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Morningstar | CSX Continues to Implement Precision Scheduled Railroading to Strong Operating Ratio Benefit

CSX's CEO and railroad turnaround legend Hunter Harrison died Dec. 16, 2017. When he took medical leave, we tempered our operating ratio improvement expectations from 60% to 62% in 2021. We believed Harrison would drive improvement at a fast pace. Harrison's replacement as CEO, James Foote, knows Harrison's precision railroading model from years working at Canadian National, but this is Foote's first opportunity to lead a Class 1 railroad. Upon his appointment, we wanted proof that Foote can carry on the transformation Harrison began at CSX before we project results as rosy as what we expected under Harrison, and after a years of impressive OR performance, our confidence in Foote has increased. Indeed, under his leadership, CSX in 2018 reached a U.S. Class I railroad operating ratio record of 60.3%.Harrison was one of a kind. Prior to his joining CSX, we named Harrison as Morningstar’s 2013 CEO of the Year for turning around three railroads during his career. Most impressively, Canadian Pacific under Harrison's leadership improved its OR from 81.3% in 2011 to 58.6% in 2016--nearly 23 percentage points of improvement. CSX's OR had been range-bound between 69.4% and 71.5% for seven years, even as other railroads improved. In fairness, CSX lost about 45% of its highly profitable coal business during this time yet still maintained a respectable OR.Foote has replicated Harrison's playbook at CSX by implementing precision railroading and rightsizing all assets, including human resources, real estate, sorting yards, motive power, and rolling stock. Fewer assets can lead to greater velocity, and resulting improved service can open intermodal opportunities. Harrison made many right-sizing changes during his brief time at CSX, and Foote has not missed a beat.Still, CSX operates a complicated spiderweb network in a densely populated area. This differs from the rails Harrison and Foote ran in Canada, which are mostly linear and run through remote locations. Nonetheless, we believe the precision railroading playbook will improve performance more rapidly than any other method.