Posts Tagged ‘precision scheduled railroading’

PSR To Help NS Close Gaps With CSX

November 13, 2018

A Norfolk Southern executive said recently that moving toward the precision scheduled railroading operating model is expected to enable the carrier to close productivity and operating ratio gaps it has with CSX, its primary competitor.

Speaking at a financial conference, NS Chief Financial Officer Cynthia Earhart said the Class 1 carrier will approach implementation of PSR with a much slower timetable that will avoid the type of disruptive change that occurred when CSX moved to PSR in 2017.

NS is using a process it has described as “clean sheeting” to redesign local service at yards and terminals that will make better use of locomotives, cars and operating crews.

Once that is completed sometime in 2019, the carrier will then turn its attention to a new systemwide service plan for  road trains that will be implemented gradually to minimize the potential for service problems.

“The biggest difference for us is we’re really trying to communicate very closely with our customers so that they understand what the changes are going to be and give them time to plan,” Earhart said.

She said there will be a lot of change to the way NS operates and that will affect shippers. NS officials have said they will provide more details of the plan to move to PSR during an investor day to be held next February.

Since switching to PSX, CSX has lowered its operating ratio by more than 10 points to 58.7 percent.

The NS operating ratio in the third quarter of 2018 was 65.4 percent. The operating ratio shows how much of revenue is devoted to expenses.

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Short Lines Have Mixed Feelings About PSR Moves

November 5, 2018

Short line railroads are having mixed feelings about the general move of Class 1 railroads toward adopting the precision scheduled railroading operating model.

During his company’s third quarter conference call, Genesee & Wyoming CEO John C. Hellmann said he sees short-term pain, but long-term gain for short lines.

Hellman  said there will be some operating uncertainty as the Class 1 railroads with whom G&W railroads interchange traffic .

“While there may be a long-term benefit to the fluidity of the Class I network, there is the risk of interchange disruptions for our short lines,” Hellmann said.
G&W’s president of North American operations, Michael Miller, said some G&W railroads experienced disruptions during a Class 1 operations changes.

Miller cited the problems that CSX had in implementing PSR in 2017. G&W interchanges more traffic with CSX than any other Class I railroad.

However, Miller said operating conditions with CSX have since become much better.

G&W expects to see an initial period of disruption followed by improved service as Union Pacific and Norfolk Southern transition to their own forms of PSR.

Both Class 1s have said they plan to implement changes to their operating procedures slowly.

Miller expects that G&W’s cost will rise as it has to adopt to the PSR models of its Class I interchange partners. This could occur because G&W railroads might have to do more switching and pre-blocking of cars for UP and NS.

“But long term, it’s going to be more volume, more predictability, more reliability, which means we can price higher for the service,” Miller said. “And I think long term, it’s a great thing.”

Indiana Short Line to Adopt PSR

October 26, 2018

The precision scheduled railroading concept is now being adopted in the short-line railroad world.

United Rail Incorporated announced this month that it will implement PSR on its properties starting with the Winamac Southern Railway in Kokomo, Indiana.

In a news release, United Rail said it is the first short-line operator to implement PSR. Until now, PSR had been an operating model used by Class 1 railroads.

United Rail Chief Executive Officer Michael Barron said he believes the Class 1 railroads will welcome the change to a PSR operating model.

John McPherson, United Rail’s director of operations, said many short lines are owned and managed by individuals, so they lack the resources or technology to implement PSR.

“As a result, many short lines operate at less than peak efficiency and lower than optimal operating margins,” McPherson said. “All parties benefit from on-time scheduled delivery.”

PSR Principles Being Adopted by NS

October 25, 2018

Count Norfolk Southern as the latest member of the precision scheduled railroading club.

The Class 1 railroad revealed this week that it plans to implement its own version of the model, which was popularized by the late E. Hunter Harrison at Canadian National, Canadian Pacific and CSX.

However, NS CEO James Squires said the carrier will only use PSR “as long as it improves customer service and enhances shareholder value.”

During a conference call with Wall Street analysts, Squires said NS is “looking at everything out there including elements of PSR that are complementary to our strategy.”

He said the railroad has recruited people with PSR experience and will pursue aggressive goals aimed at reducing the operating ratio and improving the bottom line.

