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April 2010
By Jeff Stagl, Managing Editor
Commenting on Congress' passage of his health-care reform bill on March 22, President Obama said: "This is what change looks like." A little more than a week beforehand, CSX Corp. Chairman, President and Chief Executive Officer Michael Ward said essentially the same thing about his railroad.
Sitting in his Jacksonville, Fla., office the morning of March 12 on his day off — to meet with a certain managing editor, he kindly said, but also to mind the store an hour or two, no doubt — Ward talked about changes CSX is making, and needs to keep making, while volume is light so the Class I is in a better position to seize traffic opportunities when freight demand picks up.
Last year, while carloads dropped 15 percent vs. 2008 levels, CSX sought ways to offset weak demand, and boost productivity and efficiency, says Ward. The main goal: institute permanent and systemic operational changes instead of temporary and stop-gap measures, he says.
Train operations were adjusted to carload volumes and to better match traffic flows, such as the conversion of a Buffalo, N.Y., hump yard to a flat switching yard. In addition, operating practices were changed to ramp up the efficiency meter and bring costs down, including the transformation of two-person remote-control operations in a yard's bowl area into one-person jobs.
The moves helped the railroad through the "worst economic period of our time," as Ward characterized 2009. The Class I set an annual operating ratio record at 74.7 vs. 75.4 in 2008 and 77.5 in 2007, and reduced annual operating expenses 20 percent year over year to $6.8 billion.
CSX's cost control improved throughout 2009 and consistently outpaced its eastern competitor Norfolk Southern Railway according to ton-mile growth vs. expenses, normalized for fuel, said Robert W. Baird & Co. Inc. analysts Jon Langenfeld and Benjamin Hartford in an email. The metric is useful for "standardizing the differences in calculating cost-control performance" among the U.S. Class Is, they wrote.
"By the fourth quarter, CSX's cost controls were able to get in front of the volume contraction," Langenfeld and Hartford wrote. "We believe this reflects favorably on CSX's operational discipline and productivity, which should provide positive operating leverage in 2010 as volumes improve."
But CSX needs to continue following the continuous-improvement path to ensure it gains that leverage this year, when traffic is projected to increase 5 percent. The Class I also has to prep for demand in the years ahead, when volume could balloon along with the nation's freight appetite. All the components of the "rail renaissance" are still there, from highway congestion to environmental sensitivity to constrained trucking capacity, and CSX has to be positioned to exploit it, says Ward. Otherwise, other modes — or other railroads — will.
"We're staying focused on execution," says Ward.
The ONE Plan operational planning and execution software tool that CSX implemented in 2004, and continues to tweak, should help narrow the focus, he believes. Traffic managers plan to keep using the tool to reduce train starts, eliminate terminal handlings, increase car velocity and cut transit times.
"The ONE Plan has taken costs out and driven discipline across our operations," says Ward.
Since second-quarter 2009, CSX has brought 14,000 of 30,000 rail cars and 200 of 600 locomotives out of storage, and recalled 1,500 of 3,000 furloughed workers as traffic began to edge up. The Class I won't need to reinstate all the assets and manpower if the railroad sticks to the job at hand and makes the right operational adjustments, says Ward.
"We need to be judicious about adding crew starts as traffic improves," he says. "Like 'Cash for Clunkers' last year and how it boosted automotive shipments for such a short time, you don't adjust for that."
CSX is counting on process improvement teams (PITs) to continue playing a key role in the keep-making-operations-better push. The teams are charged with identifying and executing tasks that can improve service delivery performance and cut costs.
Each of the five PITs — small, cross-functional groups of workers created in 2005 — develop a three-year plan that contains various projects, such as consolidating yardmasters to reduce the manpower needed to manage yard operations.
Although the "gigantic home runs" already have been hit via PIT projects, "there are areas we can improve on, like technology deployment," says Ward.
