Post EHH Changes for CSX

Can't remember the source to site[believe it was Trains Mag], but BNSF staff assert that IRR, not OR, is the right metric.

OR is a metric that can be easily manipulated at managements desire. Politically the EHH brigade HAD to show a very low OR by means fair or foul.

rr503 wrote:Sure, profitability matters. But railroading isn't a business where you can measure success and failure across quarters. Decisions about investment and operations pay off over decades, a timespan that OR fails to capture -- to say nothing of the fact that infrastructure-intensive businesses rely on high costs to survive. There need to be better metrics than this.

Some argue Return on Assets is more appropriate than Operating Ratio. Matt Rose gave an interesting interview in December's Railway Age magazine and it is available on line. To some degree you have to weight some of his points of view to the experience of running the only privately held Class 1 and one that operates with a higher competitive and economic advantage in a kinder marketplace than some other Class 1's past and present. He does speak about balancing multiple competing interests like long-term investment and top-end growth. And, in this vein, we do have 22 combined years of PSR with and post-EHH results indicating continued healthy capital expenditures, traffic growth, reasonable customer service and upward return on assets trends, even as operating ratio remained a focus throughout.

The post-EHH story at all his past employers was a bit more than 'it ended up being fine.' Both Mongeau (he directly succeeded EHH, right?) and Creel had a good bit of apologizing to do to customers, and now CN is having to spend like a drunk in Vegas on capacity improvements -- a game I daresay would be less difficult if so many lines (esp. reliever lines) hadn't been abandoned under EHH. I think PSR's underlying theory gets a bad rep on account of sloppy implementation, but I think the general point -- that railroads are doing a lot to scare away low to medium margin business and disinvest in their capacity in pursuit of short term statistical gain -- stands.

Generally, I think there's a mismatch between the direction of the industry and the direction of the economy here. People are moving towards more decentralized, high speed goods distribution networks running between densified nodes...and yet all the railroads seem to do is lengthen (and prune) their trains. They'll never lose the bulk stuff, but if they want to have a rat's chance in hell with medium to high value goods, they've gotta begin to see the value in less efficient (but more profitable in the absolute sense and in the volumetric sense) traffic, running on shorter, faster trains.

The post-EHH short-term "apologies" are the tail while the longer-term results of continued healthy investment, growth, decent customer service results, and upward trending ROA the dog. Blaming PSR or EHH for positive capital investment to support capacity growth occurring some 15 years after PSR implementation and 9 years post-EHH is just wrong. What abandoned "reliever" lines would have precluded CN's need to increase capacity Winnipeg-Edmonton-Vancouver/Prince Rupert and would the time frame of that abandonment have foreseen the growth of international and oil traffic at that time? Didn't Harrison actually do things to improve CN capacity, service and growth with moves like the purchase and improvement of the EJ&E?

Focusing upon short-haul traffic moving on shorter, faster trains or low-margin traffic is akin to re-arranging the deckchairs on the Titanic. Some 25% by weight and 50% by value of traffic moving 750-2000+ miles still moves by highway and there is a HUGE iceberg of watershed trucking productivity gains looming. Shifts to an e-commerce retail economy are not a negative: large-scale movements from international producers to e-commerce DC's still occur and increases in the package sector helps railroads, even in medium-distance corridors, as long as they provide good service. Isn't it better to become more efficient and use the 80/20 rule to focus on the biggest bang for the buck so that you can most effectively meet the real, huge coming challenges? Unless you're advocating for changes much bigger than for-profit railroading and in the political and economic arenas.

EHH merely a symptom and a vehicle of predatory investors who by design are all
about short term gains by any means necessary before they get out of Dodge and
destroy their next company. These short term investors don't care about the big
picture and long term prospects of a given company; witness the layoffs and essential
infrastructure abandonments in the name of "shareholder value."

NRGeep wrote:EHH merely a symptom and a vehicle of predatory investors who by design are all
about short term gains by any means necessary before they get out of Dodge and
destroy their next company. These short term investors don't care about the big
picture and long term prospects of a given company; witness the layoffs and essential
infrastructure abandonments in the name of "shareholder value."

Nailed it! Hedge Fund thieves!