NS Executive Vice President and Chief Operating Officer Michael Wheeler said the company has begun what he termed a “clean sheeting” process as part of developing a PSR plan that is expected to be implemented in phased in “cadences.”

NS officials said the company plans to reveal more details about its transformation to PSR at an investor’s day on Feb. 11, 2019.

The decision by NS to adopt elements of PSR and the expected move by Kansas City Southern to do likewise will leave only BNSF among Class 1 railroads not practicing some form of PSR.

Union Pacific announced a month ago that it is moving toward PSR and plans to implement it gradually.

Squires was cagey when asked if NS would engage in the type of major workforce reductions and downsizing of locomotive and freight car fleet that CSX has done.

“But suffice it to say that our goal is to produce a railroad that provides a more consistent service product at a lower cost,” he said.

Squires also emphasized that NS will do what it can to minimize service disruptions, something that plagued CSX when it rolled out PSR in 2017.

NS expects to reduce the number of freight cars on the road at any given time by operating a higher-velocity railroad.

The D.C.-to-A.C. locomotive conversion program will continue and NS will buy new locomotives as needed.

However, Wheeler indicated that NS will adopt many elements of PSR that CSX has implemented.

This will include merging unit trains with merchandise trains and operating longer trains seven days a week. Currently, some NS trains do not operate daily.

Wheeler said NS has already begun overhauling yard and terminal operations, including creating more blocks of traffic in local yards to allow those cars to bypass major classification yards.

He said NS is working with customers and short lines on improving blocking.

Wheeler said the new NS operating plan will be built from the local level up to the network level.

Also like CSX and other railroads that Harrison has overseen, NS will encourage faster loading and unloading of freight cars by increasing demurrage charges.

Moody’s Examines Pros, Cons of PSR

October 22, 2018

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.

CSX Continues to Cull Motive Power Fleet

October 19, 2018

The implementation of the precision scheduled railroading model at CSX last year brought many changes to the carrier, including fewer trains and an aggressive cost-cutting campaign that has resulted in lopping off 2,000 employees and selling some routes.

In particular, management has claimed that the new operating model has enabled it to haul more freight with fewer locomotives and freight cars.

Much of this has been achieved by operating fewer and longer trains. This also resulted in fewer crew starts.

Managers also contend that the trains are operated faster, saying average train speed increased by 28 percent during the third quarter in comparison to the same quarter of 2017.

CSX CEO James Foote said the railroad needs 30 fewer locomotives for every 1-mph gain in average train velocity. The average velocity was 17.9 mph for the third quarter this year, versus 14 mph a year ago.

It should be noted that during the third quarter of 2017 CSX was still recovering from congestion prompted by the rapid launch of precision scheduled railroading under then CEO E. Hunter Harrison.

CSX Chief Financial Officer Frank Lonegro touted those gains again during the third quarter earnings call by saying that the railroad during the quarter handled a traffic increase with a locomotive fleet that is 12 percent smaller than it was when the model was implemented in spring 2017.

Lonegro said revenue ton-miles were up 7 percent and overall volume grew 4 percent compared to the third quarter of 2017.

Over the past year CSX has stored or retired more than 300 locomotives.

Lonegreo said the smaller motive power fleet enabled CSX to cut the number of maintenance workers in locomotive shops by 11 percent.

“We now have over 800 locomotives in storage, in addition to the hundreds of engines we’ve sold, scrapped, or returned since the beginning of last year,” Lonegro said.

CSX managers say the locomotives that are in the active fleet are newer and more reliable.

The carrier’s active motive power fleet numbered 2,821 units at the end of the third quarter compared with 3,381 locomotives at the end of 2017.

It had an average of 3,763 locomotives in service in the first quarter of 2017 before Harrison implemented precision scheduled railroading.

By the end of 2020, CSX management expects to cull its motive power fleet to 2,400 units.

“We’ll continue to take out locomotives, we’ll continue to take out railcars, we’ll continue to free up capacity across the railroad and in the terminals because we will drive more and more efficiency and fluidity in the network,” Foote said.

