Post EHH Changes for CSX

In a booming economy, you would expect real growth in terms of actual traffic increases. CSX traffic has been flat at best. Sure the financials look great based on cost cutting and rate increases. When the economy finally does tank, CSX will find itself in the unenviable position of having to meet lower truck rates and or further loss of traffic. CSX should have one of the best car load markets in the country. But the genius disciples of EHH are turning CSX into their vision of the slow but sure "huge" trainload market with far fewer trains, cars, employees, and customers. Whether or not this will translate into a further love fest on Wall Street rermains to be seen.

How much of the operating ratio shift was due to fuel? Watching airline earnings, fuel costs increased 34% in 2018, so I'd imagine it probably had an impact for the Class 1's as well.

Safetee wrote:In a booming economy, you would expect real growth in terms of actual traffic increases. CSX traffic has been flat at best. Sure the financials look great based on cost cutting and rate increases. When the economy finally does tank, CSX will find itself in the unenviable position of having to meet lower truck rates and or further loss of traffic. CSX should have one of the best car load markets in the country. But the genius disciples of EHH are turning CSX into their vision of the slow but sure "huge" trainload market with far fewer trains, cars, employees, and customers. Whether or not this will translate into a further love fest on Wall Street rermains to be seen.

As CSX continues to transition their plan is to grow. And, while CSX 2018 merchandise volume was flat with revenue growth 100% attributable to higher unit revenue from traffic mix, fuel surcharges and rate increases, in comparison only 17% of NS' 2018 merchandise traffic revenue growth was attributable to increased volume, so not that big of a gap, really. And, when you look at 4th quarter results and what they may portend moving forward through CSX's transition, CSX merchandise volume was up 4% while NS' merchandise volume was flat. Additionally, I think some of CSX's 2018 successes in merchandise traffic growth with forest products (up 8%) and metals (up 4%) while NS was flat and down, respectively, have been masked by a big hit they took with the closing of a large fertilizer plant. Similarly, I think you have to take that position at this point with intermodal, too, in that there was still growth despite the early stages of transitioning in that sector.

When the economy tanks, or when the industry has to face the serious challenges looming on the horizon, (or competing in a favorable economy, for that matter) why would a more productive railroad face any greater challenge than the next guy? Does CN's performance during the Great Recession provide some measure of insight into what we could expect?

To eolesen's point about fuel costs, in 2018 they were up 21% at CSX on a 1% increase in volume and up 29% at NS on a 4% increase in volume.

One way or another they will eventually pay for treating certain customers like trash. Plants can relocate, circumstances can change.

At the end of the day this change is similar to what Guilford did to the Boston & Maine and Maine Central at a much smaller scale.

It hollowed the railroad out and resulted in customer flight that played out over the course of decades.

I couldn't agree more, George.

I wasn't impressed by the customer-treatment or employee-treatment stories from the early days of implementing PSR at CSX. They should have taken a little longer to implement it, and avoid big service disruptions and mass layoffs. I suppose EHH knew he was an a hurry.

However, should CSX get its service act together, the customers will return simply because rail is still much cheaper than trucking. Its even possible that CSX could outperform NS on service if they can become more reliable. Walmart is hiring truckers for almost 2x the average trucker wage now, so wage pressures in trucking will continue to help rail.

It's been interesting to watch the effects of the ELD mandate ripple through the transportation sector. This along with the continuing prospect of additional road tolls really does appear to be supporting shorter moves by rail. In Maine the best example of this is Poland Spring moving to intermodal.

CSX and PSR appear to beovimg counter trebd and throwing away the ability to capitalize on the development of high frequency and high volume regional moves.

I can respect the idea that as a Class I that's not really their focus, on the other hand they have a lot of track miles in areas that would benefit from this type of service and can afford to pay for it (MA/NY/NJ/PA/MD/VA).

gokeefe wrote:It's been interesting to watch the effects of the ELD mandate ripple through the transportation sector. This along with the continuing prospect of additional road tolls really does appear to be supporting shorter moves by rail. In Maine the best example of this is Poland Spring moving to intermodal.

CSX and PSR appear to beovimg counter trebd and throwing away the ability to capitalize on the development of high frequency and high volume regional moves.

I can respect the idea that as a Class I that's not really their focus, on the other hand they have a lot of track miles in areas that would benefit from this type of service and can afford to pay for it (MA/NY/NJ/PA/MD/VA).

I think one driver of the inattention (and, conversely, the attention by PAR/PAS types) is the relative scarcity of terminal capacity in key markets. The fixed cost of providing service is relatively high, so when dealing with limited terminal space, these RRs will choose to capitalize on longer, higher margin hauls given that there are still *so* many left to be had.

