Hunter Harrison is delivering a lecture on the right way to run a railroad—the Hunter Harrison way. “I say this with the appropriate degree of humility,” drawls the recently named chief executive of CSX (CSX), America’s third-largest rail carrier. “I know how to run a railroad. I wrote the playbook.”
He pauses for emphasis and adds: “I ain’t leavin’ a failure.”
The 72-year-old Harrison is seated on a sofa in a sun-drenched alcove off the dining room of his home in Wellington, Fla., west of Palm Beach. On this Friday afternoon, he is attired in a shiny red tracksuit, with a sapphire glinting on his right ring finger, a diamond on the left. As we talk, Harrison is inhaling oxygen through his nose from a thin tube that circles his scalp and fits over his ears, fed by a tank mounted on wheels. The burly, white-haired executive sits in front of a giant picture window overlooking the seventh hole of the Dunes, a Scottish links–style course at the Palm Beach Polo Golf & Country Club. Pop diva Madonna and TV host Steve Harvey have rented homes on either side of Harrison’s 9,200-square-foot Mediterranean-style mansion in recent years.
For more than three hours, the railroad lifer has been explaining his blueprint for turning around CSX, management pointers tumbling forth in his rolling Tennessee baritone. “Cultures change one funeral at a time,” he intones, emphasizing the importance of “detoxing the culture by weeding out the nonbelievers.”
As for the hedge fund titans who’ve funded his successes, they’re useful, allows Harrison—if they stay out of his way, that is. “I’m a huge Bill Ackman supporter,” says Harrison of the controversial activist investor and founder of Pershing Square Capital Management. “But every time he offers advice on railroading, I just say, ‘Shut up, Bill.’ ”
Harrison can afford to be brash. Because behind the bluster stands a talent as unique as any in corporate America. The college dropout boasts the best record for wringing money from locomotives and boxcars of any railroad CEO in at least half a century. “He’s the best operator since E.H. Harriman,” says Larry Gross, a partner at FTR Transportation Intelligence, invoking the icon who built a railroad empire at the dawn of the 20th century. Harrison has proved his mettle three times, taking the Illinois Central, Canadian National (CN), and Canadian Pacific (CP) railroads from worst-in-class laggards to hugely profitable businesses—earning gigantic returns along the way for investors, including multiple billions for Ackman and Bill Gates.
But those coups pale beside the latest astounding gambit. Late last year, Harrison and hedge fund manager Paul Hilal, who was once Ackman’s top lieutenant at Pershing Square, launched a secret plot to install Harrison as CSX’s new CEO. The railroad world had believed that he was retiring from CP to finally enjoy life away from the tracks. Such a notion, says Harrison, was preposterous. And on Jan. 19, the day after he and Hilal went public with their intentions, CSX’s stock surged from $36.88 to $45.51, or 23.4%, adding $7.7 billion in value. The leap in CSX’s share price worked just as Harrison and Hilal predicted, effectively leaving CSX with no choice but to scuttle its own succession plan and put the septuagenarian with a mysterious ailment at the controls.
After the initial pop, CSX shares continued to rise, advancing to around $50, though the ride has been rocky. All told, as of early August, CSX’s valuation has risen 36% since the Jan. 18 announcement, climbing $12 billion to $46 billion. That compares with a 1.0% increase in the Dow Jones transportation average. “I’ve never seen anything like it,” says Wick Moorman, the outgoing CEO of Amtrak and former chief of CSX’s main rival, Norfolk Southern. “Investors looked at what he did at CN and CP, projected that he’d do it again, and the rest was history.”
In truth, CSX stock would probably be even higher now were it not for some candid public comments from the unfiltered CEO. During the company’s second-quarter earnings call on July 19, Harrison caused a stir by declaring that “fossil fuels are dead”—adding that coal, CSX’s biggest and most lucrative franchise, “over the long term will decline,” despite the Trump administration’s rhetoric to the contrary. Nor did Harrison provide comfort that he’d complete his four-year contract: “I am a short-timer here, an interim person that’s been trying to get this company to the next step,” he said as well.