Technology is key to the Class I's process-improvement pursuit, says Vice President and Chief Transportation Officer Cindy Sanborn. For example, the mechanical department plans to begin using the GE Trip Optimizer to automatically control a locomotive's throttle and maintain a planned speed, and implement an engineer scorecard based on event recorder automated download data to improve train-handling skills. Both efforts will reduce fuel usage and costs, says Sanborn.
"We have opportunities to improve productivity and efficiency, and technology is the enabler," she says.
CSX seized some of those opportunities last year via PIT-propelled technological initiatives.
The Class I advanced several projects in 2009 that were planned for other years because of the traffic slow-down, says Sanborn. The railroad consolidated more yardmasters — resulting in a 15 percent reduction in yardmaster manpower — and accelerated remote-control implementations at hump yards.
"We did well with remote-control implementations at the hump end, but not at the bowl end," says Sanborn.
This year, a large PIT focus will be local productivity, or operations at the first and last mile of a trip, she says. Locomotives feature Global Positioning System devices that provide onboard work orders, but a team will work to ensure orders are accurate and issued on time.
"The ONE Plan made sure our innards work well, but now we need to address local productivity," says Sanborn. "We're going to look at all touches."
Another 2010 project: refining a crew balancing software tool recently rolled out to all divisions. The tool is designed to analyze where trains are located and how workers are assigned, and make recommendations on optimal work orders. Crew balancing used to be managed on paper and the tool has made the task more consistent, says Sanborn.
Field workers are helping to fine-tune the tool in the Florence Division, which is located in the Carolinas and Georgia, so data is available in real time. Information had been two hours behind real time; the tool recently was adjusted so data is one hour behind, says Sanborn.
"Getting to real time will improve our ETAs," she says. "We need accurate ETAs, and we need to make timely and right decisions in yards."
By year's end, about 80 percent of the network will be using the tool in real time, says Sanborn.
In addition to efficiencies gained through technology upgrades and PIT projects, CSX is seeking to boost productivity by improving communication between field supervisors and workers. Last month, the Class I began implementing a mutual accountability initiative that requires supervisors to meet with no more than three workers at a time and have an open discussion about what's expected of each employee and what's impeding productivity.
"It's an opportunity to clear up misconceptions and clear the air," says Sanborn.
An employee with specific questions also can get answers, such as a worker who switches cars and often wondered why cars are switched a certain way, she says.
At the end of the discussions, workers receive a book outlining a leadership point: "Be fair and consistent, and treat with mutual respect." The point comes from a "Leadership Excellence Workbook" CSX developed for supervisors to "provoke thought in how you manage yourself and lead people," says Sanborn.
The mutual accountability initiative should lead to meaningful and fruitful discussions, she says.
"We don't want drive-by conversations, like 'Here's the book, read it and let me know if you have any questions,'" says Sanborn. "This sets the stage for cooperative relationships."
Prior to launching the initiative in early March, division managers from all departments helped train 1,000 supervisors on how to conduct the talks during two-day workshops.
"This isn't being taught by HR, it's not a webinar," says Sanborn. "This cuts across all of operations."
After the supervisor-employee talks are completed by April's end, division managers will solicit feedback on the initiative. Then, they'll conduct focus groups in June to address any hang ups and determine ways to make discussions more meaningful, says Sanborn.
Although the initiative wasn't designed to boost morale per se, that will be a byproduct "if we do it right," she says. Essentially, CSX will "win or lose in this industry" based on the strength of the supervisor-worker relationship, Sanborn adds.
"This is one of the biggest initiatives we've ever taken on," she says.
The purchasing department is taking on a few large efforts to increase productivity and decrease costs, as well. Because of a shrinking supplier base, CSX is trying to be proactive by finding more companies in North America that compete with existing suppliers to control material expenses, says VP of Purchasing and Materials Fran Chinnici.
The Class I also recently purchased a machine that will enable the railroad to produce its own tie plates, if necessary, because there's only one tie-plate supplier in North America, he says.