QB 52.32 wrote:The post-EHH short-term "apologies" are the tail while the longer-term results of continued healthy investment, growth, decent customer service results, and upward trending ROA the dog. Blaming PSR or EHH for positive capital investment to support capacity growth occurring some 15 years after PSR implementation and 9 years post-EHH is just wrong. What abandoned "reliever" lines would have precluded CN's need to increase capacity Winnipeg-Edmonton-Vancouver/Prince Rupert and would the time frame of that abandonment have foreseen the growth of international and oil traffic at that time? Didn't Harrison actually do things to improve CN capacity, service and growth with moves like the purchase and improvement of the EJ&E?

Focusing upon short-haul traffic moving on shorter, faster trains or low-margin traffic is akin to re-arranging the deckchairs on the Titanic. Some 25% by weight and 50% by value of traffic moving 750-2000+ miles still moves by highway and there is a HUGE iceberg of watershed trucking productivity gains looming. Shifts to an e-commerce retail economy are not a negative: large-scale movements from international producers to e-commerce DC's still occur and increases in the package sector helps railroads, even in medium-distance corridors, as long as they provide good service. Isn't it better to become more efficient and use the 80/20 rule to focus on the biggest bang for the buck so that you can most effectively meet the real, huge coming challenges? Unless you're advocating for changes much bigger than for-profit railroading and in the political and economic arenas.

The direct Calgary line (Drumheller Sub?) and the Ottawa Valley routes would have been helpful, but those losses were secondary to the sidings EHH tore up.

I also think that when talking about CN's post-PSR successes, you have to be cognizant of how much traffic CP drove away in their PSR years, the oil boom, and generally changing economic dynamics in Canada. I'm not well versed enough in the nitty gritty up that way, but I've heard others make the argument that CN's successes were in spite of EHH, not because of him.

The stat you cite about long haul trucking share/value of said share, is, IMO all the evidence you need to prove that speed is what's essential at this point. Shippers don't want the high value-added stuff languishing on some 14k foot train -- they want it at the warehouse, and then at the customer as soon as is humanly possible. To PSR's credit, the emphasis on reducing car handlings through a route is positive here (seriously, yard-yard-yard-yard railroading should have died long ago), but trying to run everything on infinity trains ensures you don't get the high value stuff. Sure, it saves you money on track capacity, but that sort of thinking is exactly what I'm objecting to here -- if railroads truly saw those growth opportunities, they would build out their infrastructure to the point where they could run fast(er) short(er) trains (for which customers would pay at least the marginal increase in crews/ton mile)..but thinking like that is discouraged under PSR. I'm not suggesting we play trucks on the rails, but a 5-7k foot fast train? Anyone?

You're assuming that smaller intermodal trains automatically give you a speed advantage and are necessary for market share growth. CSX's intermodal train velocity has improved ~10% since PSR implementation including during periods of bad weather and peak demand. As long as you maintain horsepower:tonnage ratios, understand and manage to your customers' requirements, match infrastructure and infrastructure investment to the operation, and, deploy and invest in appropriate supporting technology, there's nothing to say you can't accomplish the same, if not more, with PSR than a system simply based upon running smaller trains (and with less long-term, riskier investment). I would also argue that as you become more efficient, your lower costs provide the opportunity for growth through greater penetration of existing markets or entry into new markets by overcoming structural railroad network barriers or allowing greater investment throughout the entire intermodal system.

QB 52.32 wrote:You're assuming that smaller intermodal trains automatically give you a speed advantage and are necessary for market share growth. CSX's intermodal train velocity has improved ~10% since PSR implementation including during periods of bad weather and peak demand. As long as you maintain horsepower:tonnage ratios, understand and manage to your customers' requirements, match infrastructure and infrastructure investment to the operation, and, deploy and invest in appropriate supporting technology, there's nothing to say you can't accomplish the same, if not more, with PSR than a system simply based upon running smaller trains (and with less long-term, riskier investment). I would also argue that as you become more efficient, your lower costs provide the opportunity for growth through greater penetration of existing markets or entry into new markets by overcoming structural railroad network barriers or allowing greater investment throughout the entire intermodal system.