Then, shortly after the controversial conference call, severe disruptions in customer service challenged the Harrison mystique, if only a bit. On July 27, the Surface Transportation Board, the federal agency regulating railroads, sent CSX a stern letter, citing “complaints from shippers” reporting that “service deteriorated markedly in the second quarter of 2017”—a period when Harrison was transforming the CSX network at warp speed. But during this effort, traffic became so congested, said the STB, that a number of shippers had to “curtail production and temporarily halt operations.” A study by Cowen and Co. found that 37% of shippers surveyed switched freight to CSX’s leading competitor, Norfolk Southern, from March through July.
Then came another shock to the system: A 32-car derailment on a train carrying hazardous materials in early August forced the evacuation of a small town in western Pennsylvania.
Harrison acknowledged the service problems, but called them temporary and outright blamed them on an old guard at CSX that was resisting change. “The pace of change at CSX has been extremely rapid,” he wrote in an apology email to customers in late July. “And while most people in the company have embraced the new plan, unfortunately a few have pushed back and continue to do so.”
Hilal, whose Mantle Ridge investors have, by Fortune’s estimates, so far made $800 million on CSX stock, says he isn’t bothered a whit by the setbacks, because everything’s always in flux in a Harrison revolution. “It’s happened every single time Hunter transforms a railroad,” he tells Fortune. “You can’t make these changes without disrupting employees and customers. You tell customers that instead of picking up freight on Monday and Wednesday at 9 a.m., it’s now Thursday and Saturday at 3 p.m. Some of these improvements are best made gradually, but where improvements are best made by ripping the Band-Aid off, the customers suffer some near-term disruption, then things get much better.”
Harrison calls his model “precision scheduled railroading.” We’ll get to the details shortly, but the basic idea involves dismantling the elaborate hub-and-spoke systems widely deployed by U.S. railroads, and installing a “point-to-point” model that ships cargo a lot faster by eliminating lengthy stops and handling. Think of railroading as capital on tracks. Harrison’s blueprint aims at increasing the amount of freight a carrier delivers, and at the same time, hugely reducing the amount of capital measured in numbers of locomotives, cars, and switching equipment.
Still, the CSX network presents a totally new challenge for Harrison and tests him as never before. Unlike the uncluttered system of long, linear routes through prairies and across tundra at CN and CP, CSX traverses a tangled web of tracks that weave through dense urban areas and crisscrossing commuter lines. For decades, the prevailing view has been that precision railroading just won’t work in such a maze.
Harrison scoffs at such doubt. “They say CSX has a dense ‘spaghetti’ network that makes precision scheduled railroading impossible, just like they said the mountains and snow made it impossible in Canada,” says Harrison. “Hell, I’ll eat the spaghetti!”
The early results are mixed. While Harrison has indeed substantially lowered costs by deploying far fewer locomotives and railcars, CSX has also antagonized customers and lost market share in the process. “He may be moving things too fast beyond the ability of the organization,” says Gross, the consultant who compared Harrison to E.H. Harriman. “The jury is very much out on whether he’ll succeed.”
If he does succeed, though, that success will likely include within it a crucial lesson for America’s bedrock industries. Harrison believes that, even in this Digital Age, when new platforms and rampant automation seem to dominate, a back-to-basics, operations-focused ethos is still what drives superior performance in business. In that sense, the latest chapter at CSX may provide a case study for how to revive the traditional, capital-intensive industries that remain the locomotive of America’s economy.
So what’s in it for Harrison? What motivates this elderly railroader-on-oxygen to manage another overhaul he describes as something “incredibly disruptive, and that lots of employees don’t want to go through”?
Well, it’s obvious to anyone in his orbit that each successive challenge to modernize this 19th-century industry dwarfs the pleasure he gets from pretty much anything else. Harrison raises prizewinning horses for show jumping—a hobby he tells Fortune is boring. He has never cared about any profession besides running trains on cold steel rails. He’s a strange manner of man for whom wrestling 12 hours a day with wrecks, delays, and network schedules generates excitement, not stress. “He may be running everyone around him ragged,” says Hilal. “But Hunter’s not working, he’s having more fun than a kid in a candy store.”
Once a two-handicap golfer, Harrison parked his clubs because of weakened health. Precisely what medical condition Harrison suffers from remains a mystery to those outside of his inner circle. When he sought the top job at CSX, the company requested that Harrison provide his private medical records and be examined by an independent physician. Harrison declined. He furnished the board with a two-sentence letter from his personal doctor. Those who saw the letter say they don’t recall the exact words, but relate that it read something like this: “I have treated this patient for a long time. He is fit to do the job.”
