CSX bets up to US$300M on CEO
Overhauling inefficient railroad may prove challenging for Harrison
Railroad turnaround veteran Hunter Harrison is back in a familiar place — at the bottom.
This time he’s joining CSX Corp., the least efficient major North American railroad, which named him chief executive on Monday. In 2012 he took over at Canadian Pacific Railway Ltd. and during the next four years transformed the perennial laggard into a top performer by cutting costs and speeding up service.
Overhauling CSX may prove more challenging because of geography. With a 34,000-kilometre network in the eastern U.S., the carrier has stretches of curving track that cut through densely populated areas and the Appalachians. The other eastern carrier, Norfolk Southern Corp., faces similar challenges and also trails carriers in Canada and the western U.S. in efficiency measures.
At stake as Harrison, 72, tries to whip CSX into shape: compensation of more than US$200 million and perhaps — according to an estimate last month by the railroad — as much as US$300 million.
That includes US$84 million in forfeited pay from his old job as head of Canadian Pacific. Without that and a related tax indemnity, he’ll resign after the 2017 annual meeting, CSX said. Shareholders should decide whether to award it, the Jacksonville, Fla.-based company said. A representative of the company didn’t immediately respond to a request for comment Tuesday.
CSX was the worst performer last year among major North American railroads by operating ratio, the industry’s gold standard of efficiency, according to data compiled by Bloomberg. The benchmark measure, in which a lower number is better, was more than 69 per cent for CSX. The previous management set a long-term goal of 65 per cent and announced a plan to cut about 1,000 management positions last month.
By the end of Harrison’s tenure, the ratio is likely to fall to less than 60 per cent, said Fadi Chamoun, an analyst at BMO Capital Markets, and Walter Spracklin at RBC Capital Markets.
“We expect emphasis now to be placed on cost cutting, with pace and timing of CSX’s operating ratio improvement the key variable,” Ben Hartford, an analyst at Robert W. Baird & Co., said in a note to clients Tuesday.
There’s also a way to measure his gains relative to a similar carrier: Norfolk Southern Corp., the other eastern U.S. railroad. Its operating ratio last year was just under 69 per cent.
While at Canadian Pacific, Harrison twice tried — and failed — to buy CSX, first in 2014 and again last year. He also tried to combine the Canadian railroad with Norfolk Southern.
Harrison’s methods have cost jobs. Canadian Pacific ended last year with 11,653 full-time employees, a 34 per cent reduction from June 2012, the month before he took over.
Labour costs will be Harrison’s biggest opportunity for reducing expenses, with Canadian Pacific and Canadian National about twice as productive as CSX, Christian Wetherbee, an analyst at Citigroup Inc., said. Closing the gap with the Canadian peers, even partially, could generate as much as US$900 million in annual savings for CSX, he said.
At CSX, Harrison will “cut into the rank and file head count” by reducing yards and repair shops, said Jason Seidl, an analyst at Cowen & Co.
Harrison also put non-labour costs under a microscope. Under his watch, Canadian Pacific moved out of a downtown Calgary office tower to a new building adjacent to a rail yard. Mark Wallace, who was Harrison’s chief of staff at the time, estimated in 2014 that the move saved about $20 million a year in rent.