Can CSX finish what Harrison started?

E. Hunter Harrison (1944-2017).

E. Hunter Harrison (1944-2017).

Last Thursday, Dec. 14, CSX announced that their CEO, E. Hunter Harrison, was taking a medical leave. Two days later, Harrison died in Wellington, Florida, from “unexpectedly severe complications from a recent illness.” The legendary railway turnaround artist was nine months into his tenure at CSX, an assignment for which he was to be paid $300M

“Hunter was a larger-than-life figure who brought his remarkable passion, experience and energy in railroading to CSX,” the company said. “The entire CSX family mourns this loss.”

Harrison was born in Memphis, Tennessee, on November 7, 1944, and entered the railroad industry as a carman-oiler for the St. Louis-San Francisco Railway while a student at Memphis State University. He was promoted to railroad operator at Frisco, and served in the same position at Burlington Northern Railroad (BN) after it acquired Frisco. Harrison was steadily promoted at BN, eventually becoming Vice President - Transportation and Vice President - Service Design.

The latter part of Harrison’s career was dotted by a series of CEO positions; first at Illinois Central Railroad from 1993-8, then at Canadian National Railway from 2003-9, after which he retired to his horse farm in Connecticut. A proxy battle over the control of Canadian Pacific Railway lead by activist investor Bill Ackman lured Harrison back into the fray, and he was made CEO of that railroad in 2012. Harrison ultimately resigned from CPR in January 2017, joining CSX two months later. 

Harrison had a larger-than-life reputation for his success in making railroad companies more valuable by cutting costs and implementing processes throughout the enterprise to increase the efficiency of each part. Harrison developed a philosophy called “precision railroading”, which achieved reliable deliveries by running running shipments on fixed timetables instead of holding trains until they were full. Harrison book explaining his approach, How We Work and Why: Running a Precision Railroad (2005) remains required reading in the railroad industry. 

But Harrison was in poor health at CSX. He had taken a medical leave from Canada Pacific in 2015, and ran CSX mostly from his home while using a portable oxygen tank. “[The hire] was a classic triumph of short-term thinking over long-term sustainability,” Renny Ponvert, CEO of Management CV Inc., told the Wall Street Journal. CSX’s board, said Ponvert, “took a high-beta risk that appeared to pay off for the first six months. Now, they’re stuck with a consequence that could expose long-term shareholders.”

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In November, FreightWaves reported that CSX’s customers were expressing dissatisfaction with deep cuts in staffing, severe delays, and no-shows for scheduled shipments, coupled with CEO Harrison’s decision to raise fees on shippers in order to “streamline operations and optimize asset utilization.” In their December 3rd Industry Update, Stifel reported on some industry observers, like Lee Clair, founder of Transportation and Logistics Advisors, who thought that the future of railway competitiveness would be in customer focus and responsiveness, not taking one last stab at improving cost structures by firing people and shedding assets. 

“Carriers outlined plans to cut costs to demonstrate to shareholders that Mr. Harrison wasn’t the only one possessing the ability to slash capital spending and operating expenses. The result of these efforts has been to, in general, run longer, slower, heavier, less frequent trains. Not exactly a fit with Amazon’s redefining of customer expectations,” wrote Stifel’s John Larkin. 

CSX’s stock price fell sharply from 57.46 to 51.90 (-9.6%) after the announcement of Harrison’s medical leave. Bascome Majors, CFA, of Susquehanna Financial Group (SIG), wrote on Sunday that “CSX shares should remain lower near-term, as investors wait for longer-term clarity on acting CEO Jim Foote's C-suite.” Majors pointed out that Canadian Pacific shares will be subject to additional volatility because while Harrison’s non-compete agreements prevented him from hiring any of his old executive team from CP, his death could allow CSX to poach CP CEO Keith Creel. 

There is some concern about CSX’s commitment to the turnaround envisioned by Harrison. Paul Hilal, a CSX board member, wrote this about the February negotiation that led to Harrison’s hiring: “The Board’s letter to Hunter proposed that he be hired for only two years, not the four we explained was necessary. This raised concerns relating to the Board’s commitment to the transformation. That lack of commitment could create material risk to the timely and successful implementation of Precision Scheduled Railroading.”

Majors thinks that filling out CSX’s C-suite, after the departures of COO Cindy Sanborn and CMO Fredrik Eliasson in Q4, should be the board’s near-term priority. SIG has consistently argued that “Mr. Harrison needed 18-24 months to truly get CSX on a self-sustaining operational and cultural ‘glide path’”, and added that “since Hunter ran CSX for just half that time, we expect investor concerns toward the ‘stickiness’ of the cultural transformation to rise near-term, and it will be difficult to overcome this skepticism with anything but execution and time.” Still, SIG has given CSX a positive rating with a price target of $61.

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