Morningstar | We expect CSX to continue improving its operating ratio, despite secular coal weakness.
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 two quarters of impressive OR performance, our confidence in Foote has increased.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.We believe Foote will try to replicate 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.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. For this reason, we model more modest ORs than what CP produces, but believe the precision railroading playbook will improve performance as rapidly as any other method.CSX provides rail-based freight transportation services. The company's principal operating subsidiary, CSX Transportation, Inc., provides a link to the transportation supply chain through its rail network, which serves centers in states east of the Mississippi River, the District of Columbia and the Canadian provinces of Ontario and Quebec. The company's CSX Intermodal Terminals, Inc. subsidiary owns and operates a system of intermodal terminals, primarily in the eastern United States and also performs drayage services (the pickup and delivery of intermodal shipments). The company's Total Distribution Services, Inc. subsidiary serves the automotive industry with distribution centers and storage locations.
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