CSX-freight-train

CSX Service Disaster Steps Up Scrutiny by Congress and the STB

Defiant CSX CEO Harrison insults shippers, blames employees and fails to respond to STB information demands—but Wall Street still loves him.

Extensive delays and communications breakdowns throughout the CSX Transportation rail system spurred the Surface Transportation Board to schedule a public listening session for Sept. 12 to hear from shippers and other stakeholders about service issues that have threatened to close factories and added significant costs to business operations.

The STB action arose from continuing service failures being brought to its attention by the railroad’s customers and members of Congress hearing about the problems from constituents.

Even Amtrak is blaming worsening delays in its Midwest passenger service on CSX regularly halting Amtrak’s passenger trains so that its freight trains may pass to make up for delays elsewhere. CSX denied it had deliberately done this, but Amtrak says it has evidence that the CSX actions were intentional and in violation of its contract with the passenger railroad owned by the federal government.

On Aug. 22, two days before the STB announced the Sept. 12 listening session, the nation’s largest coal mining company Murray Energy Company and its affiliate Foresight Energy asked the board to open a formal proceeding to investigate CSX service issues. Both companies also had filed suits earlier against CSX over what they say is its failure to live up to service agreements.

Accusing Harrison of having an “open disregard for the coal industry,” the coal shippers asked the board to investigate what they called CSX’s “brazen refusal to meet the demands for coal transportation.” In a July earnings conference call CSX CEO E. Hunter Harrison declared that coal has no future, although he said the railroad would continue to haul it.

A survey of CSX shippers by a financial services consulting company found that many frustrated shippers have been switching their freight off of CSX and onto  competitor Norfolk Southern and onto trucks wherever those alternatives are available. Because of geographical and commodity types, many shippers have no alternative but to use CSX.

At this point it appears that the only people who think well of Harrison are the hedge fund managers and investment advisors who are betting that CSX Corporation’s stock will rise to new heights after the railroad’s service issues eventually improve.

Not so sure about a rosy future coming down the road are the shippers who are suffering from the poorly-conceived and executed CSX cost-cutting program. Both the STB and Congress have been regularly communicating with each other while keeping a wary eye on the situation since at least July.

After the STB demanded detailed weekly performance data from CSX, Harrison chose instead to supply what the board termed were largely general “narrative” explanations, prompting the STB to repeat its demand for detailed metrics and statistical data.

The STB said acting chairman Ann Begeman had direct conversations with Harrison about the deterioration in CSX’s service, and all three board members have twice written to CSX to express their concerns and request information about CSX’s service recovery plans.

“It is not apparent to the board or interested stakeholders that service has improved,” the three board members wrote to Harrison in an Aug. 14 letter, citing “widespread degradation of rail service” across the CSX system. Begeman also cited reports to the STB by companies saying badly delayed shipments could force factory shutdowns.

Harrison has responded by announcing that the company will supply the STB and make public only a much more limited list of self-selected metrics, such as on-time train departure data.

 

This Is ‘Precision Scheduled Railroading’?

Earlier this year the CSX stock price soared in reaction to the news that it was hiring Harrison away from Canadian Pacific. Before that the 73-year-old Harrison had worked at Canadian National and was credited with improving the financial positions of both CN and CP, particularly in regard to their operating ratios.

Harrison was touted as a rail management genius because of his invention of a cost-cutting restructuring concept he calls “precision scheduled railroading”—which at this point appears to be neither precision, nor scheduled, nor railroading (to paraphrase Voltaire).

In only a few months at the helm of CSX, Harrison has cut 2,300 jobs, with 300 more slated to disappear by the end of the year. He has also sidelined at least 900 pieces of rolling stock and begun closing and rearranging switching yard operations.

Critics have pointed out that Harrison’s changes were much easier for him to implement at CP and CN, which are simpler systems than the complex 21,000-mile network operated by CSX in 23 states, the District of Columbia, and Ontario and Quebec.

Harrison’s behavior since news of the widespread service failures surfaced in July has belied his image as a smart, steadfast CEO in control of himself or of the railroad he leads. Harrison has even attacked the railroad’s own customers for complaining about poor service.

The Rail Customer Coalition, made up of dozens of industry associations representing industries ranging from chemicals to agriculture, wrote to Harrison to express its members’ concerns. His response was to dismiss the claims of service deterioration as “unfounded and grossly exaggerated.”

Then he doubled down: “Since coalitions do not have service issues, we do not intend to continue a discussion with you about the service we provide to our customers. We are also aware that not all members of your coalition were informed of your letter in advance and some do not agree with your position,” but he did not say who they were. By now so many individual shippers have reported serious service failures that Harrison’s responses seem cavalier, to say the least.

Harrison also has blamed CSX employees for contributing to the operational failures, stoking the fury of the railroad’s unions. He even suggested that it may have been his own workers who placed a bulldozer too close to tracks in South Carolina in early August, causing a derailment.

In an interview with Fortune magazine published Aug. 24, Harrison declared that, “Cultures change one funeral at a time,” and stressed the importance of “detoxing the culture by weeding out the nonbelievers” from the railroad’s workforce.

What remains to be seen is how far the STB and possibly Congress will go to remedy the situation. As the board explains on its own website: “The STB's power to collect railroad financial and statistical data is strictly limited by statute to information essential to the economic oversight of the industry.”

Its enforcement powers in regard to railroads are largely—but not entirely—confined to financial matters, including the collection of financial data and operational statistical reports, supervision of railroad ratemaking and scrutinizing mergers.

If the STB finds that a railroad has knowingly filed false reports, it can impose fines of hundreds of thousands of dollars. However, it has only done this once—in 2010 when CN was fined $250,000 for falsely reporting about delays in Chicago—reports that began during Harrison’s tenure as the CEO of CN before he left at the end of 2009 and which continued afterward.

Congress passed a law in 2015 that gave the board additional power to investigate rail service and delay issues. That law also expanded the board membership from its current three to five members, but President Obama declined to nominate the additional members, and Trump has yet to do so.

Shippers also are seeking from the board and Congress a requirement that railroads allow competing railroads to operate over their lines in a practice called competitive or reciprocal switching. The STB has only ordered the use of reciprocal switching to address a service failure in a single case that took place 20 years ago.

However, the STB’s bystander position could come to an end if the CSX crisis refuels efforts by some shippers to persuade Congress to impose stricter regulations on the nation’s four major railroads that today in many parts of the country offer the only available freight rail transportation service. The shippers seeking reform argue that this situation is not what Congress envisioned when it passed the Staggers Rail Act in 1980 to deregulate the railroads.

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