From today's news wire

http://trn.trains.com/news/news-wire/20 ... ocomotives" onclick="window.open(this.href);return false;

And moving tonnage on fewer, longer trains also reduces fuel consumption. The practice better matches horsepower to tonnage and keeps locomotives running in their higher power range, which is more fuel efficient, Corbin says.

Unless I'm misunderstanding something here, this is saying lower HP:Ton.

I generally like PSR, and I think efficient railroading is good railroading. But I think focusing solely on immediate ratio metrics decoupled from volume or long term return fails to account for the fact that any market penetration is likely to incur a (relative) loss in the short term, that (to a point) earning more in an absolute sense is better than earning less, and that sometimes future-proofing pays off.

Generally, I'm not seeing much of this virtuous cycle type investment from railroads these days, but that's me...

I think Corwin's statement is too general to say it would be targeted to segments of the intermodal business requiring more hustle than carload or segments of intermodal requiring consistency over speed. The key is my second point of understanding and managing to your customers' needs. Also, in that Newswire you had NS' Squires announcing PSR roll-out "because it works" (of all the folks least inclined to utter those words!) and that carload and intermodal growth will be part of their formula, as it has been at CN, CP and CSX.

PSR is more than just big trains or sole and short-term OR focus, but also includes implementation of relevant customer service metrics, traffic growth, and emphasis upon using "soft" and targeted "hard" investments to support increased efficiency and growth, to name a few. Plenty of virtuous cycle investment taking place on CN and, though it was dictated, how about the large investments all railroads have made in PTC? Post-EHH CSX, besides quick financial, customer service and what appears to be the start of growth improvement results, we're seeing DPU deployment, no loss of premium traffic, and intense management of the flow of freight throughout their network. Their 2019 capital program includes virtuous cycle investment supporting improved efficiency and service in TN and NC and growth with a new Rocky Mount, NC intermodal terminal and expanded Fairburn, GA, Charlotte, Syracuse & Nashville intermodal terminals. So far, from what I've seen, I'm optimistic.

Look, there's a lot of the PSR theory that I like. But you've gotta admit that CN, CP and CSX under Hunter were disasters -- and not just in the short term, either. Hunter left CN something just short of an inoperable mess, with a disreputable safety culture to boot. You say the apology tours at CN were just for cracking the eggs while making the omlette, but the man was CEO for, what, ten years? Hardly the immediate disruption apology I'd imagine.

But let's lay aside Hunter for a sec; he is the human straw man. The issue with a singular focus on OR is that it discourages growth. Take UP and BNSF. BNSF has been growing strongly for a while; UP not so much, despite their superior route structure. Driving that seems to be the fact that BNSF is a lot more flexible in its drive for profit. It doesn't reduce everything down to isolated, at-the-time-of-transaction efficiency questions, and thus allows itself to incur short term inefficiencies in pursuit of more traffic. So while UP can boast some ridiculously low OR (and, IINM, higher profits), BNSF has a larger traffic base, which means less risk, and more room to exert price pressure than its competitor -- which, to me, seems the more valid long term strategy. If traffic wasn't changing all that much, if railroads could rest on their laurels, then this'd be less of an issue for UP, but with the decline in coal and the inexorable increase in the volume of high value-added goods, railroads are gonna have to start playing a stronger hand when going after new traffic, lest their magic OR of 50 be off of a 4 dollar revenue base. It's that old adage: no pain, no gain.

rr503 wrote:Look, there's a lot of the PSR theory that I like. But you've gotta admit that CN, CP and CSX under Hunter were disasters -- and not just in the short term, either. Hunter left CN something just short of an inoperable mess, with a disreputable safety culture to boot. You say the apology tours at CN were just for cracking the eggs while making the omlette, but the man was CEO for, what, ten years? Hardly the immediate disruption apology I'd imagine.

With the kind of nitpick-proof results of 11% and 28% operating ratio improvement, 61% and 27% revenue growth, and 68% and 11% injury rate reduction at CN and CP, respectively, how could anyone admit anything except that he was successful? CSX is still in play, but certainly the 2nd year results look good and EHH deserves credit for setting the table. What I would allow is that one might debate the efficacy of his shock-and-awe methods (which we'll be able to compare over the next couple of years to the different ways PSR is now being implemented at KCS, NS and UP), or, the human costs, fairness, etc., but that's much bigger than EHH or railroads.

