CSX, in a three-year strategy, looks at grabbing share from trucks after a solid 1Q

James Foote, the President and CEO of railroad giant CSX, had a message for the trucking sector: we’re coming after your business.

Not all of it, mind you. But in a call with analysts after a strong first quarter earnings report for CSX, Foote said taking merchandise business from trucks could be part of CSX’s long-term strategy, which was described as being one quarter done in a plan that runs out to 2020.

“The big area of opportunity is to convert those customers using trucks for reliability to your network on the merchandise side of the business,” Foote said. “Half the intermodal business is looking just for price, and the other half is looking for just price but at the same time a real high premium on service. So an area where we can focus on and do the best good for CSX is on the merchandise side of the business, and we will be transitioning.” However, Foote added that he expects that push to be more in the “out” years of the plan to 2020.

The potential customers that CSX would be looking at “know rail, they know trucks,” and they know how much additional they are paying for the service that a truck provides. “So you have to go in and sell the business and sell them on the idea of converting,” Foote said. “You have to provide it to them that you can handle their product and do it in the same way, and the same level and efficiency that they get out of a truck.”

The customers that might be candidates for such a conversion are not those who need their product in 24 or 48 hours, but rather those who “need it there with a degree of reliability so that if you say it’s going to be four days, it’s there four days 85% or 90% of the time. That is how you win it back.”

But Foote said on repeated occasions during the call that the CSX plan, which was presented to analysts several weeks ago, does not include the idea of chasing business for the sake of chasing it.

“I do not have a scorecard in my office that says road-to-rail and how many did I get today,” he said. “That is not a game that is going to make me any money.” Taking a truck off the road and on to rail that is not in the “right” corridor “has no value to me, or to the customer. I need to provide value to him and I need to make sure I get paid for that.”

Some of the numbers released by CSX on the changes in the company were impressive. For example, train velocity is up from 14.2 mph in the first quarter of last year to 17.3 in the corresponding quarter of 2018. It jumped significantly also from the fourth quarter of 2017 to the first quarter, up from 16.2, during a quarter that is always considered problematic for railroads largely due to weather.

CSX’ train length in the first quarter was 6,886 feet; a year ago, it was 6,560 feet. Terminal car dwell time dropped to 10.4 hours from 11.5 hours. And the operating rate jumped to 63.7% from 73.2%, an enormous improvement.

The most significant improvement from the perspective of investors is that the company saw a roughly 4% drop in revenue, to $2.876 billion from $2.869 a year earlier, but saw its net earnings rise to $695 million from $362 million, a 92% jump

The revenue decline was largely across the board, with coal down 4% and agriculture and food products down 8%.

But Foote expressed several times during the call that a short-term drop in revenue should have been expected in the “precision railroading” strategy that the company is implementing. It involves several pieces, but dropping non-profitable business on numerous routes, and shifting to more of a point-to-point model, is at the heart of it. “What we’re trying to get to is taking something that is moving in a straight line, rather than a crooked line, is less miles and getting paid the same amount for doing it” is how Foote described it.

Foote said he expected these changes would make the drayage community more satisfied, because the CSX system is becoming more reliable. At the same time, CSX is becoming “more clear…in what we expect of our customers.” And that means that prior policies that might have waived detention fees won’t be so easily overlooked in the future. “There’s an intense focus on the volume of infrastructure and we are not going to just give that away anymore,” Foote said. It isn’t being viewed as a profit center–“we don’t want to gouge our customers”–but rail cars sitting in an intermodal yard that are not being unloaded by a third party sets up a situation where “we expect to be compensated for either the use of our track space or the use of our asset.” Such practices are standard in the industry, Foote said, but from now on CSX will be “applying them in a more uniform and consistent manner.”

CSX’ service had deteriorated so much by last summer that the federal Surface Transportation Board required the railroad to file weekly reports on the status of its network. But Foote said the improvements have been enough that the reporting requirement has been lifted.

An analyst asked Foote if he and other CSX executives continued to be on an “apology tour” for the railroad’s performance. “It is not an apology tour anymore,” he said. “That is cancelled. There is nothing to apologize for.”

And if the volume picks up, will there be new hires to help propel it? Foote was unequivocal: no. Several times he noted that the company had about 800 fewer locomotives, eight fewer hump yards, 20,000 fewer rail card and 4,000 fewer employees. But better efficiency in the current network will allow growth without a huge amount of further investment, he said.