CSX: Service metrics are better, traffic's up. The challenge, Maintaining the momentum

by Jeff Stagl, Managing Editor

On the window ledge in Michael Ward’s top-floor office is a sign stating his golden rule: No whining. CSX Corp.’s chairman, president and chief executive officer points to it if a manager begins to make excuses why he or she can’t change something to improve operational and financial performance.

Not that Ward’s been hearing much griping of late. CSX has spent the past few years implementing an operating plan and adding capacity to improve service metrics, which bottomed out in 2004, when the railroad couldn’t keep up with spiking traffic. Now, velocity is up, and cars on line and terminal dwell times are down. Plus, revenue and income have risen to record levels, and the company’s surface transportation operating ratio is dropping into the low 70s.

Mid-level managers and rank-and-file employees who believed the ONE Plan was going to be the next operational-turnaround idea to tank — as had happened with a couple of other strategy shifts during the past decade — have seen CSX’s on-time performance percentage climb from the low 40s to mid-70s since the operating plan was rolled out in fall 2004.

The plan has helped mesh the railroad’s north and south networks, which since the 1999 Conrail integration had unique operating characteristics and different operating plans. Workers are noticing they’re handling cars fewer times, cars are more consistently on the right train, terminal handlings are down, locomotives are available when needed and yards aren’t congested.

And more employees have
become plan believers. There’s a buy-in that each worker is accountable for his or her role in moving trains, every task can be improved and audibles no longer should be called in the field, says Ward.

“First, it was a matter of inspiring our people to execute the plan,” he says. “Now, they’re convinced it’s making their life better.”

Workers also are gaining confidence in Ward’s leadership. President and CEO since October 2002, and chairman since January 2003, he’s a one-of-their-own former field worker who’s as unassuming now as he was when he took the top job.

In addition, Ward’s senior management team, which includes former Norfolk Southerner Tony Ingram, who helped champion that road’s Thoroughbred Operating Plan, is the most cohesive team employees have worked under since the revolving-door days of the early 2000s.

“We’re all on the same page,” says Ward. “We had too much of a change in leadership in the past.”

Now, workers are motivated and contributing to a well-performing railroad instead of toiling for one that’s mostly struggled to provide reliable service. And CSXers are relieved industry observers, analysts and the media no longer are identifying the railroad as one of two poor-performing Class Is.

Performance indicator
The not-the-same-old-CSX service is being noticed by shippers, too. In a Bank of America Securities’ fourth-quarter survey of 1,400 industrial shippers, 52 percent of the respondents said the railroad’s service had improved compared with 12 percent in a fourth-quarter 2005 survey.

Consistent service will help CSX convince more shippers to divert traffic to the railroad, says Ward.

“Three years ago, it was ‘Let me help you find your car,’” he says. “Now, we’re talking to customers about getting new business.”

To keep convincing shippers, workers — and investors— that CSX is on the performance-improvement path to stay, Ward and his senior management team are trying to live up to a slogan displayed on pickup trucks and other company vehicles: quality in motion. Rather than allow the company to become complacent or take a step back, they plan to continually adjust the ONE Plan to meet shippers’ needs, expand terminals and yards, add and upgrade track, and acquire more rolling stock to keep CSX on the march toward its reliable-service destination. And they’re willing to spend the capital necessary to do so — to the tune of $2.8 billion in 2006 and 2007 combined.

“We have morale and momentum. We’re better prepared to take on more traffic and have better recoverability. [And] we see the critical improvements we need to make to maintain our forward charge,” says Ward. “We want to be more truck-like and price for the value we’re creating.”

But it’ll take time to create that level of value. After a banner third quarter, CSX is the most likely Class I to miss its fourth-quarter earnings target, according to a Bear Stearns report.

The railroad faced several earnings headwinds, including a $45 million year-over-year fuel hedge, a steeper-than-expected volume decline and management’s commitment to the ONE Plan regardless of cost overrides, Bear Stearns said. On Dec. 13, CSX’s stock price dropped $1.62 per share — or 4.4 percent — to $35.04 after the Wall Street firm downgraded the railroad’s stock from “outperform” to “peer perform.” On Dec. 20, the stock was trading at $33.61 per share.

