If Canadian National Railway Co. wins the takeover battle for Kansas City Southern, the freight hauler will greet some familiar faces using a well-known playbook at KCS’s Missouri headquarters.
That’s because three of KCS’s top operations executives worked at CN and were schooled in the ways of railroading by the late Hunter Harrison. The industry legend pioneered the cost-cutting operating model known as precision scheduled railroading, or PSR, at CN in the 1990s and early 2000s, and later implemented it at Canadian Pacific Railway Ltd .
CN’s US$29.8-billion proposal to take over KCS is in the first step of a two-part review process by the U.S. Surface Transportation Board. The deal comes as precision railroading faces renewed scrutiny from U.S. regulators and service complaints from customers.
With the exception of Warren Buffett’s BNSF Railway, six of the seven major North American rail companies employ the lean strategy, and have hired executives and managers who worked under Mr. Harrison at CN or CP to slash costs and streamline operations.
“The CN diaspora of talent first went to [CP in] Calgary, then from Calgary to Union Pacific, Norfolk Southern to CSX,” said Anthony Hatch, an independent railway analyst at ABH Consulting. “They’re everywhere.”
KCS, CSX Corp. , Union Pacific Railroad and Norfolk Southern Corp. have all adopted PSR, and hired proteges of Mr. Harrison. He was chief executive at Illinois Central when CN took over the company in 1998, and it was the first Canadian railway Mr. Harrison retooled, first as CN’s chief operating officer and then after becoming in CEO in 2003.
“Most everybody has implemented PSR and are operating in that like mindset,” Jennifer Hamann, Union Pacific Railroad’s chief financial officer, said at a recent investors’ conference.
Precision railroading’s main tenets are to put company profits and investors before all. Trains are longer, faster and run on the company’s schedule, not the customer’s. Rail yards are consolidated, based on Mr. Harrison’s belief that intermediary yards are inefficient and slow down operations. A switch to PSR typically includes layoffs, customer complaints about service and rising profits.
If you hear a railroad executive obsess about the operating ratio, which compares sales with expenses, he or she is a PSR acolyte.
“Hunter [Harrison] created this unbelievable blueprint that has swept the whole industry,” Mr. Hatch said.
Unions and some customers and politicians see it in less favourable terms.
“PSR may be good for the bottom line, but it is bad for the nation’s shippers, American customers and the workers who move the nation’s freight,” said Dennis Pierce, president of the Teamsters Rail Conference, the union that represents more than 70,000 U.S. rail workers.
On May 12, a powerful U.S. lawmaker called for a study on the impact of the operating model on everything from rail service and safety to the abilities of railways to respond to changing economic demand. “PSR in practice means the bottom line drives the decisions,” Peter DeFazio, chairman of the transportation committee for the U.S. House of Representatives, said in a letter to the Government Accountability Office requesting an investigation. “Longer trains, unhappy shippers and a work force pushed to do more with less is not a model to chase after – unless you’re on Wall Street.”
The scrutiny is welcomed by groups representing large U.S. shippers that rely on railways for parts and supplies, and to transport their finished goods, including the American Chemistry Council and the Rail Customers Coalition, which represents large manufacturers, farmers and energy producers.
Jeff Sloan, director of regulatory affairs at the American Chemistry Council, said shippers have not shared in the benefits of precision scheduled railroading. Railway fees have risen and shippers have not been able to reduce the costs of their rail car fleets, owing to difficulties meeting the railways’ schedules.
“It’s hard to make broad generalizations about precision scheduled railroading because each railroad has done it a little bit differently,” Mr. Sloan said in an interview. “But from a shipper’s perspective, the implementation has often caused significant problems up front with the transition to it. But over the long term, it’s not always clear that shippers are seeing the benefits of it that were promised.”
Mr. Harrison is credited with turning around four major railways, beginning with Illinois Central in 1989. After CN bought that railway in 1998, he upended CN’s operations with his PSR model. The former Crown corporation soon shed its reputation as a bloated government spinoff to become widely seen as the best-run railway in North America.
