I’m a little shocked that there has been no discussion on this forum of CSX CEO Joe Hinrich’s brutally frank assessment of the Class I’s failings in dealing with customers and employees and the subsequent fallout with the STB. He even makes the point that the industry tee’d itself up for a major backlash from Congress after the East Palestine disaster. His comments were posted on the News Wire page two days ago: https://www.trains.com/trn/news-reviews/news-wire/first-step-toward-improving-rail-service-is-treating-employees-better-csx-ceo-says/
I am normally very skeptical of rail CEO speeches because they are usually completely disconnected from reality. This speech could have been prepared by a major rail labor union leader. He addresses just about every major problem in the industry that has been driving me nuts over the past few years and he doesn’t sugar coat anything. He seems to be the real deal in terms of shaking things up at CSX. The cynical side of me wonders, however, how long he will last at CSX especially since the actions proposed to be taken will by necessity adversely affect the OR and profit margins.
He addressed the profit margin issue head-on in his speech.
Some on Wall Street have questioned how CSX’s focus on employees and customers would affect its profit margins. But Hinrichs says that’s the wrong way to look at the issue.
“What’s it costing us to have our employees not motivated, our employees mad, our employees quitting and leaving?” Hinrichs asks. “Or we hire new employees, we do all the work to train them, we bring them in, they go to the yard, and the guys say, ‘Why are you working here? They treat you like crap, you should leave. And by the way, they want to get rid of you.’ ”
All I can say is “wow”. That’s exactly what veteran railroaders say to new hires. Saw this kind of thing for years on the old Yardlimits.com forums. He’s not pulling any punches.
It should NEVER have been about profit margins and OR. It’s net that matters. Or more precisely, the net present value of all future net profits.
Net is volume x margin. Somehow, everyone forgot about the volume part - because it’s harder to understand and do.
You can’t grow volume without a top-performing product. That means all parts have to work well together. Managment’s prime job is to facilitate work that supports the product.
Wick Moorman tried 10 years ago with NS. Problem is there was no buy-in from just about every manager below him. And if the mngmt doesn’t buy into it, what hope is there for the labor?
Decades and decades of mistrust aren’t going to be erased overnight. And with the last contract process, we’re still a long way away from harmony.
My look at bringing in Hinrich and letting Foote go, the CSX Board was seeing the damage that EHH’s PSR principles were doing to the employees, the customers and to the ability to sustain the bottom line. The PSR principles can ring up big ‘profits’ for the short term as those profits are beind derived from STEALING from the elements that are required to sustain the operation over the long term.
Cutting crews so that customers that got daily service on get service three times a week doesn’t leave a good taste in the customers experience and sets customer on a path to see if they can meet their own standards by getting ZERO rail service. Furloughing employees into a ‘hot’ job market means those employees are GONE - during their short railroad career, they got all the WORST the industry can present and other jobs become more to their liking. Stinting on plant investment and maintenance just runs the property down, if carried on long enough to the levels of Penn Central. Fortunately the CSX board seems to have seen through the brown bull haze of PSR’s ‘quick profits’ to see the damage being done.
During Michael Wards era at CSX here’s the kicker… Between 2009-2010 CSX traffic growth had produced a lower OR. It declined 3 percentage points from 71% to 68%… In fact the OR was already dropping during the so called rail renaissance which began in 2003. IIRC CSX was hovering around a 77% OR. by 2010 it had dropped to 68%. During an era of traffic growth before and after the 2008 GFC mind you…
To save face in failure, declare victory and change direction. That’s likely what’s happening with PSR and the obsession with the OR. Bringing in an “outsider” was I think a smart move…sometimes those of us who have been in transportation for decades are set in our ways and can’t see the forest for the trees. An outsider who isn’t vested in PSR brings a fresh perspective, and perhaps that’s what’s needed most of all. Hopefully Hinrich is able to get his team behind him…
The worship of the low OR is over… some CEOs and others have openly stated as much. And Wall Street and Bay Street are onside as well…there are good examples of transportation companies with relatively high ORs that have outperformed the rails. Investors… at least the intelligent ones… don’t look at just one number… we look at the business in its entirety and make our decisions based on a wide range of factors that point to the overall quality of the business. The OR is only one number and far from the most important one at that.
I think most investors don’t have a clue about rail, so OR was sold as a way to demystify railroads. A single number for comparison made it a no-brainer.
With interest rates climbing maybe we will see an end to the loading up on almost-permanent long-term debt to buy shares back to artificially drive up stock prices. The carrying cost of all that debt loaded on over the last 13-or-so years as it rolls over will most certainly impact future profits and dividends.
Overmod is right - ultimately over the long term it is about the total net income.
Better to have a larger pool of net income at year end from more volume and a higher operating ratio than a smaller pool of net income from less volume and a lower operating ratio.
Share buybacks are not unique to railroads… alot of companies do it. It can be viewed as a vote of confidence in the business. Are railroad share prices artifically high due to demand created by share repurchases? I doubt it… And fewer shares outstanding means a lower dividend payout as well… i.e. if the quarterly dividend is $.79/ share (CN Rail) then obviously the total amount to be paid out is less if there are fewer shares outstanding. This results in LESS money out to shareholders every quarter… hmmm… I should hear clapping…