Why Hunter Harrison’s Railroad Revolution Will Outlive Him at CSX

January 20, 2018, 3:00 PM UTC
Photograph by Melissa Golden for Fortune

Hunter Harrison reigned at CSX for only eight months before he died, in late December. His astounding legacy: Implanting a new paradigm for railroading in a new market, the U.S. And against all odds, his lifelong creation has taken root.

On January 18th of last year, almost exactly a year ago, the railroad legend and his private-equity backer Paul Hilal announced that the then-72-year-old Harrison would seek to install himself as CEO of CSX, America’s third-largest carrier. As Harrison and Hilal expected, investors who were awed by Harrison’s remarkable track record made their surprise attack a winner. Within a week of the announcement, CSX shares popped by 32%, creating over $10 billion in market value. CSX’s board had to choose between anointing Harrison or watching their stock plunge amid a rebellion by institutional investors. On March 6, the board officially scuttled its own succession plan and put Harrison at the controls.

A new way to run a railroad

Over the next eight months, Harrison oversaw a super-fast, super-disruptive crash campaign to impose his brainchild, precision-scheduled railroading. It was precisely the same playbook Harrison had deployed to revive three previous railroads: Illinois Central, Canadian National and Canadian Pacific. Put simply, CSX, like most carriers, was using a hub-and-spoke system, similar to the dominant model in U.S. airlines. Railcars would pour into the hubs from the spokes, then were reshuffled, car by car, into newly formed trains in “hump yards,” often for delivery to still another hump yard, where they’d be sorted once again.

Read:Investors Are Wagering $12 Billion on This 72-Year-Old Railroad Savior.”

From day one, Harrison unleashed shock and awe to transform CSX from a hub-and-spoke network into a lean, point-to-point system modeled on those he’d created at CN and CP––the same paradigm pioneered by Southwest Airlines. The program infuriated shippers, who were forced to scrap their schedules; Harrison’s new schedule required then to load smaller batches of cars more days a week. Harrison’s message to customers was unambiguous: “It’s my way, the highway or another railroad.” For months, customers complained and bolted for Norfolk Southern and the railroads’ regulator, the Surface Transportation Board, issued CSX warnings over its clogged network and chronic delays.

But for Harrison, the fracturing was essential to harvesting the huge advantages of precision railroading: Transporting the same or more freight with far less capital in the form of railcars, locomotives and expensive-to-run switching facilities. Harrison converted no fewer than 7 of CSX’s 12 hump yards into “flat-switching” facilities where large blocks of chemical or lumber cars that had been assembled at their railyard of origin were combined with blocks for the same customers, then shipped to nearby plants or warehouses. In other words, Harrison was making trains deliver from origin to destination a lot faster by removing the time-consuming intermediate stops.

CSX’s locomotive maintenance and repair facility at Rice Yard, in Waycross, Ga.Photograph by Melissa Golden for Fortune
Photograph by Melissa Golden for Fortune

It was well-known that Harrison suffered from a serious illness. This reporter interviewed Harrison for more than six hours last summer, and during that time the CEO took every breath with the aid of an oxygen tank. Many big investors doubted that Harrison could serve out his full, four-year contract, but were confident he’d remain CEO long enough to firmly implant precision railroading (PR), locking in place the already gigantic gains in share price, and clearing the track for more.

CSX’s disclosure on December 11 that Harrison was going on medical leave, and its announcement of his death five days later “due to unexpectedly severe complications from a recent illness,” threatened to dash those epic expectations. But surpisingly, fears that the Harrison’s death would leave his revolution in limbo, or that the transformation couldn’t proceed without him, didn’t materialize. After a brief dip, CSX stock (CSX) resurged to its historic high. And while it hasn’t taken part in the post-tax-cut market rally of the past few weeks, it still stands at around $58.50, almost precisely its level when Harrison went on medical leave.

Less is more

Investors are convinced that Harrison orchestrated an enduring transformation. In fact, it’s hard to think of any leader who so revolutionized a major company in just eight months as CEO. The numbers confirm Harrison’s success. This highly capital-intensive businessit might be called “capital on tracks”is now carrying slightly less freight with a far smaller base of railcars, locomotives, and expensive facilities. But in the process, it’s making a lot more money. For 2017, CSX’s “operating ratio,” its operating costs as a share of revenues, and the industry’s leading benchmark for efficiency, dropped from 67% to 64.8%, besting its chief U.S. rival. Norfolk Southern. CSX trains now travel 14% faster than last year, thanks to fewer delays and less congestion.

Its workforce shrank 12%, to 24,000, and CSX is now using around half the fleets of railcars and locomotives, to transport somewhat less volume, compared with the pre-Harrison era. Capital investments, the amounts needed to purchase and maintain equipment, dropped by a quarter, from $2.7 billion to $2.04 billion. Management is now saying it won’t need to buy much more capital stock for years, and that capex will drop to around $1.4 billion annually. The leap in efficiency doubled free cash flow to $1.7 billion.

“Very few railroads are showing operating improvements besides CSX,” says Fadi Chamoun, analyst at BMO Capital Markets. “We think Harrison got about halfway there for potential efficiency gains, around $500 million out of $1.1 billion potential if CSX gets to the levels of the Canadian railroads he used to run.”

To ensure CSX would get there, Harrison thoroughly transformed CSX’s top management. He pushed out the chief marketing and operating officers, and in October he named his long-time lieutenant from CN, James Foote, as COO. After his death, the board then chose Foote, a deep believer in precision railroading, to succeed Harrison as CEO. In early January, Foote hired another stalwart from the CN team, Edmond Harris, as EVP in charge of operations. “Jim had a great reputation in marketing,” says independent analyst Tony Hatch. “Ed Harris was COO at CN, he’s an operating guy who was there at the creation of the precision railroading story. His appointment resolves questions about their ability to deliver on the model.”