In two long interviews with Fortune, Harrison would say only that his doctors at the Mayo Clinic are “putting the dots together.” He declined to specify whether the physicians are attempting to determine his precise condition, or map the best treatment for a ailment they’ve already diagnosed. He says he started using oxygen early last year because he gets “short of breath,” but that he believes his reliance on oxygen will be temporary. “Do I need oxygen until I improve some?” he asks. “Yes. Why hide it?” he says. “I can’t play tennis anymore, but can I run a railroad? Hell yes!”
In our many hours of talks, Harrison was on oxygen the entire time, but otherwise seemed healthy, never coughing or breathing heavily.
On the job, it’s clear that he has energy to burn. He huddles with his operating team from around 9 a.m. to 9 p.m., either at the Jacksonville headquarters, or by phone, mainly from his Connecticut estate. “He’s so intense that food is shoved under the door,” says Cindy Sanborn, CSX’s chief operating officer.
Clearly, Harrison feels that this daily regime is less hazardous to his health than retirement. “I retired once for two years,” he recalls, “and my wife said, ‘You’ve got to get back to work!’ ” Harrison and his wife, Jeannie, have been married 54 years. The couple have two daughters 20 years apart in age, the younger of whom, Cayce Harrison Judge, runs the horse farms. “If I retired again,” says Harrison, “I’d be totally stressed and pacing like a bear.”
The question is whether Harrison can complete his four-year contract with his current vigor, if at all. “I have no doubt that Harrison will succeed if his health holds out,” says Noel Perry, a former CSX researcher and now a consultant with FTR. “But that’s a big ‘if.’ ”
Harrison’s father, Ewing Hunter Harrison Jr., nicknamed “Tank,” was a Memphis police officer who retired to become a traveling preacher. He had pitched in the minor leagues as a teenager before being shot in his throwing arm in World War II. Like his dad, Ewing Hunter III was an outstanding athlete. “I could have been a professional catcher,” he recalls, “except for what a scout called my ‘rabbit ears and red ass.’ I heard every catcall from the bleachers and wanted to fight about it.”
The Harrison home was half a mile from Graceland on the old Highway 51, now Elvis Presley Boulevard. A buddy of Hunter’s who knew one of the King’s bodyguards got his friend invited to swim in Elvis’s pool a couple of times (“Elvis was always in the TV room,” Harrison recalls). When Presley rented the Memphian movie theater for private screenings, the young Harrison occasionally got to sit behind the empty rows separating Elvis and his entourage from the other guests. “A movie would start playing, and Elvis would decide he didn’t like it and yell, ‘Cut!’ And they’d start another movie, two or three times!” he says.
At age 18, the summer before his sophomore year at Memphis State, Harrison took a full-time job at $2.12 an hour squirting oil on the undercarriages of railcars for the old St. Louis–San Francisco Railway, known as “the Frisco,” leaving college soon after starting on the railroad. It was his stint dispatching locomotives and railcars on the 6 p.m. to 6 a.m. shift from a sweltering tower—the railroading version of air traffic control—that cemented his love for the world of switches and hump yards. Fueling those graveyard shifts, Harrison recalls, were “lunch boxes full of Rolaids, four packs of Marlboros, and nothing to eat.”
“If you didn’t love it, it would drive you crazy,” he says. “In school, I’d pray for the clock to speed up. In the tower, I’d pray for it to slow down. I learned more in those four years than in the last 50.”
For Harrison, the epiphany was that the folks running rail yards knew far more about railroading than the bureaucrats at headquarters. Harrison learned then that a railroad’s profitability was determined by the precise, hands-on synchronizing of schedules, repairs, and crew assignments organized right in the rail yard—and that efficiencies achieved in one rail yard could be spread to dozens of others.