A great place to see this phenomenon is on the West Coast. There's certainly a good volume of north/south freight traffic along I5, but beyond a pair of Z trains and a few ocean box moves on UP, there is no IM service. BNSF hasn't even bothered clearing the Inside Gateway for stacks. Why? All those IM terminals are *bursting* with higher margin east-west traffic.

Acknowledged and agreed. That being said one has to wonder if there are profits to be made by reutilizing smaller facilities, many of them long since dismantled.

One of the key changes of modern information technology is that it has made decentralization feasible in large operations which previously had centralized for reasons of efficiency.

Modern IT actually creates a paradox were decentralization can better handle large volumes of tasks than centralization which rapidly becomes vulnerable to bottlenecks.

In the past paper based systems clearly thrived on centralization which greatly rewarded proximity, simplification and cyclical patterns.

Southwest Airlines is the aviation version of decentralization and they executed the strategy while the rest of their industry was building operations around "fortress hubs" that were enormous examples of centralized routing.

In the case of railroads I am uncertain if a modern version of decentralization that fully utilizes the vast capabilities of modern IT has emerged.

"Precision Scheduled Railroading" is at its most fundamental a capitulation by an organization to the stresses of asynchronous and asymmetric demand patterns. In effect E. Hunter Harrison's strategy was to assume that the railroad was simply incapable of profitably handling anything but the most consistent and simplest traffic.

This was not the thinking of some who truly understood how to utilize modern technology to its greatest potential for profit. It was an extreme and reactionary impulse that remains a vestige of the days of paper train orders and radio controlled dispatching by a switch tower.

This was and remains the great irony of Harrison's "success". It came at the price of a leap backwards by the railroad in process management which will make future improvements nearly impossible to achieve.

gokeefe wrote:One way or another they will eventually pay for treating certain customers like trash. Plants can relocate, circumstances can change.

At the end of the day this change is similar to what Guilford did to the Boston & Maine and Maine Central at a much smaller scale.

It hollowed the railroad out and resulted in customer flight that played out over the course of decades.

There is absolutely no similarity between CSX transitioning to PSR and Guilford's rationalization of the B&M and MEC, starting with the quite quick results where CSX has opened up a productivity and customer service gap with their head-to-head competitor, moving to the fact that each carriers' status couldn't be as far apart at each given time, and, finishing with the absolute difference in tactics and results to meet their strategy.

Don't mistake that short haul moves like the Poland Spring water on PAR provide cash for carriers who are limited in market demand but over the long term do not cover adequate returns for necessary capital investment. The only way your decentralization and short haul theory would work in large scale is with, at the very least, major expansion of public railroad infrastructure investment (and ownership). That gets into much bigger political and economic considerations with unfavorable odds given where we are as a country, how the rail industry would view such a thing, and, where technology will be taking us.

One thing I liked about PSR is the willingness to try new ways to operate. If the rails have a way to make adequate returns on new traffic lanes, then having a marketer as a CEO will help that happen.

PSR only means centralization and 'customers suit the trains we want to run' insofar as Class 1's obsession with frivolous metrics like OR exists. Save for load balancing, the basic principles of running a tightly scheduled railroad with matched train (note not traffic) flows is totally sound -- and is in fact a good move for an entity reliant on profit and efficiency. Where it breaks down is when in pursuit of this 'perfect railroad-ness,' traffic is scared away when it fails to meet the vision of those making train plans, but that's an issue PSR or not -- you have to look no further than the fact that Class 1s have spent the last 40-50 years shooing carloads.

Even load balancing can work if done properly:

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

The real barriers to short haul (beyond terminal capacity and operation) are high fixed infrastructure costs (mitigable with gov't help), low price leverage (speed disadvantage becomes especially great over short distances, which brings us back to terminals) and crewing.

For-profit railroads are capital-intensive businesses that on a whole, according to the STB, did not earn the cost of capital in 2017. The operating ratio metric indicates the portion of revenue that can be used to pay the company's equity and debt investors. So,while you can debate how much weight it should be given, especially if your capital returns exceed costs or can rely upon public capital investment, how low is too low, or to what end the tool is used, it's hardly a frivolous metric.

I would never call OR a frivolous metric. My concern would be when the operation is cut to eliminate -- in the short run -- fat, muscle, and even part of the bone, it tends to hurt long term sustainability. It's like killing the goose that lays the golden eggs, to mix metaphors shamelessly. Union Pacific is walking people out to the loading dock (literally), practically every day, who are at the heart of what has made the company extrememly successful in the past. They've actually gotten quite adept at effortlessly running very good, loyal people off the property. Then they wonder why morale surveys are in the toilet.

IMO, OR should be seen as a measure of true, sustainable efficiency (which takes skill and hard work over time) and not just a blind ratio that mostly represents quick expense reductions. Hedge funds like the short cut version better, I believe.

But what do I know?

I apologize for being slightly off topic.

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.