Best Foote Forward
CSX's CEO James Foote leads transformation of freight carrier
CSX seemed about to derail just three years ago. Now it's leading a transformation of America's railroads, but can it ride the rails to growth?
It’s hard to overstate the mess Jim Foote stepped into when he became an executive at CSX in October 2017. The freight carrier’s new CEO, Hunter Harrison, on the job for just seven months, had trashed the company’s traditional operating methods, going all-in on his own revolutionary way to run a railroad. Initially, as Harrison instituted his changes, on-time performance fell. Trains ran slower. Disgusted customers representing much of American industry were warning Congress that CSX’s “chronic service failures” threatened the economy. Federal railroad regulators demanded regular reports on service.
A CSX corporate derailment would have added an ignominious chapter to Florida’s rich railroading history. Henry Flagler’s railroad, living on as Florida East Coast Railway, won the most fame for moving people and development down the peninsula, altering Florida forever. But others had moved in, and the evolution of Atlantic Coast Line (which moved to Jacksonville from Wilmington, N.C., in 1960) into CSX had long made Florida a CSX state. The railroad is the only Class 1 carrier — the largest class of railroads — serving most of the state. Its headquarters and the dispatching and operations nerve center for its 23-state network are in Jacksonville.
For all the growth, however, railroads hadn’t kept up with the state’s development. Florida grew to third nationally in population but, according to the Association of American Railroads, ranks 24th in rail miles and 32nd in rail freight tonnage. Trucks, more expensive for shipping but more reliable and faster, had come to control freight transport in Florida as in America. The slow, unreliable, inefficient, hidebound rail industry was ripe for disruption.
For CSX, it arrived in 2017. New York hedge fund investor Paul Hilal acquired a stake and moved to oust CEO Michael Ward, a CSX lifer revered in Jacksonville for his philanthropy and service to the community. To replace him, Hilal wanted Harrison. The pivotal figure in the contemporary rail industry, Harrison had headed the Illinois Central railroad in the 1990s, where he created an efficiency-driven model called precision scheduled railroading.
Before Harrison, major railroads didn’t operate on fixed schedules. They shuffled railcars among yards, from customer sites down spokes to hubs, cobbled them into trains and moved them out to other hubs and then out to customers, again with much shuffling and switching and labor.
Under Harrison’s approach, freight trains run according to a fixed schedule, economizing the use of both labor and capital equipment like locomotives. The approach emphasizes point-to-point service rather than hub-and-spoke, which increases efficiency and profits for the railroad. But since Harrison’s methods require fewer workers, they anger unions. And since precision railroading focuses on return on assets and cutting unprofitable service, some customers lose service and are left unhappy.
Old timers said Harrison’s method wouldn’t work. It succeeded wildly. Canadian National Railway acquired Illinois Central in 1998 in large part to secure Harrison’s talents. When Harrison arrived at Canadian National, he found a fellow veteran of Midwestern rail — Foote.
Foote is a native of Superior, Wisc., a place he remembers as so cold that moving to Chicago felt like moving to Florida. His father, grandfather and uncles all worked for the railroad. Foote joined the Soo Line Railroad at 18, repairing locomotives by night, studying at the University of Wisconsin branch campus by day.
“You either were a farmer, you worked for the railroad or you worked in the grain shipping industry there on Lake Superior,” Foote says. “The big shot in town was the State Farm insurance agent. I went to college so I wouldn’t have to work in the railroad business.” At that goal, he failed. Foote moved into railroad management and later to Chicago, where he went to John Marshall Law School at night and worked days for the Chicago and North Western Railroad.
Over the course of 48 years in the industry, Foote has run finance, law, labor relations, regulatory affairs, corporate communications, operations, sales and marketing departments. He joined Canadian National in 1995 in investor relations for the privatization of the government-owned railroad, the largest initial public offering in Canadian history. Rising to executive vice president of sales and marketing, Foote became a player on Harrison’s “dream team” — a group of executives who went on to become railroad company CEOs and senior executives and transformed other railroads according to Harrison’s model.
“It seems like all the major rails have some level of Canadian National heritage in them now from a management perspective,” says Amit Mehrotra, a Deutsche Bank analyst.
At Canadian National, Harrison again built a more profitable, efficient railroad using his model. He retired in 2009, leaving behind happy investors — and sometimes angry shippers and workers. He left retirement to repeat the performance at Canadian Pacific.
Then came CSX. Harrison, in his early 70s, was in ill health, but CSX shareholders voted to hire him in March 2017. The stock leaped from $34 to $55 on his ascension.
Most of former CEO Ward’s executive team left. Harrison wasted no time scrapping CSX’s operating model, lopping off money-losing routes by the hundreds, closing railyards, parking locomotives and shrinking the workforce, while pushing scheduled, point-to-point service.
Initially, performance metrics improved, but then they declined. Individual manufacturing and business customers weren’t getting their resources in and product out. “In some cases they were close to having to shut down production,” says Scott Jensen, a spokesman for the American Chemistry Council. Under the umbrella of the Rail Customer Coalition, 44 U.S. business groups, including the heavyweight auto, steel, chemical and agricultural industries and smaller groups such as the Manufacturers Association of Florida, complained to Congress and the U.S. Surface Transportation Board.