In addition, CSX plans to install more creosote- and borate-treated ties in southern U.S. regions to extend tie life more than 20 years longer than creosote-treated ties, and use more of Harsco Rail's Stoneblower, which is designed to pneumatically inject ballast under a tie without disturbing a pre-compacted foundation.
"We could use one-tenth the amount of ballast we do now," says Chinnici.
The purchasing department also is turning to technology to drive efficiency. Certain materials are being bar-coded and electronic "punch-out" screens are being created to enable workers to accurately order a specific part or component and generate a requisition automatically.
"It's just like on Amazon.com," says Chinnici. "You can see a photo to make sure you get the part you need."
CSX also is trying to maximize efficiency and productivity in the intermodal sector by incorporating the latest technology — and latest infrastructure amenities — into a terminal under construction in North Baltimore, Ohio. To open in 2011, the terminal will feature five wide-span electric cranes, 24,000 feet of working track and 100,000 feet of block-swapping track designed to quickly accommodate and process containers.
"It will be like a classification yard for containers," says Assistant VP of Strategic Planning John Koch.
Instead of sitting on docks for days at various eastern ports waiting to fill a train, containers can flow to North Baltimore for faster distribution to the Midwest and other regions, he says. The terminal is part of the National Gateway, a double-stack intermodal corridor CSX plans to establish through six states and the District of Columbia.
"We are in a unique position where traffic flows to us," says Koch, adding that two-thirds of the nation's total goods consumption occurs in the eastern U.S.
Consumers' confidence in the economy will be a big factor in determining if consumption — and, so, traffic — picks up through 2010, says Ward. They certainly weren't exuding confidence last year and in early 2010.
"Their 401(k) is down, so they feel poor," says Ward.
This year's traffic already is showing promise because phosphates and fertilizers are "going great guns," ethanol is on the uptick and an unexpected metallurgical coal contract in China is on CSX's books, he says.
During Ward's 33-year CSX career, the railroad hasn't landed export metallurgical coal business from China, he says.
"China has swung from an exporter to importer the last few years," says Ward. "The U.S. is a swing supplier in the world."
Through 2010's first 11 weeks ending March 20, CSX's total carloads were up 0.3 percent and total intermodal volume was up 15.3 percent year over year. Total traffic increased 4.8 percent, but had been trending even higher each week since late February.
Because CSX moves many of the raw materials used in manufacturing and construction, such as scrap material for steel mills, the railroad is "sure to gain from the recovery," said Standard & Poor's analyst Kevin Kirkeby in a report issued last month.
Traffic will continue to mount through 2010 and beyond if the Class I doesn't get in its own way of boosting productivity and efficiency by reverting to the practices of old — and Congress doesn't get in its way, either, says Ward.
The STB reauthorization bill, which would satisfy the "wishes of a very small group of shippers," and positive train control (PTC) mandate pose roadblocks to CSX's continuous-improvement path, he says. About 12 percent of the Class I's 2010 capital expenditures will be used for PTC, meaning CSX won't purchase any new locomotives this year as a consequence, says Ward.
The railroad also could have used the funds to bolster additional track. More derailments are caused by rail problems — such as broken rail — than accidents caused by an engineer sending a text message on a cell phone, as was the case in the fatal Metrolink/Union Pacific Railroad train collision last year that led to the PTC mandate, says Ward.
"The pursuit of a risk-free world is a bit misguided," he says. "We could make freeways virtually risk-free by having everyone drive 25 miles per hour, but that's not workable as a society."
Ultimately, CSX expects to be a more productive and efficient railroad by the time consumer confidence strengthens and industrial production gears up again, perhaps before the calendar turns to 2011.
The Class I's on the right path, Ward believes. However, legislation that's "broader than Congress intended" — such as the high expenses associated with the PTC mandate and potential antitrust provision posed by the STB reauthorization bill — could create detours, he says.
"It's up to us to deliver for customers, investors and employees," says Ward. "My message to Congress would be, 'Just let us do that.'"
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