In 1980, the Burlington Northern (now the BNSF, owned by Warren Buffett’s Berkshire Hathaway) purchased the Frisco. Harrison rose to become a top operating manager, but clashed with CEO Gerald “Jerry” Grinstein, later chief of Delta Air Lines. “I was too much of a ‘kick ’em in the ass’ type for Jerry,” recalls Harrison. “He told me, ‘You’re just too high risk, and we don’t need risk right now.” His breakthrough opportunity came in 1989, when a private equity group orchestrated an LBO for the Illinois Central, a midsize carrier running from Chicago to New Orleans, and installed Harrison to lead a rescue operation. The new boss deployed scheduled railroading to steer the IC from near bankruptcy to immense profitability, culminating in a 1999 sale to Canadian National for $2.4 billion, 16 times what the private equity group had paid a decade earlier.
Privatized in 1995 after 76 years as a state-owned “Crown corporation,” CN remained hobbled by bureaucracy and poor worker productivity in the rail yards, all fat targets for Harrison, who rose from COO to CEO in 2003. “Workers could be lazy and carefree doing their jobs, and the bosses weren’t hanging over their heads,” recalls Tim Secord, a former official in the SMART union’s transportation division. “Under Harrison, the culture changed 110%.”
His draconian reforms and prickly personality irked Montreal’s clubby business elite. His French never advanced past, “Bonjour, y’all.” Paul Tellier, the former CEO of CN, remarked long ago that his colleagues would try to keep Hunter in a cage, “but he gets out every so often, so we have to put him back in.” Once again, though, Harrison produced a fantastic turnaround. From his arrival at the start of 1999 until his departure at the close of 2010, CN’s shares roared from $4.50 to $34, creating $26 billion in market cap. (Bill Gates’ personal investment arm and the Bill & Melinda Gates Foundation Trust are now CN’s largest shareholders; since around 2000, they’ve reaped over $7 billion in gains.) Harrison says that in 2008, Gates told him, “You paid my taxes last year!”
Even so, Harrison and CN split on a sour note. At the end of 2010, the board declined to renew his contract, even though the chairman had informally asked if he’d stay on, Harrison says. “Some directors complained I’d been using the company plane too much, and it was ‘obscenely expensive,’ ” says Harrison, still rankled by the slight.
As Harrison languished and fought boredom at his equestrian estate in Connecticut, Hilal was studying railroads—specifically, CN’s rival, Canadian Pacific. Hilal was a partner at Pershing Square Capital, headed by Bill Ackman, whom he met rowing crew at Harvard and became his roommate. “CP was by far the worst-performing railroad in North America, and the most similar railroad, CN, was the best,” Hilal says. “I quickly realized the difference was management.” So he called Harrison, who he reckoned could fix CP the way he’d rebuilt its chief competitor.
After secretly purchasing a big stake in CP (it eventually bought 14.2% of CP shares), Ackman and Hilal’s Pershing fund, in early 2012, launched a five-month proxy battle to take control of CP. They prevailed and installed Harrison as chief executive. On his first day on the job in early July 2012, the Calgary headquarters was strangely empty. Executives were off frolicking at the Calgary Stampede, a rowdy festival of rodeos and covered chuck-wagon races, celebrating its 100th anniversary. “Word got out that I’d arrived,” says Harrison. “Cell phones are blazing. People are pouring out of the bars, getting mouthwashed, and showing up in turned-up boots, straw cowboy hats, and bandannas. It was the damnedest welcome for a new boss you ever saw.”
To win believers, he brought to CP what had worked so well at CN—a template that included off-site seminars known as “Hunter Camps.” As many as 20 times a year, Harrison invited two dozen young managers to three-day sessions at resorts in Canada and the U.S., where he’d lecture his troops with messianic intensity in front of a whiteboard. He also demanded that executives be trained as engineers, conductors, and other trades so they could replace workers in case of a strike. All told, 1,000 CP managers were certified to operate, switch, and repair trains, and during a walkout in early 2015, the executives kept the railroad chugging. “The union guys’ eyes got awful big when they saw a train coming down the track at 60 mph, with a manager in an engineer’s cap at the controls, blowing the whistle while they’re holding picket signs,” Harrison recalls with relish. He credits the managers’ new role with helping to end the strike after just a few days.
Harrison was so determined that the corporate brass be steeped in operations that he moved the headquarters from a glass tower in downtown Calgary to a renovated repair shop in a prairie rail yard 10 miles out of town. In his first 24 months on the job, CP’s market cap rose by $19 billion, or $800 million a month. Over the five-year span from the start of Pershing’s ownership push to its exit as shareholder in August 2016, CP shares rose 200% to $150, handing Pershing a $2.6 billion gain on an original investment of just over $1 billion.
