Let’s hear it for precision railroading.
That’s the message of a recent report by Moody’s Investors Service, one of the leading debt rating agencies, about the system pioneered by the late Hunter Harrison at Canadian Pacific (NYSE: CP) and now being implemented at CSX (NYSE: CSX) . As the report notes, with it also in place at Canadian National (NYSE: CNI) and recently adopted by Union Pacific, there are fewer class 1 railroads not using it–Norfolk Southern (NYSE: NSC), Kansas City Southern (NYSE: KSU) and BNSF–then there are those who have embraced it.
The report pretty much finds one overreaching problem with precision railroading: customers may not like some of the things they need to do to adapt to it. “The model’s train schedule is established with the primary objective to enhance the efficiency of railroad operations,” the report said. “This narrows the scope to accommodate customer needs and may cause customers having to adapt to the railroad’s train schedule.”
Or as a railroad veteran recently said in private, Harrison’s attitude was to build his railroad, set up the schedule and tell the customers that they needed to work around the trains that were scheduled, not the other way around.
And it is leading to improvements in many of the benchmarks by which railroads are judged, according to the Moody’s review of what is happening in the industry where precision railroading is being adopted. The practice “may help reverse deterioration in average service levels,” the report said.
The Moody’s report spells out the changes CSX implemented to help it improve its performance, which resulted in an operating ratio of less than 60% in the second quarter. It was that quarterly earnings report, with an almost 10 point improvement in OR from a year earlier, that appears to have set off a great deal of soul-searching in the industry as to whether CSX was creating a model to be emulated.
The summary of what CSX has done, according to Moody’s: converting seven out of 12 hump yards–where trains are switched around through the use of humps that send trains down an incline to be re-connected with other equipment–to flat switching operations; sorting cars in blocks rather than individual cars; increasing train length 12.5%; and cutting the number of cars on the system, a big drop to less than 120,000 from 140,000 to 150,000 at the start of 2017. “As a result, CSX managed to increase railcar miles per day to 123.8 in the second quarter of 2018, a 12% increase from a year ago,” the report said.
The conclusion reached by Moody’s is blunt: “Service levels improve at railroads using precision scheduled railroading,” the report said. “Railroads that have implemented precision scheduled railroading have demonstrated a marked improvement in service levels by some measures.” Although CSX’ benchmarks might still be below the base year of 2013 that Moody’s uses for the purposes of comparison, its network speed is only 2% less than that 2013 level. Dwell time at CSX compared to 2013 is down 16% from its average in 2013, according to Moody’s.
Although the report gives precision railroading glowing reviews, it concedes that it “is not a panacea for service problems.” One of the supporting facts for that statement is that BNSF, which is not a precision railroader and is owned by Berkshire Hathaway, “has maintained good service levels that to date exceed its average 2013 levels.” However, for the companies where investor focus is increasingly on OR, some metrics may mean less to Wall Street than it does at BNSF, which has the long-term growth philosophy of Warren Buffet as its standard.
And that long-term outlook is another area of criticism that precision railroading comes in for. Moody’s tackles it head-on: “A material reduction in capital expenditures concurrent with the implementation of precision scheduled railroading may affect the railroad’s ability to maintain good service levels over time if sustained too long.” While it is not a capital expenditure, CSX cut its workforce by about 3,000 workers from the second quarter of 2017 to a year later, down to a little over 23,000.