Letter from the Editor

By Mark Szakonyi

Significantly more investment in intermodal operations is needed to retain business , much less expand it .

CSX CEO Joe Hinrichs is remarkably frank on the dangers of what he considers short- sighted focus on better margins at the expense of intermodal business and the true costs of not supporting labor . Arguing that activist investors have put pressure on railroads to look at operating margins more than the service provided to shippers itself , Hinrich said the industry must sell an alternative approach to shareholders .

“ It ’ s not a secret that , in general , intermodal is a lower-margin business than moving coal or automobiles [ merchandise ], so one of the pressure points on the industry has been , ‘ Well , if you want to improve margins , eliminate some of your intermodal business ,’” Hinrichs said at the Georgia International Trade Conference in late April . “[ But ] the return on intermodal business is much higher than our cost of capital , so it creates value for shareholders . And there ’ s no other merchandise business that is going to grow dramatically over time ... so we ’ ve got to find a way to tell that story and to be able to defend it against the activists .”

A report earlier this month from noted rail consultancy Oliver Wyman comes to a similar conclusion , warning that significantly more investment in intermodal operations is needed to retain intermodal business , much less expand it . Shippers generally prefer more expensive trucking “ because of its superior flexibility , reliability and customer-centricity ,” yet want to and would move more freight to the rails if the service was better , according to report authors Matthew Schabas and Adriene Bailey . The railroads , according to the authors , can grow their business by attracting more freight moving across the US – Mexico border and offering more interline and short-haul products .

Activist at the door

But that would take significantly more investment amid intense pressure from activist investors to reduce costs . Norfolk Southern Railway ( NS ) is trying to fight off activist investor Ancora Holdings , which wants to oust CEO Alan Shaw and COO John Orr . Last year , Jim Vena was named CEO of Union Pacific Railroad after activist Soroban Capital Partners pushed out previous CEO Lance Fritz .

CSX ’ s operating ratio was 64.1 % in the first quarter , while NS reported that its adjusted ratio in the same period was 69.9 %, and 92.9 % when factoring in the costs of the derailment of a train in East Palestine in February 2023 , spilling toxic chemicals and forcing some residents of the Ohio town to evacuate .

Since E . Hunter Harrison streamlined the networks of Canadian National Railway under the banner of so-called precision scheduled railroading ( PSR ), investors have generally embraced PSR and demanded more . The late Harrison went on to slice the networks of Canadian Pacific Railroad and , finally , CSX , boosting margins while angering customers and rail unions .

Rail union frustration with working conditions nearly boiled into a nationwide strike in late 2022 , before President Joe Biden averted labor action by signing the tentative agreement into law as shippers braced for the worst .

Different background , approach

Hinrichs , a rarity among Class I CEOs in that his tenure was in the automotive industry rather than railroads , is candid about the industry ’ s shortcomings . The rail industry “ overall hasn ’ t delivered repeatable , reliable , dependable service and therefore people aren ’ t motivated , aren ’ t interested in doing more business with rail when they ’ re being let down ,” he said at the Georgia conference .

Hinrichs , in his previous role as an automotive shipper , knows about being let down by railroads , remembering a lack of customer focus that he says he ’ s now injecting into CSX . Hinrichs , who was seen as friendly to unionized auto workers , hasn ’ t been shy about wanting to improve company culture , which those close to the matter say was suffering from rounds of layoffs under past leadership .

“ We ’ re a service business ; we use assets , but we ’ re a service business ,” Hinrichs said . “ In order for any service business to be good at what it does , especially with serving customers , it starts with how your employees feel . Are they engaged ? Do they care ? Are they motivated ? And frankly , we haven ’ t had that in this industry .”

He stressed the deep and often violent history of rail unions , noting among the first US unions was The Brotherhood of Locomotive Engineers in 1863 , and how deadly rail strikes in the 1890s led to the creation of the Labor Day holiday . CSX was one of the first Class I railroads to agree to extend paid sick leave to union workers .

Extending sick leave days in 2023 “ added some costs , but more importantly , one of the biggest issues you face in the railroad every day

4 Journal of Commerce | May 6 , 2024 www . joc . com