As usual, Harrison succeeded in carrying more freight with a lot less equipment and people. And as usual, the big shrink in the workforce roused ire. “He declared war on the unions and screwed the workers,” says Doug Finnson, president of the Teamsters Canada Rail Conference, which represents rail workers in Canada. “All he cares about is the shareholders. His forte is slash and burn.” Though many union leaders despise Harrison, others acknowledge his managerial skills and respect his straight, if brutally blunt, talk. “You may not like what he says, but the guy does not lie,” says Secord, the former SMART official. “And whether you like him or not, he knows how to run a railroad.”
Though it was financiers who installed him at CP and later at CSX, Harrison often bristled at their counsel. “Ackman and Hilal were saying, ‘We’re brilliant finance guys; we’ll do the finances for you,’ like it was a gift,” says Harrison. “Their Harvardness was oozing out of their pores.” According to Harrison, Ackman and Hilal, along with the board, recommended two CFOs, both of whom quickly departed. “I finally picked my own internal person, who worked out great. Then I took a needle and stuck it in Bill and Paul.” (The company had five CFOs in five years; Hilal says it was extremely difficult to find one that could satisfy both the board and Harrison.)
It took just two years for Harrison to transform CP’s operations, and by mid-2014, he was looking for a new challenge. But the next year brought two medical challenges—a blockage in his legs that required an operation to implant stents and a severe bout of pneumonia, conditions that, he says, were unrelated to his current health issues. (Once a heavy smoker, Harrison underwent open-heart surgery in 1998, and never smoked again.)
Harrison, Hilal, and Ackman teamed up to try to create the first major transcontinental railroad, exploring a merger between CP and one of the two major U.S. carriers on the East Coast. But talks with CSX and Norfolk Southern foundered. Hilal was undeterred, confident there was still plenty of buried value in the industry that Harrison—who was scheduled to retire in June 2017 and who, additionally, was bound by a tight noncompete agreement that precluded him from working for rival railroads—could unearth.
Mantle Ridge had raised $1.2 billion for a single investment, to buy a 5% stake in CSX—and install Harrison as CEO. The investment group also wanted to designate six directors, representation that would ensure that Harrison “had sufficiently strong board support to overcome internal resistance” to the wrenching change that would inevitably come, Hilal says. (The group got five board seats.)
As CSX’s share price jumped on the news, Hilal and Harrison suddenly had their leverage. The windfall prompted such institutions as Fidelity and Neuberger Berman to push for naming Harrison CEO.
Over the next seven weeks, Hilal and CSX sparred over terms. But for Harrison, the delay was intolerable. It was an exercise in “chest pounding,” he groused in the press. “Both sides were posturing and playing games,” says Harrison, who didn’t hide his displeasure from Hilal. “Hunter has an incredible sense of urgency, which is a major asset in transforming companies,” says Hilal. “If it makes sense to do, it should be done this afternoon. He said to me three or four times, ‘The stock is way up, and their profits are down. How come I’m not in the chair yet?’ ”
Harrison viewed CSX as just the kind of target he relishes, a sluggish underachiever ripe for precision scheduled railroading. “CSX is the least efficient carrier of all the six majors in the U.S. and Canada,” he tells Fortune. “And when I get through, it will be right there with the best, or awful close.” CSX operates 21,000 miles of track that span 23 states east of the Mississippi and extend into Quebec and Montreal. Along with its regional rival Norfolk Southern, CSX is far more dependent on coal shipments flowing from mines in Pennsylvania, Ohio, and West Virginia to the big utilities, than are the Western carriers, Union Pacific and BNSF. Since 2011, CSX’s coal revenues have dropped by 51%, from $3.7 billion to $1.8 billion.
The loss of coal revenue changed the economics for the railroad: It was spending more to deliver each comparable ton of freight than the best-run railroads, notably those transformed by Hunter Harrison. CSX kept promising huge efficiency gains that mostly didn’t happen. Its “operating ratio,” cost as a share of revenue (which is the industry’s prime benchmark for productivity), was a mediocre 69.4% in 2016. That’s 11 percentage points higher than CP’s, and 14 points above CN’s. Harrison’s stated goal is to drive that number into the mid-50s within three years, a feat that would nearly double CSX profits from $1.71 billion last year to well over $3 billion.