And although the ONE Plan is gaining traction and helping to improve CSX’s operations, the railroad has a ways to go, Bank of America Securities analyst Scott Flower believes.

“CSX has historically provided inconsistent and, at times, mediocre service, which makes the improvement in some ways against a lesser hurdle,” he said in a summary of the firm’s fourth-quarter shipper survey.

On-time performance, which is averaging 77 percent, has lots of room for improvement, Ward acknowledges. But unlike most Class Is that measure times of arrival plus two hours, CSX measures on-time performance to the minute, he says.

“Consistency is the most important thing,” says Ward. “We want to build a conveyor line-type railroad.”

Senior executives are counting on the ONE Plan to drive service consistency. Designed in conjunction with MultiModal Applied Systems Inc., the plan is in place for most long-haul traffic. Now, CSX managers are trying to develop hundreds of local service plans.

“That last mile is always a challenge in this industry,” says Ward. “We want a more satisfied customer, so we’re agreeing on [delivery] windows that make more sense.”

Railroad managers also are emphasizing a “right car on right train” rule so freight-car blocks are accurate.

“We want 100 percent sorting at terminals,” says Vice President and Chief Transportation Officer David Brown.

Small fixes, big payoff
Supervisors at CSX’s Rice Yard in Waycross, Ga., can’t yet claim that accuracy rate, but they can vouch that the ONE Plan has helped reduce re-humped cars from about 300 to 100 daily and cut dwell time from 32 hours to 27. The four-and-one-half-mile-long hump yard, which classifies 2,400 to 2,700 cars and builds 30 trains per day, also includes a locomotive service center and heavy repair shop, and car repair facility.

“There isn’t one magic thing. It’s a lot of small fixes that all add up,” says Jacksonville Division Manager Bob Frulla, who’s responsible for the yard.

For example, Rice Yard workers previously classified small blocks of cars headed to Jacksonville, Orlando, Tampa and Miami. Now, those blocks have been relocated to smaller and less busy yards.

Rice Yard used to be so congested, supervisors frequently held trains out of the facility. But that’s a “rare occurrence now” because the railroad eliminated a number of intermediate terminal handlings, says Frulla.

“I used to hear from a customer in Orlando at least once a week, but I haven’t heard from them in about eight months,” he says, recalling a shipper who grew frustrated with late-arriving cars from the Waycross yard.

To continue to boost on-time originations — which were projected to average 88 percent in 2006 — yard managers will install a camera system later this year that will save time during shoves and ensure rules compliance. Workers won’t have to walk to the end of a train to protect a shove, says Frulla.

Managers also are trying to ensure locomotives receive minor repairs and are refueled at the service center within 90 minutes, and opposite-facing units are paired so trains can move in either direction.

A conscientious commitment
Yard managers’ efforts are helping the network operations center place the railroad’s 2,800 road locomotives in the correct location, says VP of Network Operations Jim Snyder. As a result, CSX is meeting committed times of arrival — or the delivery window promised to customers — an average of 62 percent of the time compared with a percentage in the 40s two years ago.

“It’s a balance to make sure a train is made up and a crew is called on time, the right car is on the right train and a locomotive is through the shop,” says Snyder.

That balance can be tipped by an unexpected event, like severe weather. But network recoverability — which CSX hasn’t had post-Conrail — is evident now, says Snyder. In late November, the Anacostia Bridge near Washington, D.C., remained out of service for three weeks because of support structure repairs, but didn’t clog area traffic — which was re-routed — or hinder locomotive distribution or train originations for days afterward, says Snyder.

“Things that we had talked about doing for years are being done now,” he says.

In with the new
That includes implementing a next-generation computer-aided dispatching system.

In October, Union Switch & Signal Inc. completed a three-year project under which the supplier installed personal computer-based dispatching software featuring train authority capabilities that enable CSX’s 400 dispatchers to manage train operations from any dispatching center.

“It’s a more flexible system,” says Snyder. “Dispatchers have a mouse and can go faster. They used to only use the keyboard before.”

Technology upgrades aimed at boosting productivity are on tap at CSX Intermodal, as well. The company plans to install wireless radio frequency (RF) systems — currently used at eight terminals — at another 12 terminals by 2007’s end. Installed on lift equipment, the RF systems monitor container and trailer locations in real time.