CP’s Creel Predicts Class 1 Mergers Coming

October 9, 2018

With half of North America’s Class 1 railroads now operating some form of the precision scheduled railroading operating model it may be easier for railroad mergers to take place.

Canadian Pacific CEO Keith Creel made that assertion at the railroad’s Oct. 4 investor day event.

Precision scheduled railroading has been implemented by the late E. Harrison Hunter at CP, Canadian National and CSX.

Union Pacific recently announced that it will practice the model as well.

“Yes, eventually it’s going to happen,” Creel said about the prospect of Class 1 mergers. “It’s not a matter of if — it’s when.

Creel said it would be easier to combine two railroads that practice precision scheduled railroading and thus overcome a potential hurdle in the review process by the U.S. Surface Transportation Board.

An increase in rail freight traffic is expected to drive the North American rail mergers.

Precision scheduled railroading can only do so much to alleviate the congestion, particularly in the Chicago region, that Creel expects to happen.

He said population growth and highway congestion will increase the demand for moving freight by rail.

“You can’t double traffic in Chicago and solve that problem with just PSR. It just doesn’t happen,” Creel said.

He said the solution to increased demand and finite capacity will be to remove operational complexities and eliminate interchanges by combining Class I railroads.

“Eventually it’s going to have to happen,” Creel said. “I don’t know if it’s three years, five years, 10 years.”

Ex-CSX President Looks Back on His Time There

October 2, 2018

Long before E. Hunter Harrison became CEO at CSX, the railroad’s management team was already studying the precision scheduled railroading model and had adopted some of its principles.

That was the message that Clarence Gooden, the CSX Transportation president who retired after Harrison became CSX CEO, told the North East Association of Rail Shippers last week.

Gooden said CSX adopted such practices as laying off employees, mothballing locomotives, closing some small yards, and shuttering 11 of its smaller car and locomotive repair shops.

CSX under former CEO Michael Ward also began running longer trains in an effort to reduce train starts and improve crew and locomotive utilization, and increased its use of distributed power.

Although CSX closed a couple of the 14 humps it operated at the time , Gooden said the carrier should have closed four or five more humps.

The moves during the Ward administration were in response to the Great Recession of 2008 and a sharp drop in coal traffic.

Coal provided a 53 percent profit margin and when it declined, it was a major blow to the CSX balance sheet.

Losing coal traffic cost CSX $1.5 in revenue as the domestic utility coal market collapsed over a five-year period.

Gooden expects CSX to take another hit in lost coal revenue starting in 2023 when a wave of retirements of coal-fired power plants is expected to begin.

He predicted that CSX and NS alike will spin off or close many of their coal-dependent routes.

Although intermodal traffic might pick up some of the slack left by falling coal traffic, Gooden said intermodal traffic is not nearly as profitable as coal.

The Eastern railroads might have to live with higher operating ratios due to declining coal traffic and an increase in intermodal business.

Gooden spoke favorably of the changes that Harrison introduced during his less than a year at the helm of CSX before his death.

But he also defended the accomplishments of the railroad during the Ward years.

From 2004 to 2017, CSX’s stock price went from $5.13 to $36.88.

Other achievements that Gooden cited included making the hiring of veterans a priority, launching an ad campaign promoting the efficiency of rail transportation, having the distinction of being the safest Class I railroad.

At the same time Gooden said CSX should have adopted technology much faster. He said automating yard operations and taking advantage of the operational benefits of positive train control will be a focal point for reducing costs.

Gooden also believes that CSX should have developed closer ties with short line and regional railroads because of their importance in feeding traffic.

Reading Between the Lines of How CSX Management Projects Itself to the World

March 7, 2018

CSX executives revealed last week at long last their vision for their company. They were supposed to have done it last fall, but three top-ranking vice presidents left during a management shakeup. Then CEO E. Hunter Harrison died.

But things have now stabilized. CEO James M. Foote and his management team put forth the most optimistic and rosy scenarios that they dared to spin.

Hovering over those presentations in New York City, though was Harrison.

A year ago Harrison and the hedge fund Mantle Ridge were closing in on their takeover of CSX, a feat they pulled off with a relatively small amount of money and in a short amount of time.

Harrison had great plans for the hidebound CSX. He brought the precision scheduled railroading model that he had implemented on the Illinois Central and then at Canadian National and Canadian Pacific.