Steve Halverson, chairman of Jacksonville design-build firm Haskell and a CSX board member, says CSX’s customers “were unhappy. The regulators were unhappy. The employees were uncertain about where we were going.”
Foote, meanwhile, had been a Florida resident for a decade and working as the CEO of a company that re-engineers locomotives to run on natural gas rather than diesel. Acquiring a home in Jupiter in Palm Beach County, he had kept in touch with Harrison, a horseman who owned a home in nearby equestrian mecca Wellington. The two were occasional golf partners. Harrison "was really a fun guy to be around,” Foote says.
Foote acknowledges that Harrison’s moves at CSX “could have been done more delicately. Mr. Harrison was a very impatient man. It’s kind of like people changing planes in Philadelphia on the way to Heathrow, and all of a sudden the guy goes, ‘Mr. Harrison said he’s not going to Heathrow anymore and the plane you wanted to go back from Philadelphia, he doesn’t go there anymore either.’ So we kind of pissed off a lot of customers.”
Foote, however, remained a devotee of Harrison's methods and wanted to see the transition through. He offered his services in handling what Harrison didn’t enjoy — customer and regulatory issues — leaving Harrison to transform operations. Halverson interviewed Foote and came away impressed with his demeanor and knowledge of the Harrison model and customer service. The trade press, though, raised questions about the depth of Foote’s operations experience.
The railroad continued to improve its performance, but eight weeks after Foote joined CSX, Harrison died at age 73 in Wellington. A retrospective in Trains magazine called him “respected, sought after, feared and loathed in equal measures.” Shareholders certainly appreciated him. CSX’s market cap had risen from $36 billion in January 2017 to $50 billion at his death.
Foote, given the “battlefield promotion” from COO to CEO, cemented the turnaround in a matter of months, in what Halverson calls "an extraordinary example of leadership. Jim is a great unwritten story in Florida business. We are fortunate to have Jim Foote in Florida."
Foote rejects as false the premise that scheduled railroading trades customer service for efficiency. He immediately met with major customers and promised better service. CSX customer service metrics soon reached record levels. Halverson says Foote also was “laser focused” on safety issues and pushed CSX from industry laggard to leader. Also, Halverson notes, railroads are one of the few remaining private sector industries that are heavily unionized and have a history of labor-management mistrust and conflict. Foote focused the relationship on partnership, Halverson says.
"The results measured in terms of workforce engagement have been substantial. Jim stood essentially alone among his rail CEO peers in forging new directions in labor management,” Halverson says.
In a short period of time, worker safety became best in class. Average train speeds increased. Service improved dramatically, Deutsche Bank’s Mehrotra said in June.
As have CSX’s financials. Compared to the year before Harrison started, annual revenue increased 7%, or $800 million, to $11.9 billion. Operating income jumped 47% to nearly $5 billion.
Under Ward, the company had realized about 30 cents of profit for each dollar in revenue. Under Foote and scheduled railroading, CSX shocked the industry by generating 41 cents in profit for each dollar in revenue.
“It’s just process-engineering,” Foote says. “It’s just doing the same thing that UPS and everybody else involved in logistics does on a daily basis: How can I move a package from A to B as quickly and as efficiently and effectively as I can and do it when I said I was going to do it so the customer is satisfied? That’s all it is. And for years and years and years the railroads never looked at running like that.”
CSX now moves $800 million more in goods a year with 33% fewer locomotives, 21% fewer railcars and 18% fewer workers. That translates to 1,200 fewer locomotives, 31,000 fewer railcars and 4,700 fewer workers. CSX now has fewer employees (20,438) overall than it had of just union employees (22,000) in 2016.
Shareholders did well. CSX raised its dividend and bought back $10 billion in stock to cut CSX’s outstanding shares by 16.5%.
Class 1 railroads in America have followed CSX’s lead, but CSX is further along. This year, it set an industry quarterly record for efficiency. “CSX is still on the cutting edge of that,” says Brett Wetzel of Wisconsin-based transportation and energy management company Breakthrough, which helps shippers manage supply chains.
Take it or leave it
Scheduled railroading doesn’t make everybody happy. In the new era, customers in markets with concentrations of industry and business get more reliable, faster service — though not cheaper service, says Peter Swan, associate professor of logistics and operations management at Penn State Harrisburg. And some customers outside profitable markets get left behind. Some have no ready alternative to rail for shipping. “You offer what fits with your operating plan,” Swan says of the scheduled railroading mindset. “If it suits the customer, that’s fine. If it doesn’t, that’s fine too. It’s been of great benefit to the railroad industry. I think it’s difficult to show any significant benefit to the shippers.”
Florida cities and railyards have escaped heavy cuts. CSX reduced service between Miami and some cities, and container traffic to Tampa and Miami also was impacted, the Journal of Commerce reported in 2018. Breakthrough keeps track of railroad moves affecting its shipper clients. It reports CSX in Florida cut roughly 60 of 200 “lanes” its customers used. (Lanes are a paired origin and destination.) But a suitable substitute lane usually could be found within 30 or 40 miles. Nationally, closed lanes affected just 4% to 5% of client volume, says Wetzel, Breakthrough’s director for applied knowledge.