“It tells the driver where to go in the terminal to find their load, so you get better throughput,” says James Hertwig, president of CSXI, which handles 29 percent of CSX’s surface transportation traffic and generates 16 percent of the company’s annual revenue. “It’s helping to cut out one-third of the dwell time.”

CSXI also is analyzing optical reader/recognition systems designed to speed up gate processing.

Loose purse strings
CSX senior execs have been willing to invest in technology upgrades for both CSXI and CSX Transportation. In 2006, CSX budgeted $80 million for technology — compared with an annual average of $55 million between 2000 and 2005 — as part of a $1.4 billion capital spending plan. Other 2006 expenditures included $751 million on infrastructure improvements (up 26 percent from the 2000-2005 average); $256 million on capacity expansion (up 251 percent); $201 million on locomotives (up 16 percent); and $132 million on freight cars and containers (up 45 percent).

CSX is budgeting a similar $1.4 billion for 2007, providing CSXI capital to purchase more equipment and complete several capacity-expanding projects to keep up with burgeoning international business, says Hertwig. Accounting for 66 percent of CSXI’s traffic mix, international business is projected to increase 6 percent annually.

This year, CSXI plans to expand its Buffalo, N.Y., terminal by converting a portion of an existing yard into an intermodal facility; expand its Tampa terminal by adding parking spaces and enlarging a paved processing area to increase lift capacity; and upgrade its Bedford Park, Ill., terminal by reconfiguring track to accommodate additional trains. The company also will work with the Port of Savannah, Ga., to build an on-dock loading facility.

“Our goal is to have as many on-dock facilities as possible,” says Hertwig. “When unloading vessels, you can load containers right onto a train.”

In addition, CSXI is on schedule to complete a terminal in Chambersburg, Pa., in September — the company’s first new intermodal facility in a decade. The 114-acre terminal will feature 20,700 feet of track and 1,680 parking spaces, and handle 100,000 lifts annually.

“Chambersburg will fill a hole in our network for an east-west terminal,” says Hertwig.

Eye on infrastructure
CSX has other capacity expansion projects slated for 2007. In the second quarter, the railroad will begin constructing a 200-acre “gas and go” yard south of Princeton, Ind., so locomotives can be refueled quickly in the region.

Later this year, the Class I also will begin building several 10,000-foot sidings between LaGrange, Ky., and Manchester, Ga., to accommodate additional intermodal traffic generated by an agreement with BNSF Railway Co., says VP of Engineering Don Bagley.

In October, the Class Is agreed to establish a high-volume intermodal corridor between the West Coast and Southeast. CSX eventually will double-track a line between Birmingham, Ala., and Atlanta, and expand a Fairburn, Ga., terminal as part of the pact.

Also during 2007, CSX will build 10 to 12 sidings on a line between Danville, Ill., and Waycross, and construct 5.5 miles of double track in Waycross outside Rice Yard.

“We’ll be able to close 23 grade crossings, mostly in downtown Waycross, because of the double track,” says Bagley.

In addition, CSX’s 2007 maintenance-of-way (MOW) program calls for installing 3 million crossties and 375 miles of rail, surfacing more than 5,000 track miles and upgrading dozens of bridges. The railroad also will spend $30 million on MOW equipment, including the acquisition of two tampers, one ballast regulator and one yard cleaner, and several spikers and backhoes.

Within or without
Adding capacity and improving infrastructure will enable CSX to move more traffic, but there’s another way the railroad can handle additional carloads.

“We can add capacity within a train by operating bigger trains that can move more tonnage,” says VP and CTO Brown.

Today, the word “more” is expressed often by CSX’s braintrust. Senior execs are exploring every opportunity to generate more traffic, revenue and income, which they believe will boost the company’s stock price.

CSX needs to capitalize on all opportunities presented by the “rail renaissance,” a period of unprecedented rail industry growth that could last another 20 years or more, says Ward.

“Populations are growing, fuel prices are rising, highways are congesting and there are environmental concerns — what’s going to change in the next few decades?” he asks. “The rail renaissance is not a temporal phenomenon.”

To capture its share of opportunities, CSX needs to continue striving to be a top-notch rail service provider.

“We’re at a good pace, but we can always do better,” says Ward. “There’s really nothing standing in our way of capitalizing on opportunities but ourselves.”