Harrison sees an opening in another transportation industry weakness. Trucking companies are in trouble, he says. “They can’t hire drivers. The highways are crumbling. I won’t get on I-95—it’s like NASCAR. We can offer truck-competitive services at lower rates.”
Some industry veterans doubt he’ll pull that off. “Trucking is so much more flexible than rail that we’ve never seen a major shift from rail to truck for cargoes moving in railcars, what Harrison’s targeting, as opposed to containers and trailers,” says Gross, the consultant at FTR. But Harrison, he says, is far more likely to do what he always does—a fast and furious reorg that radically lowers costs.
The blueprint for this, once again, is precision railroading: dispatching individual shipments of coal, chemicals, or lumber in the shortest possible times from their origin at the supplier’s depot or factory to the customer’s warehouse or mill. Shrinking delivery times means that a railroad can deliver the same or greater volumes of freight with far smaller fleets of railcars and locomotives and far fewer workers. It’s what Harrison calls “sweating the assets” by keeping locomotives and railcars moving a lot more hours a day, minimizing the time they sit idle in rail yards.
To accomplish that, Harrison is shifting CSX’s complex “hub-and-spoke” system to “point-to-point” delivery. The railroad used to lower costs per carload shipped by running long trains. The idea was that because a longer train requires the same two-person crew as a shorter one, it saves labor costs, while burning only slightly more fuel. But to ensure that “merchandise” trains hauling a mixture of everything from paper to chemicals had as many cars as possible, CSX had to funnel blocks of cars from sundry local stations into 12 hubs, known as “hump yards,” dotting the Eastern U.S. from Albany to Birmingham. At the hump yards, the cars are unhooked from arriving trains and pushed by locomotives over a man-made hill—that’s the hump. Propelled by gravity, the cars roll down the hill, and a computerized switching system directs each car, one at a time, onto individual tracks at the bottom. That’s how trains are “built,” and cargoes sorted.
Harrison regards the hump yard system as a rusty relic. The reason is twofold. First, hump yards are extremely expensive to operate. The facilities were built decades ago and require constant upgrades and maintenance on their aging spiderwebs of tracks. They’re also far more capital-intensive than their gravity-driven system would imply. The cars must roll at precisely the right speed to couple with the car at the end of the train. If a boxcar carrying auto parts moves too fast, it could derail its waiting mate, say, a tank car. To safely and smoothly assemble trains, a system of “retarders” attached to the tracks deploys sensors to calculate the speed the car must maintain based on its weight and length. The retarders then apply the correct braking pressure to the car.
The strategy is clear. But so far, implementation has been erratic, as demonstrated by the mixed metrics. On the plus side, CSX is moving cargo with a lot less capital: Its number of locomotives, for example, has decreased by a fourth, from 3,900 to 3,000. But as CSX shrinks its fleet and shutters hump yards—it has already converted eight of 12 hump yards to nonhub terminals—it’s also radically shuffling customer schedules. Customers can’t always adjust production and loading at the same lightning pace that Harrison is changing their pickup and delivery schedules. They’re struggling to adapt to
the Harrison-mandated schedules designed to run a faster, leaner railroad. For example, he’s demanding customers shift from dispatching, say, 20 tank cars five days a week to 14 or 15
every day. As a result, traffic is snarling. After rising between March and June, the overall speed of CSX’s network declined starting in July.
In late June, former directors at Canadian Pacific feted their hero at a dinner held the historic Breakers hotel in Palm Beach, the creation of another railroad legend, Henry Flagler. Among the attendees were the moneymen who had been backing the guest of honor for years, Bill Ackman and Paul Hilal, along with Harrison protégé and CP’s current CEO, Keith Creel. “Hunter went around the room and talked about how he first met us, and thanked us for getting him here,” recalls Creel. Most of all, he praised the crew for vision they’d shown in pulling him out of retirement—and then keeping him out. Now, claimed Harrison, he’d embarked on the most challenging journey of his career, but with the potential to create more riches than any of the others. “It’s been a great run,” intoned Harrison, “but this is my final trip.”
