Moody’s Examines Pros, Cons of PSR

The decision of CSX in 2017 and Union Pacific this year to embrace the precision scheduled railroading model means that most of North America’s Class 1 railroads are practicing it.

Only Norfolk Southern, BNSF and Kansas City Southern have eschewed it – at least for the time being.

The concept of precision scheduled railroading is widely believed to have been pioneered by the late E. Hunter Harrison at the Illinois Central Railroad.

Harrison later implemented the concept at Canadian National and Canadian Pacific. He was well on his way to putting it in place on CSX before his death in December 2017.

Wall Street has fallen in love with PSR because a centerpiece of it is reducing costs to drive up profitability and stock prices.

At CSX, management has touted how it is moving the same volume of traffic with fewer employees and fewer locomotives and freight cars.

Railroad executives who favor PSR love to talk up the efficiencies that it brings.

But shippers, those folks who make railroads possible by paying them to haul freight, might be less enamored of PSR.

Moody’s Investors Service is one of North America’s leading debt rating agencies.

The analysts at Moody’s are not opponents of PSR. In fact a recent report by Moody’s about the operating model concluded that service levels have improved at railroads using precision scheduled railroading.

But the report issued a key caveat that Wall Street seems to overlook or downplay.

Shippers may not like how they are being forced to conform to the railroad’s interests rather than the railroad seeking to serve the interests of shippers.

“The model’s train schedule is established with the primary objective to enhance the efficiency of railroad operations,” Moody’s said in a report about PSR. “This narrows the scope to accommodate customer needs and may cause customers having to adapt to the railroad’s train schedule.”

The report quoted an unnamed railroad executive as saying that Harrison’s PSR approach is to set up schedules and tell the customers that they need to work around the trains that are scheduled, not the other way around.

As CSX encountered severe service issues when it implemented PSR too quickly in 2017, Harrison repeatedly relied on the mantra that service would improve and shippers would have better service than they had before.

That may seem true when viewing the service metrics that railroads like to measure themselves against.

One of those is operating ratio, which shows what percentage of operating revenue is used to pay operating expenses.

Lowering operating expenses has become the rage in the railroad industry in recent years, even among carriers that do not practice PSR.

CSX has bragged about how its operating ratio in recent quarterly financial reports has dipped below 60 percent. There was a time when an operating ratio in the 70s was considered in the industry to be a good performance.

Overall, Moody’s spoke favorably about PSR, but acknowledged it “is not a panacea for service problems.”

The report noted that BNSF does not practice PSR but “has maintained good service levels that to date exceed its average 2013 levels.”

Yet, BNSF is a privately-owned company and, Moody’s noted, some metrics that mean a lot to its owner, Warren Buffet, mean far less to Wall Street investors looking for short-term gains.

Buffet is known for his belief in long-term growth, which is often seen as lacking among practitioners of PSR.

“A material reduction in capital expenditures concurrent with the implementation of precision scheduled railroading may affect the railroad’s ability to maintain good service levels over time if sustained too long.” The Moody’s report said.

Tags: BNSF, class 1 railroads, CSX, E Hunter Harrison, Moody's Investor's Service, North American Class 1 railroads, precision scheduled railroading