail and CSX is the only railroad available. One of these companies is the $5.4 billion commodity chemical giant The Chemours Co., which depends on rail to transport most of its inbound and outbound shipments, and 96% of that rail traffic is captive to CSX. Company executives told the STB both Chemours and its customers suffered badly since Harrison began implementing his Precision Scheduled Railroading concept.

“To date, we have spent in excess of $1.3 million in trucking to assure delivery of critical raw materials for production and to supply finished product at a time of peak cycle demand,” said Kevin Acker, rail executive for Chemours. “In August, we experienced transit time increases of between 57% and 187% in six key customer lanes vs. full year 2016. These increases not only stress a fleet of railcars, they also add a substantial working capital burden.”

Bruce Ridley, vice president of Packaging Corp. of America (the parent company of Boise Paper), said his company saw reductions in car supply become critical, forcing it to resort to trucks. Ridley also said that by dropping out of the North American Box Car Pool, CSX has resulted in many unfilled return loads, driving up costs for shippers.

In addition, rampant missed switches means that his plants don’t get the railcars they ordered, only to find they are charged demurrage for cars sitting idle in a yard, he pointed out. He said CSX also has reduced the number of days a week that the company’s facilities receive train service, and because there are fewer employees, communication breakdowns are a daily occurrence.

“CSX should be required to add resources to help restore service levels and work with its customers with respect to the timing and impact of planned operation changes,” Ridley declared. “Our fear is that CSX intends the current atrocious service levels to become the new normal.”

Tim Tirabassi, director of North American logistics for Olin Chlor Alkai Products, told the STB, “Our company has significant captivity issues with all of our rail service providers, including CSX. Recently, CSX’s service cuts and massive disinvestment have caused a tremendous strain on our logistics operations. It is disturbing that a railroad with a statutory common carrier obligation is able to take such dramatic action with little or no oversight from the government.”

He added, “The customer service issues we are experiencing with CSX are only possible because CSX faces minimal competition in the marketplace. If our corporation or a competitor suffered a systemic failure like CSX has recently, we or our competitors would immediately move to take market share.”

Tirabassi cited one alarming incident where CSX completely lost track of a tank car filled with potentially deadly chlorine. In another case a chlorine car was stuck in a CSX railyard for 17 days.

Additional concerns about chlorine hauling were raised by Lisa Powers, North American distribution manager for the Cristal chemical company, who believes CSX fudged its performance metrics.

“While CSX may cite improving dwell times as a metric, Cristal is now frequently raising inquiries on inbound chlorine when the cars make numerous moves between yards, past the local yard and back again,” she noted. “Increasing transit times have forced Cristal to increase targeted inventory levels by 50%.” 

Cal Dooley, president of the American Chemistry Council, agreed. “CSX customer service was so unresponsive and uninformed; our members have been unable to tell their own customers when delayed shipments might be delivered. Some service problems have been so extreme that company sites and customer facilities have been forced to shut down operations.”

He urged the board to investigate the underlying causes of CSX’s service disruptions as well as the long-term impacts of its operational changes. It also should take steps to inject more competition into the rail environment, including streamlining procedures to allow reciprocal switching.

Reciprocal switching occurs when a railcar is switched from one railroad to another railroad to a shipper’s private or assigned siding. The Class I railroads in the U.S. have fought against it being allowed, claiming that the costs would be so large they would endanger future rail infrastructure investment—in spite of the fact that reciprocal switching has been common on the two Canadian railroads for many years without a problem.

Herman Hacksteen, president of the Private Railcar Food and Beverage Association, represented the Rail Customer Coalition at the session, telling the board that 22% of his members have had to move freight from rails to roads. “Harrison hasn’t made CSX more efficient, he has simply pushed costs onto customers,” he observed.

He also sarcastically expressed gratitude to Harrison for having overwhelmingly proven the shippers’ case in support of immediate rail reform, which he said should have been obvious following the rail mergers of the 1990s and the rail service failures of 2014-15.

“We thank Mr. Harrison and his investors who were responsible for the changes that were made at CSX,” Hacksteen said. “In the past several months, he and his investors have provided the strongest reason and evidence to date as to why reciprocal switching must become an option.”

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Does Lack of Quorum Legally Bar the STB From Acting?

“If the implementation of this unilateral action by CSX has taught us one thing, it’s that the board clearly has a role in protecting the business interests of rail shippers,” Kevin Acker, strategic relationship and category manager of rail for The Chemours Co., told the Surface Transportation Board at its Oct. 11 listening session on CSX service failures.

One obstacle to fulfilling his wish is that it’s not clear what legal authority the board has to do much of anything at this point.

Acker urged the STB to more closely monitor the performance measures from all Class I carriers to proactively identify possible network disruptions and quickly respond to them. He also said the board should require rail carriers to file what he called a “flight plan” when the railroad intends to implement a significant operational change, including explaining how it will communicate with customers before and during the plan’s implementation.

Individual shippers and shipper groups at the session called on the STB to take various short-term actions, such as requiring CSX to adhere to a strict recovery plan including specific goals and detailed performance measure reports. Shippers also would like to see the board finally approve their proposal for allowing reciprocal switching, which has been waiting years for a decision. Others would like to see the board direct the railroad to pay direct compensation to shippers who were financially harmed by its widespread service failures.

There is just one problem: The board currently lacks a quorum, which would seem to prevent it from voting on any decision until at least one new member takes a seat. However, the STB’s general counsel disagrees and without any further explanation believes that the two-member board can continue to legally vote.

The successor agency to the old Interstate Commerce Commission, the STB was created by Congress in 1996 as a three-member independent federal agency, organized on much the same lines as the National Labor Relations Board and Federal Communications Commission.

Following the 2014-15 rail service crisis that saw crops rotting alongside the tracks because major railroads chose instead to haul more profitable oil and natural gas, Congress passed a law that gave the STB greater authority over rail rate regulation and expanded the body from three members to five.

Neither President Obama nor Trump chose to nominate the two additional members, which was not a serious concern because three out of five members constitutes a quorum under law. The problem arose when Chairman Daniel Elliott, one of the three remaining STB members, quit the board at the end of September 2017. This leaves only Acting Chairman Ann D. Begeman and Vice Chairman Deb Miller, both of whom presided over the CSX listening session.

During the second Bush administration, the U.S. Supreme Court ruled that all National Labor Relations Board decisions made in the two-year period were illegal because it had only two out of its five mandated members. As a result, the board had to go back and re-vote hundreds of decisions when it later obtained the required full complement of members.

Asked about this, the STB press spokesman told MH&L that the board’s general counsel believes the two-member board can legally vote on decisions and continue to function exactly the same way as it has in the past. The NLRB precedent raises the possibility that any decisions approved by the STB to take the stronger actions sought by shippers would invite a court challenge based on the quorum question.

However, it is not clear at this point whether Begeman and Miller are even inclined to do anything more than sit back and watchfully wait while CSX struggles to regain its balance.

—David Sparkman