CSX CEO waxes philosophical about PSR, and says the customer is at the core

It’s been almost a year since CSX (NYSE: CSX) CEO and industry legend Hunter Harrison died suddenly. On Wednesday, current CEO Jim Foote presented at the Credit Suisse Industrials conference, and it was a 45-minute chat that seemed more philosophical than operational.

With Harrison viewed as the father of precision railroading (PSR), and CSX now the largest railroad with it in place–and with some other railroads starting to scramble to follow suit–Foote didn’t spend much of his time talking about traditional issues like the company’s financial performance, the pricing market on the rails, projected earnings…none of those things. Instead, it was more like a scorecard of how PSR was impacting customers, because the broad criticism of PSR–often issued without a lot of statistics to back it up–is that it’s just a cost-cutting program that ends up in poor service and unhappy customers.

The presentation is not open to outside participants, but CSX chose to broadcast it via webcast.

Foote begged to disagree. “It has never been my view that you do this massive cost reduction initiative and damn the customer, and then once we get our act in gear then we’ll go back and try to rekindle the relationship,” he said. “I said from day one we are here to serve the customer.” CSX’ view has not seen what Foote called a “line of demarcation” where after implementing PSR there’s a day in which the railroad declares “Bingo! Now we’re going to grow.”

“What I’m here to do is sell service,” Foote said. What everybody wants, he said, is a “premium product,” adding that CSX is making “dramatic” improvements in the quality of the company’s service.

The data does support the statement that there have been service improvements. For example, average system velocity in the most recent weekly report filed by CSX to the Surface Transportation Board was 23.8 mph. At the start of May–just to take a snapshot, but by that time a disastrous winter was ending–was 22.2 mph. Terminal dwell time for the system was 19 hours in the latest report. It was 21.5 in early May.

But there are other indicators that are not improving. For example, it was pointed out to Foote that there is still a significant gap between the on-time data for train departures and arrivals. “It is a significant opportunity for us there, and as we smooth things out it will become more a focus,” Foote said. It’s called “trip plan performance,” and Foote said CSX still has a “long way to go” in that metric.

He then circled back to the suggestion that PSR is just a cost-reduction exercise. “When you provide that highly reliable service that customers want and are willing to pay for, you do it by running the company at the most efficient rates that are possible,” he said. But “you can’t have trip plan compliance..if you miss the meet,” the scheduled time when the load is to be delivered to the customer.

A lot of what needs to happen to successfully implement PSR is cultural, Foote said. And a key part of it is pushing decision-making down the line and out on to the depots and the tracks. “At the end of the day, the people making decisions are people in the field, which is why we decentralized and took out the mentality that we run CSX in Jacksonville (the company’s headquarters),” Foote said. He said CSX wants those people in “Waycross and Nashville…to feel empowered to do that, and they should be able to say at the end of the day, ‘Look what we did today.'”

Foote, in talking about customer satisfaction, said in some railroads–and presumably CSX in its pre-PSR days–might have left boxes that were going to be delivered at one depot rather than pushing to get them on a train to be delivered on time. The idea was that shipping them out later would be OK.

That undercuts the whole idea of reliability which he said numerous times during his remarks is at the heart of PSR. “What customers want is to know that when we say that something is going to be there, it will be there. Then they will give us more business.” The culture change has been sweeping enough, Foote said, that there is “a complete meeting of the minds” on that philosophy now.

And if those service improvements continue, growth can come at the expense of trucks. CSX has customers, Foote said, who might have 50-60% of their business moving on CSX with the balance on trucks. It’s possible they are paying 15% more per mile for the reliability of truck service, and they’re doing that, Foote said, “because they’ve been burned by the railroads so many times.” “So to the extent that we become more reliable, we can go to the customer and say, we can save you a lot of money because we have become more reliable and truck-like.”

Still, the company’s third quarter operating ratio of 58.7%, which every other class 1 railroad is now being compared against, was helped along by some old-fashioned business: coal. The export market for coal has been strong, Foote said, and it has provided a “tailwind” for CSX’ performance. “That looks like it is going to continue into 2019, and as long as we have that help, will continue to show year-after-year improvement,” Foote said.