Efforts to obtain interviews with major Florida companies about their CSX service experience weren’t successful. One that did respond, U.S. Sugar, which ships on its own railway to Sebring to connect with CSX, says, “they have been good transportation partners with U.S. Sugar over the years.”
Elsewhere across the nation, the new precision-railroading normal has seen most customers adjust, but some continue to press regulators and Congress with complaints. The threat of system failure has passed, the American Chemistry Council’s Jensen says, but “I wouldn’t say it’s gotten better. It just sort of keeps shifting into other areas, different types of problems.”
Eric Byer, CEO of the National Association of Chemical Distributors, says a 25% drop in rail orders because of COVID-19 boosted rail’s on-time deliveries dramatically. “It is likely once the economy opens back up that the underlying issues will remain and reassert themselves,” he said in June.
Meanwhile, Foote and CSX have started to revive the company’s reputation in Jacksonville for civic engagement. Time was, for example, that CSX and employees in the annual payroll deduction giving campaign donated $1.2 million to United Way Northeast Florida. That fell by more than half as CSX employment shrank and executives left. (A drop in United Way giving is hardly unique to CSX.) However, from Foote on down, “everyone has signaled they’re interested in deepening the relationship,” says local United Way CEO Michelle Braun. CSX has increased giving to a veterans program — an important issue at a company and city with lots of veterans. Companywide, CSX donates some $10 million, including more than $1.6 million to Florida-based groups. Foote also has joined the Florida Council of 100 and Jacksonville Civic Council business groups.
Looking ahead, Foote wants to prove that CSX’s transformation — “fixing the railroad” — was a precursor to growth. “I want it viewed as a dynamic, progressive growth company,” Foote says. Before Harrison, customers were in the dark about when rail shipments would arrive. Now, customers can track their goods like an Amazon package as they move with truck-like reliability. Freight time from Chicago to Florida has been shortened to 2½ days rather than eight or nine days, he says. CSX wants to win business from Florida manufacturers, goods shippers, agriculture and in general recapture business lost to trucks — a potentially important shift in Florida and other states facing highway capacity issues.
“We look at Florida as a big opportunity. All you’ve got to do is drive on 75 or 95 to know what I’m talking about. It is dominated by the trucks,” Foote says. “I-95, 4 and 75 — I would like to have it truck free.”
Railroading: Traditional Practices
- Focus: Sorting the Cargo
At the railyard, the freight cars sit on sidetracks and are sorted and moved about depending on cargo and destination. Traditionally, railroads preferred to operate two kinds of freight trains: “Unit” trains where every car carried the same kind of freight — coal, for example — or “mixed” trains with a variety of goods.
- No Set Schedule
Under the traditional method, railroad companies don’t operate freight trains according to a schedule. For example, on a given Thursday there might be a freight train from Jacksonville to Washington, D.C., but there might not be one. When traffic managers felt they had enough goods going to a location to operate a train profitably, they assembled the train and sent it on its way. Meanwhile, multiple crews and locomotives shuttled cars around the railyard in the course of putting together a train.
- And the Customer?
A given freight car might sit for days before it was coupled onto a train. On its way to its final destination, a train might make any number of stops depending on where customers wanted their goods to go. At a hub railyard, a car might be uncoupled from one train and switched to another depending on its destination.
For the customers, the overall lack of reliability was bearable as long as freight costs were reasonable and goods ultimately got where they needed to be.
Scheduled Railroading Practices
- Focus: Destination, Not Type of Cargo
Rather than run traditional “unit” and “mixed” trains, combine cars headed the same way regardless of cargo.
- Set Schedules, Fewer Trains, Fewer Workers
Trains run from point-to-point on a scheduled service, with fewer, longer trains moving faster — instead of shuttling cars from yard to yard, switching and culling cars from train to train.
The emphasis is on avoiding having to move freight cars around. That emphasis lessens the need for both workers and capital equipment like locomotives. In an area served in traditional railroading by two locomotives by day, precision railroading eliminates one and has crews in shifts work it day and night. Fewer employees means fewer familiar trainmasters and salespeople for customers to contact with issues.
- And the Customer?
The goal: Close superfluous yards, eliminate unprofitable routes, service light-volume customers less frequently or drop them altogether.
For customers, scheduled railroading brings reliability and faster services, but less flexibility and more pressure. Customers continue to be charged for leaving cars idle, but the more rigid timetables pressures them to move faster with loading and unloading.
“It is also important to understand that PSR as it is practiced is all about maximizing ROI. Customer service is not what drives the system. Efficient use of resources is what drives it. So trains, locomotives and crews are scheduled to minimize the number of crews needed, the number of deadheads (crew repositioning), and the switching of cars (especially capital intensive hump yard switching). So trains are run in the same direction at the same times to keep everything in balance.”
— Peter Swan, Penn State Harrisburg
Read more in Florida Trend's August issue.
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