James M. Foote, CEO and president of Class I railroad CSX Transportation, has doubled down on his promise to carry out the late Hunter Harrison’s slash-and-burn cost-cutting program of shedding employees and mothballing rail equipment.
Speaking at a March 1 shareholders meeting, Foote told Wall Street investors that he would spare no effort in pursuit of getting the railroad’s operating ratio (OR) down to 60 by 2020 from 67.9 at the end of 2017. In 2016, before Harrison was installed as CEO, the railroad’s OR was 69.4.
In the days following Harrison’s death, Foote declared that he would carry on Harrison’s legacy by continuing down the same cost-cutting path. On March 1, he stressed that he has no intention from wavering in his pursuit of Harrison’s plan and intends to pursue further drastic reductions of rolling stock and employees.
“We are picking up right where Hunter left off, and we are going to deliver, just as he envisioned,” he declared. This involves eliminating 2,200 jobs by the end of 2018, following the shedding of 3,300 jobs and 1,000 contractors and consultants in 2017. It also anticipates a further elimination of 4,000 jobs by 2020 through cuts and attrition.
CSX also plans to cut the number of locomotives by up to 20% by 2020, and shrink its fleet of rail cars by more than 20%. During the first nine months of 2017 when Harrison was in charge, he mothballed 1,000 locomotives and removed about 60,000 freight cars from service.
At the same time, he chose to spend $1.85 million on improving executive offices at the CSX headquarters in Jacksonville, Fla.
Foote also said the company plans to further slim down its operations and could generate another $800 million by selling off some of its rail lines and other real estate it owns. It is also reducing average yearly capital spending through 2020 to roughly $1.6 billion, down from about $2.7 billion in 2017.
The numbers make it clear that Foote also has no intention of using the $3.6 billion tax reform windfall it is receiving for capital investments, unlike many other American companies of similar size and scope. The company is projecting expected “average” annual revenue growth rate of 4% in 2019 and 2020 stemming from rising freight volumes and higher pricing.
Foote was named CEO in December following Harrison’s sudden demise. Since then Foote has been attempting to soothe unhappy shippers who saw their businesses damaged by the service deterioration that took place throughout the CSX system in the wake of Harrison’s rush to shove the railroad into the Procrustean bed of his favored operations model, which he called Precision Scheduled Railroading (PSR).
However, CSX customers who lost business and employees who lost their jobs called it nothing less than a nightmare. They pointed out that they ended up paying for the lowering of the railroad’s OR from 2016 through 2017 by 1.5% because of service failures.
Wall Street Approves
There is one group that was more than happy with what Harrison accomplished and approves thoroughly of Foote continuing down that path: Wall Street investors and the analysts who advise them. Harrison’s appointment early last year was engineered by a hedge fund manager with the sole aim of driving up the stock price of CSX and in that regard, he succeeded.
In fact, the drastic reordering of CSX operations and the chaos that ensued was entirely the creation of Wall Street. The “activist investor” Paul Hilal, who is CEO of the hedge fund Mantle Ridge LP, launched a takeover offensive with the argument that installing Harrison would substantially increase shareholder value. He swayed enough investors to get himself named as vice chairman along with installing three other directors who were his allies to the board of directors.
To lure Harrison away from his post heading Canadian Pacific Railway, CSX had to promise it would make up for the income he would lose by tearing up his contract with CP—an estimated $300 million. It had been Hilal who earlier persuaded Harrison to come out of retirement as head of Canadian National and become chief of CP.
In a move that the CSX board later realized was a mistake, they also agreed to waive a physical examination for Harrison and even went along with his refusal to answer questions about his medical condition. (To this day, his cause of death has not been revealed). Harrison had spent a large chunk of 2015 at CP on medical leave and in 2017 went almost everywhere tethered to an oxygen tank. Since Harrison died, the board has adopted rules requiring regular medical checkups for senior executives.
By last October, when Harrison spoke at a Surface Transportation Board listening session confronting the widespread CSX service failures, his mind wandered and at times he was unable to answer questions put to him. In November, the company hired rail industry veteran Foote, who had served under Harrison at CN. The move turned out to be timely when Harrison died in mid-December, and the board named Foote to succeed him as CEO.
Harrison may have created a mess when he attempted to push his PSR program so hard, so quickly, but shareholders’ obsession with attempting to reduce the OR number has had its effect. Share price has risen about 50% since January 2017 when Harrison’s imminent appointment was announced, and about 12% since March 2017, when he began the precipitous implementation of PSR.
Less than a month ago, CSX announced a 10% increase in its quarterly dividend along with an increase in its share repurchase program to $5 billion—both moves guaranteed to make shareholders smile.
In January, the company announced fourth quarter 2017 net earnings of $4.1 billion, or $4.62 per share, versus $458 million, or $0.49 per share in the same period in 2016. It also admitted that the 2017 fourth quarter net earnings included a $3.6 billion net tax reform benefit and a $10 million net restructuring charge. Absent these two items, the fourth quarter 2017 adjusted net earnings were $573 million, or $0.64 per share.
It is unclear how much more room there is for increasing the share price when some Wall Street observers say Harrison’s hiring and implementation of PSR are already baked into the share value.
Questions also have been raised about the negative impact of the changes on safety after a sting of derailments. Two of the most recent were the February 4 collision between an Amtrak train and a CSX train that killed two and injured more than 100 in South Carolina, and the CSX derailment that sent tanks cars toppling from a tall bridge into Maryland’s Susquehanna River that occurred on March 4.