Foote and his team went to great lengths to show that Harrison’s vision is their vision, too. Harrison received the reverence normally reserved for a company founder or elder statesman of much longer tenure.

Harrison had a lot of work to do. Independent railroad industry analyst Tony Hatch and Trains magazine columnist Fred Frailey have described CSX as long hindered by adherence to the practices of its  predecessor railroads, meaning it was  averse to change and rather bureaucratic.

Frailey said ormer CEO John Snow as uninspiring and his successor, Michael Ward, sought to move CSX forward but was bewildered as to how to get it out of its rut.

No wonder the CSX board of directors gave Harrison a chance even if, to quote his successor Foote, Harrison engaged in “carpet bombing” the railroad with fast-paced changes that led to widespread service failures that drew the ire of shippers and the attention of the U.S. Surface Transportation Board.

But all of that is behind CSX now, or so management wanted those attending or watching the presentations in New York to believe.

Some have bought it. Writing in Progressive Railroading, Hatch quoted an  investor as saying this was the best CSX meeting he had seen in a decade of watching the railroad.

The current management team laid out  goal of a 60 percent operating ratio by 2020, described a new intermodal business strategy, and pointed to the huge buckets of money it will fill from sales of unneeded real estate and rail lines.

Having a plan and making it work are not always, though, the same thing. Truth is every railroad company talks about growing traffic and all of them are facing challenges finding it.

Hatch said that if CSX is to increase its carload and intermodal business it will have to provide consistent and improving service.

Frailey didn’t comment directly on the New York conference, instead referring readers to articles written by the magazine’s writer covering the story, Bill Stephens.

Those articles, Frailey correctly observed, did well in showing how CSX seeks to project itself to the world.

Yet Frailey said some industry observers with whom he regularly corresponds have been debating the endgame that CSX management is seeking and it isn’t necessarily to grow traffic and become North America’s best railroad.

Those observers think CSX plans to eventually liquidate the company.

Frailey said the case for liquidation goes as follows: “The railroad borrows money to buy back an astounding $5 billion of stock, making every dollar of profit worth more to shareholders who stick around because the same amount of earnings is spread among many fewer shares . . . Freight rates are being jacked up to cover fully allocated costs, a direction I’m told only Union Pacific has gone up to now—milk the cow until it collapses, the saying goes. Its carload business has been steadily eroding since the turn of the century.”

The veteran journalist who has written about railroads since the 1960s said  he understands that CSX has reduced its marketing staff to a hard core operation.

That hardly sounds like a railroad that will be able to aggressively go to find new business. Perhaps CSX expects that by offering a superior product that shippers will come to it begging to do business.

The word “liquidate” that some of Frailey’s contacts used to describe CSX’s endgame is unfortunate because it conjures up selling assets and going away.

Perhaps a better description might have been to break up the railroad much as Illinois Central Gulf slimmed down in the 1970s and 1980s until it emerged as largely a Chicago-New Orleans core with a few arteries connecting to it.

Yes, some rail lines were abandoned, but most wound up in the hands of short line and regional railroads.

It was that railroad on which Harrison first implemented his precision scheduled railroading model.

Frailey isn’t sure what to make of what CSX is doing, but doesn’t believe Foote isn’t prepared to do the job thrust upon him following Harrison’s death.

Foote was in the right place at the right time and for now CSX and its shareholders will let him sit at the throttle and take the EHH train a little further down the line. But it is Harrison’s train orders that Foote is following and not those Foote wrote himself.

Shareholders can be a fickle lot. Just this week Canadian National, a railroad described in most circles as highly successful, pushed out CEO Luc Jobin after the company hit a rough patch.

What I see happening at CSX is that management is trying to walk a fine line between pleasing investors and shippers and keeping at bay a few interested bystanders who have the ability to make life easy or miserable for a company.

Cost cutting and asset sales will only take a company so far in that endeavor. Of course growing traffic makes everyone happy, but is CSX prepared to spend the time and money needed to make that happen. It is so much easier to sell property and lightly used rail routes.

In theory, a company exists to serve its customers because without them you don’t have a company. But theory also says that a company exists to make money for its shareholders.

