The transition to e-commerce and anticipated advances in automated trucking are forcing the freight railroads to adapt to supply chains that require railroads to be more responsive and nimble.
One way that the railroads are seeking to address this challenge is by hiring executives outside of the railroading community, in the hopes that placing a non-rail executive in a leadership role will help the railroad weather systemic changes within the supply chain.
Examples of this tactic include Canadian National’s (NYSE: CNI) promotion of Michael Foster to executive vice president and chief information technology officer and CSX’s (NYSE: CSX) appointment of Farrukh A. Bezar as senior vice president and chief strategy officer. Other examples include Kansas City Southern’s (NYSE: KSU) September 2018 promotions of Brian Hancock to executive vice president and chief innovation officer and Michael Naatz to executive vice president and chief marketing officer.
“We have a very strong bench of scheduled railroad operators. What we need to have is a bit of a melting pot of cultures and skills coming from other industrial sectors,” said CNI chief executive officer J.J. Ruest at an investor conference last month. “That’s why our chief information officer comes from FedEx, and why our chief mechanical officer comes from Southwest Airlines, We need to redefine what’s possible in the rail industry by stealing best practices or best technology from other sectors.”
Ruest also said, “If we can’t steal from another railroad because no other railroad does it, we go to another industrial sector, which may be more advanced than what we are in the industry in some of the stuff we want to do.”
Foster, who began his new role at CNI on June 3 after serving as senior vice president and chief information and technology officer for CNI since March 2018, came from FedEx and has a background in applying artificial intelligence and data analytics to transportation logistics. Bezar, who started on May 29, has over 25 years of experience in transportation and logistics and was founder and managing partner at transportation and logistics advisory firm Lynwood Partners.
Meanwhile, Hancock, who has been with KSU since July 2015, has held executive positions at Family Dollar Stores, Martin Brower, Whirlpool and Schneider National. Naatz, who has been with KSU since May 2012, worked at USF Holland and YRC Worldwide.
“Brian has prior executive leadership experience running high-performing global supply chains, which will bring excellent perspective as we chart our own course in a rapidly changing, technology-driven, competitive landscape,” said KSU chief executive Pat Ottensmeyer when the railroad announced Hancock’s appointment in September 2018.
Industry practice for hiring rail executives has tended to be promoting from within the company or hiring from within the railroad industry. The appointments of Jim Vena as chief operating officer at Union Pacific (NYSE: UNP) and Sameh Fahmy as executive vice president of precision scheduled railroading (PSR) at KSU are examples where management changes were related to the adoption of PSR at UNP and KSU, said Morgan Stanley analyst Ravi Shanker.
“Some rail[road]s have had to bring in management with PSR experience from the Canadian railroads,” Shanker said. Other changes in executive leadership “are just part of the normal course.”
Another example of the railroads hiring within the industry is Canadian National’s appointment of Rob Reilly to replace retiring chief operating officer Mike Cory, said FreightWaves market expert Jim Blaze. Reilly was most recently with BNSF (NYSE: BRK), which does not use PSR. CNI deploys PSR, an operational model that scheduled railcars on a fixed schedule, but has had problems with capacity in recent years along its network in western Canada.
BNSF “promoted a non-PSR guy from BNSF. Someone who knows how to fix bottlenecks and solve growth problems,” Blaze said.
But when a railroad hires a non-rail executive, that railroad will need to determine how best to utilize someone who might be unaccustomed to dealing with the physical constraints inherent in railroading. Railcars can only move forward and backward, while some railroads deploy older technology related to railcar tracking.
“While you’re getting cross-fertilization, the real question is what critical aspect of knowledge, skill and procedure is easily transferred to the railroad portfolio, which has a traditionally more narrow functioning capacity,” Blaze said.