But let's lay aside Hunter for a sec; he is the human straw man. The issue with a singular focus on OR is that it discourages growth.

Focus upon the OR, singular or otherwise, does not mean it necessarily discourages growth. By definition you can lower OR simply through growth. But, not all growth is the same nor all growth good in the real world of railroading. Singular focus upon OR focus and issues surrounding growth in our changing economy completely misses the much bigger for-profit railroad characteristic that informs their behavior and the biggest threat they face. They require lots of capital, as a whole don't even earn the cost of their capital, and, compete against an industry with much shorter capital cycles and moving toward huge productivity improvements (50% cost reduction according to consultant Noel Perry as written in the March 2019 Trains issue). Under these for-profit-driven circumstances, what management is going to invest in infrastructure or equipment that has to be economically justified over a 25-year period simply for "growth", especially if it is particularly vulnerable to truck competition now/moving forward or no/low-margin? Hand wringing over contemporary economic changes seems a bit overblown either because they continue to provide opportunities or lead to opportunities way out of the space in which railroads compete. Participation in the e-commerce economy, for example, means becoming a base-carrier for small-shipment providers and continued participation in the flow of products produced offshore. So, really, the much more accurate take on OR focus isn't "discouraging growth" but "encouraging smart, sustainable growth".

Take UP and BNSF. BNSF has been growing strongly for a while; UP not so much, despite their superior route structure. Driving that seems to be the fact that BNSF is a lot more flexible in its drive for profit. It doesn't reduce everything down to isolated, at-the-time-of-transaction efficiency questions, and thus allows itself to incur short term inefficiencies in pursuit of more traffic. So while UP can boast some ridiculously low OR (and, IINM, higher profits), BNSF has a larger traffic base, which means less risk, and more room to exert price pressure than its competitor -- which, to me, seems the more valid long term strategy. If traffic wasn't changing all that much, if railroads could rest on their laurels, then this'd be less of an issue for UP, but with the decline in coal and the inexorable increase in the volume of high value-added goods, railroads are gonna have to start playing a stronger hand when going after new traffic, lest their magic OR of 50 be off of a 4 dollar revenue base. It's that old adage: no pain, no gain.

Your take on BNSF and UP over emphasizes what you think is a more growth-aggressive posture, missing the impact of network characteristics over route structure, both carriers' behavior including UP's 2018 growth rate in general & for intermodal 2.5 times that of BNSF, and the real results that BNSF's traffic volume and base is not less-risky than UP's (arguably the opposite). As easy as applying your no pain, no gain adage to "growth", you can just as well apply it to PSR. And, in the instance of your growth theory, I'd say only an addict would accept chronic pain for gains that could very well lead to amputations and shorter mortality.

I'd encourage folks who are interested in what's going on with PSR and the issues raised in this thread to listen to the 31-minute Q&A of CSX CEO Foote at this past week's Barclay's Industrial Select Conference available at CSX's website https://www.csx.com/index.cfm/investors/" onclick="window.open(this.href);return false;. It provides direct, unfiltered and unbiased access to what's going on at CSX post-EHH.

In sum, what Foote says is that CSX's goal is to maintain their leadership in OR with a ways to go and on the cost side, employment reductions coming from attrition. Significantly, it also provides insight that they plan to grow the top line through improved service targeting the $25-50B of business moving via truck in CSX territory at 10-15% price premiums resulting from rail's historic service deficits. Foote mentions that what can be expected is for CSX to grow at much higher rates than has ever been seen and in both the intermodal and carload sectors. Additionally, he discusses the large amount (20-30%) of capacity available for growth without a need to spend capital.

It certainly seems significant that CSX, after years of relative parity, post-EHH now finds itself at least 2 years ahead of NS, whose plan going forward is unproven, with an 8% lower cost structure, service at least as good if not better, 20-30% available capacity, and a marketing guy with a history of growth in charge.

First quarter earnings call today was very interesting - worth a listen. OR 59.5, and service levels are good (not just according to CSX). It's hard to argue against the fact that CSX has been positively transformed (though some will).