The two objectives are not necessarily in opposition. Arguably, you can’t make money for shareholders unless you provide a product or service that someone is willing to buy.

But you can’t improve your product or seek to sell more of it without spending money on that, too.

Management has always existed to reconcile those sometimes opposing forces.

The history of the railroad industry is filled with tales of financiers milking companies and leaving them behind. There is reason to believe that CSX is tilting toward enabling the financiers to make a financial killing before moving on to something else.

To quote a line from the John Mellencamp song Peaceful World, “These are just words and words are OK. It’s what you do and not what you say, if you’re not part of the future then get out of the way.”

We will know in time what the future of CSX is but take with some healthy skepticism how CSX projects that to the world.

No Turning Back, Foote Says

January 18, 2018

New CSX CEO James M. Foote wanted to make one thing clear. On his watch there will be no turning back from the commitment made to precision scheduled railroading that the late E. Hunter Harrison brought to the carrier last year.

James Foote

During a conference call on Wednesday to discuss the railroad’s fourth quarter financial results, Foote praised Harrison and said CSX would not be where it is today without him.

“I am committed to seeing his vision through and making CSX the best railroad in North America,” Foote said.

Speaking during the same conference call the newly-appointed CSX vice president of operations, Edmond Harris, said the carrier will continue what Harrison started, including operating fewer trains, putting more locomotives into storage, moving the same tonnage with fewer freight cars, and having a more fluid network.

“The table has been set,” Harris said, saying CSX will take advantage of technology and boost the use of distributed motive power.

Foote said he made changes to the sales and marketing structure to simplify the organization by reducing the leadership group to three business units and aligning certain functions into other departments.

He said he also implemented changes in the operating department at the staff and field levels in order to achieve more efficient operation and achieve service improvements.

Foote noted that one of his first moves as CEO was to order the hump to be razed at Tilford Yard in Atlanta.

The yard, which remains open as a flat switching facility, was one of eight hump yards that were converted last year.

As for what the future holds for CSX operations, Harris said that he favors run-through interchange trains and would like to see CSX bypass the Belt Railway of Chicago by running merchandise trains directly to BNSF and Union Pacific.

He will also seek partnerships with short lines railroads and other Class I carriers to create shorter, more efficient routes.

CSX will study creating directional running for longer trains and will continue to build longer trains pulled by fewer locomotives per train.

Foote said CSX will make it a priority to improve its on-time performance, which was just 56 percent in the fourth quarter of 2017.

Calling that unsatisfactory, Foote said CSX plans to create schedule plans for every carload as a way to improve on-time deliveries.

Foote acknowledged that the rapid changes that Harrison ordered at CSX before his death last Dec. 16, disrupted operations, resulting in angry shippers and additional regulatory oversight.

The railroad also lost some traffic, but Foote predicted that most of it will return. “We are seeing some of those customers return already,” Foote said.

However, CSX doesn’t expect to recoup the 7 percent loss it suffered in domestic intermodal business after it closed its Northwest Ohio Intermodal Terminal and ditched the hub and spoke strategy toward building intermodal traffic.

CSX’s intermodal strategy will be built on increasing container traffic to East Coast ports and not on seeking to develop low-volume service lanes.

Capital spending will fall by 20 percent to $1.6 billion in 2018 on top of a 25 percent cut last year.

That prompted some analysts on the conference call to express concern about CSX’s ability to maintain its infrastructure.

In response, Chief Financial Officer Frank Lonegro said CSX will spend $1.4 billion this year on track maintenance, which he said is about the same as it spent in previous years.

Lonegro said most of the curtailed capital spending would have been for new locomotives and freight cars. But with 900 locomotives in storage, and 20,000 cars sidelined, he said it would be many years before CSX needs to buy more rolling stock.

Looking ahead to a March 1 investors conference, CSX executives said they did not want to provide many details about their expectations for this year and beyond other than they expect the operating ratio to improve due to operations improvements and efficiency gains.

However, they did say that CSX expects to reduce its payroll by 2,000 people this year and that it ended 2017 with 3,282 employees than it had on the last day of 2016. CSX now employs 24,000. CSX also reduced the number of consultants that it hired by 1,418.