Mar 21, 2023
CSX’s New CEO Has a Big Idea for Railroads: Carry More Freight
(Bloomberg) -- Joe Hinrichs had never worked for a railroad when he was named chief executive officer of CSX Corp., but the company is counting on his outsider perspective as the insular industry is beset by challenges.
Hinrichs, 56, left a two-decade career at Ford Motor Co. after losing out on the CEO job to Jim Farley and came to CSX, the third-biggest US railroad by revenue, in September. His only previous experience dealing with railroads came as a customer, when he led Ford’s logistics department two decades ago.
Since being deregulated in 1980, railroads have pleased investors with a series of mergers and healthy profits that drove stock gains. But the same things that satisfied Wall Street have grated on customers, who say service has suffered, and employees, who say the drive for efficiency has cost jobs and exhausted workers who remain. On top of that, rail safety is under scrutiny following a Norfolk Southern Corp. train derailment in February that spilled chemicals in a small Ohio town and sparked a political furor.
Hinrichs says he wants to repair broken relations with union workers and customers and provide consistent, reliable service that will attract more businesses to send their freight over rails instead of roads. US railroads hauled 25.4 million railcars last year, down 13% from a peak in 2006, as carriers focused on boosting the bottom line by wringing out efficiencies and controlling costs.
“Our emphasis is on the employees and the customer service,” Hinrichs said in an interview in his 15th-floor office at CSX’s Jacksonville, Florida, headquarters. “If we take care of the employees and they’re engaged and excited and motivated to deliver great service to our customers, the shareholders will be rewarded for that.”
Such a change would reverse how railroads have been run for decades. Hinrichs wants to increase rail carloads at the same rate as the US economy, which expanded 2.1% in 2022. In the past, railroads have often tied growth targets to US industrial production, which tends to lag a broader economy driven by consumer spending, and failed to hit them.
“Over the next 10 years, certainly the rails have to show that they can grow,” said Ari Rosa, an analyst with Credit Suisse Group AG. “If the stocks are going to work, you almost need to have volume growth to make that happen.”
It’s a show-me story for skeptical investors and shippers. Shareholders will have to wait to see if the shift will end up dragging on profits. Companies have been trying for years to get railroads to haul more of their goods, said Herman Haksteen, president of the Private Railcar Food and Beverage Association, who has set up meetings with railroads and large shippers including PepsiCo Inc., Kraft Heinz Co. and General Mills Inc.
“They all wanted to do more business with the railroads and, and it was just frustrating,” Haksteen said. Railroads “were nothing but defensive.”
For more than five years, US railroads have been slashing costs, shedding workers and parking locomotives to increase operating margins to record levels, spurred by the success of late industry legend Hunter Harrison, who introduced so-called Precision Scheduled Railroading at Canada’s two largest railroads before a whirlwind nine-month stint atop CSX. Harrison died in 2017.
Read more: Wall Street’s Favorite Way to Run a Railroad Is Under Fire
CSX has been one of the most profitable railroads in North America and returned more than $20 billion to shareholders through dividends and share buybacks over the past five years. The shares have gained about 76% through Monday since Harrison began his turnaround six years ago, outpacing a 66% increase in the S&P 500 Index — though CSX has trailed the broader market since Hinrichs was announced as the next CEO on Sept. 15, partly because of the drag on the whole industry following the Norfolk Southern chemical spill.
Hinrichs said it’s essential to motivate employees sapped by layoffs, onerous work rules and acrimonious labor negotiations that required Congress to intervene in December to avoid a strike. He has relaxed a punitive attendance policy and offered paid sick leave, which had been rejected in a five-year labor contract negotiated before he took over last year. Norfolk Southern, Union Pacific Corp. and BNSF Railway Co. have since followed CSX’s lead to offer paid sick days.
Additionally, CSX won’t be as quick to furlough workers during a downturn to make sure the resources are there to maintain service, Hinrichs said. The industry had struggled to hire and retain workers, including train engineers that typically make more than $100,000 a year.
“If the employees don’t feel appreciated, valued, respected and included, then they’re less likely to give you that extra effort that you want to have to serve the customer,” said Hinrichs.
At Ford, Hinrichs had to deal with the auto workers union and employee morale. He left the company as a highly regarded executive credited with transitioning the company’s F-150 pickup to an aluminum body. Still, he was in charge at the time of a botched rollout of the revamped Explorer SUV that hurt Ford’s earnings.
“I’m proud of my contributions to Ford and my career there, and I’m excited about what we’re doing at CSX,” Hinrichs said.
Trucks vs. Trains
The dearth of freight growth has been a drag on the US economy and has forced shippers to use more trucks, which are more dangerous than trains and emit four times the greenhouse gases, said Martin Oberman, chairman of the Surface Transportation Board, an independent agency that regulates railroad operations.
Although the Ohio derailment has ignited public uproar, the Bureau of Transportation Statistics documented last year that 94% of all hazardous material spills and incidents occurred by truck and only 1% by rail, Oberman said. Large trucks killed 4,444 people and injured 147,000 in 2020, according to the Federal Motor Carrier Safety Administration. For the same year, railroads had 1,666 accidents, including 1,116 derailments, that killed six people and injured 72, according to the bureau. While truck wrecks have been rising, rail accidents have dropped by half since 2004.
In the push for companies to reduce their carbon footprint, switching from truck to rail has an immediate impact. Rail makes up about 28% of US freight movement by ton-miles but only accounts for 2% of US transportation emissions, according to the Department of Energy.
“There’s every public policy and economic reason for the railroads to increase their movement of freight and for us to rely as little as necessary on a truck,” Oberman said in an interview.
Hinrichs said his desire to shake things up at 195-year-old CSX is about capturing the lost opportunity to increase shipments over the past decade and a half. Near a wall-mounted picture of his two red Hacker-Craft wooden boats, he explained with a hobbyist’s enthusiasm the history behind model CSX railcars perched on the cabinets of his office — and his fervor to tinker with his hard-charging predecessor Harrison’s legacy.
“It’s all about keeping things moving,” he said. “The more fluid we are, the better running we are, the better service we can provide.”
--With assistance from Keith Naughton.
©2023 Bloomberg L.P.