From Memphis to a mansion

My conversations with Harrison covered terrain as varied as the ocean-to-ocean territory traversed by the Canadian railways he once operated. Our first encounter came at CSX headquarters in Jacksonville, Fla., where Harrison was attired in his trademark dark blue suit and lavender pocket square, followed by a longer session at his 9200-square-foot mansion on a luxury golf course in Wellington, Fla., the equestrian capital near Palm Beach. During that meeting, Harrison wore a shiny red jumpsuit, and as in the first session, a two-foot oxygen tank on wheels followed his every step.

Harrison taught not in numbers, or even by giving a detailed explanation of precision railroading. For him, business was all about people and cultureand the inspiration required to get the troops behind you. Those were leadership qualities he knew he had in abundance, and he wasn’t shy about saying as much. His anecdotes might skip from recollections of splashing in Elvis Presley’s pool as a kid in his native Memphis to a New York lunch with Bill Ackman where he joined the campaign to attach CP, to out-dueling roughhewn labor leaders in Calgary. But he concentrated on three basic themes: His lifelong romance with railroading, his conviction that no model could match precision railroading, and his view that U.S. railroads could reverse their deep losses to trucks and ignite an historic upheaval by moving freight from the highways to the rails.

A rail worker uncouples cars in the Waycross hump yard to assemble trains.Photograph by Melissa Golden for Fortune
Photograph by Melissa Golden for Fortune

Harrison recalled dropping out of Memphis State to work in as a dispatcher in a switch tower for the old St. Louis-San Francisco Railway, known as the “Frisco.” “I’d work the 6 a.m. to 6 p.m. shift,” he said. “We’d have lunch boxes full of Rolaids, four packs of Marlboros, and nothing to eat. I’d pray for the clock to move in school. In the tower, I’d pray for it to slow down so that I could get done what needed to get done.” Harrison indeed saw beauty in an unusual place. “When I first saw the tower, it seemed to rise to the heavens,” he recalls. “If you didn’t love it you’d go crazy.”

The big bosses, he claims, didn’t know nearly as much about railroading as the folks at the yards. “My boss was arrogant, he knew nothing,” he said. “It was then I learned that how you arrange schedules and manage assets are the key, not chasing volumes.”

It was also clear that the North American railroads’ dismissal of precision railroading only fired Harrison’s drive to prove them wrong. “When I was at CP, we tried to buy CSX and NS,” he said. “They high-hatted us, didn’t show the appropriate degree of respect. People said, ‘He’s smoke and mirrors.’ That incited me.”

The top brass in North America, he claims, said that the dense, “spaghetti-bowl” networks, especially in the east, as opposed to the super-long routes in Canada, made the precision model unworkable. “Before I took over CN, the execs in North America used to say Canada couldn’t meet their standards!” he said, an assertion he proved ridiculous by making CN the continent’s most efficient carrier by far. “We all use the same railcars, and locomotives, and switching infrastructure. It’s all about de-toxing the corporate culture that says it can’t be done. I’ll eat the spaghetti!”

Harrison also viewed a giant, untapped opportunity for rail. He rues that trucks have taken a huge portion of what’s known as “merchandise” traffic from the railroads since the 1980s. Merchandise refers to mixed trains that carry wide varieties of goods from lumber, to construction materials, to chemicals, to paper, as opposed to “unit” trains that haul dedicated trains of either grain or coal directly from origin to destination. Harrison thought that the hub-and-spoke system made delivery times so long that rails couldn’t operate with the timeliness and precision to challenge trucks. Precision railroading and only precision railroading, he argued, could close the gap.

“The truckers are in trouble,” he told me. “They’re having all kinds of trouble hiring drivers. They’re fuel-inefficient, and the highways are crumbling. I-95 here in Florida is like Nascar. I won’t get on it. Your life is in your hands. You’ll either suffer from road rage, or get in a wreck.”

Harrison acknowledged that trucking will always rule for certain kinds of freight. “They’ll dominate for freight that’s perishable and that’s sensitive to damage,” he said. “We can’t win in all markets. But in most markets, we can beat the trucks on delivery speed” using precision railroading. In a typical barb, he put much of the blame on customers. “If you listen to customers, you’ll go bankrupt. They don’t like change. We should be charging different prices for different service, say $100 for 5-day service, and $1000 for 2-day services, delivering right from an assembly line to Macy’s door, skipping the warehouses.”

The industry leaders, he asserted, were missing the future. “Too many leaders are looking not at the future of rail but their future on the golf courses in the sky,” he said. And the looming riches from besting rail, he maintained, were gigantic. “If we take a 5% share off the highways, there’s not a bank big enough to hold all the money the railroads would make.”

“He’s right,” says Hatch, the railway analyst. “This is a big frontier that was lost with the interstate highways. But as the trucking industry gets less efficient, the railroads could regain much of that lost business.”

That view isn’t shared by many railroad experts. But Hunter Harrison built a career flummoxing the skeptics. His last run ensured that his lifelong work has taken hold in a new market, the United States, at unprecedented scale. It will be fascinating to watch whether the architecture that Harrison imposed in just eight short months is so potent that it can fulfill his wish of shifting the balance between trucking and rail. It’s a battle Harrison didn’t live to see. But the power of precision railroading survives, on both sides of the Great Lakes. We’ll soon see if they’ll secure the victory that this spellbinding executive, who saw continents criss-crossed by cold steel as his field of dreams, predicted to me while attired in that vermillion jump suit, tethered to an oxygen tank.

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