After a brief retirement, he was recruited by billionaire Wall Street investor Bill Ackman for the top job at CP when Mr. Ackman took over the railway in 2012. Mr. Harrison quickly transformed the underperforming former conglomerate into a scrappy operation that made a lot of investors rich. During Mr. Harrison’s seven years at CP, profit soared and investors enjoyed the trip, watching their CP shares more than triple in value.
But in 2017, Mr. Harrison jumped to Florida-based CSX, where investors clamoured for the boost his PSR model would bring. He quickly laid off 2,700 workers and closed 10 rail yards, and found himself facing the U.S. Transportation Safety Board amid complaints from customers about rail cars that sat for days, and unreliable delivery schedules. Mr. Harrison died in December of that year.
Mr. Hatch, the analyst, says the second-generation of PSR executives, led by CP’s CEO Keith Creel and CN’s Jean-Jacques Ruest and Claude Mongeau before him, are more diplomatic than the brash Mr. Harrison. They are “kinder and gentler to the stakeholders whose feelings were bruised by the revolution,” Mr. Hatch said. “And then you started the growth.”
The railways they run are still quick to lay off employees and close workshops and yards to match drops in rail traffic. But they are investing to boost sales and expand their networks after slashing the cost structure.
KCS has accepted CN’s takeover offer, terminating an earlier agreement with CP. However, CN’s bid faces high hurdles at the U.S. regulator and CP said it is poised to step in if its rival fails.
KCS’s railways run deep into Mexican automotive and petroleum markets and link with sea ports on the Gulf of Mexico and Pacific Ocean, offering both suitors a rare chance to widen the reach of their networks and link three countries.
The fight for KCS is the highest-profile example of an attempt at expanding, but there are others. CN bought a trucking company; CP bought the trail tunnel that links Windsor and Detroit; CP bought the Central Maine and Quebec Railway, gaining access to the Port of Saint John; CSX is trying to buy Pan Am Railways of New England.
While at CP, Mr. Harrison led failed efforts to take over CSX and Norfolk Southern, but he boosted profit by 400 per cent even though CP’s revenue climbed by just 31 per cent.
The gap highlights a shortcoming of PSR. It’s not about growth – not at first.
“He wasn’t anti-growth, but he didn’t care,” Mr. Hatch said. “You know, he was a steamroller to drive efficiency, and the railroads hit the next level after he left.”
Hunter Harrison’s tour of duty
- Illinois Central: 1989 to 1998
- CN: 1998 to 2009
- CP: 2012 to 2017
- CSX: 2017 (eight months)
Many of the railway operations executives at the largest U.S. railways are former CN and CP managers taught by Mr. Harrison, and helped implement his precision scheduled railroading model. Here are some of them:
Canadian Pacific Railway
Keith Creel, CEO
Mr. Creel is Mr. Harrison’s best-known protege, and worked for him at three railways: Illinois Central, CN and CP, where he succeeded him as CEO.
Illinois Central: 1996
CN: 1998 to 2013, left as chief operating officer
CP: 2013 COO, 2017 CEO
Kansas City Southern
John Orr, executive vice-president of operations
Mr. Orr worked at CN for 34 years, 1984 to 2019.
Sameh Fahmy, executive VP of precision scheduled railroading
Mr. Fahmy worked for CN from 1981 to 1985, then again from 1994 to 2013, for a total of 23 years. He joined CSX with Mr. Harrison in 2017, where he helped implement PSR.
Manny Loureiro, VP and chief engineer
Mr. Loureiro worked for CN for 37 years.
Union Pacific Railroad
Jim Vena, senior adviser, formerly COO
Mr. Vena worked at CN from 1976 to 2016, departing as COO.
James Foote, president and CEO
Mr. Foote joined CSX with Mr. Harrison in 2017, and led the implementation of PSR as the operations chief. He became CEO when Mr. Harrison died later that year. Mr. Foote worked at CN from 1995 to 2009, helping Mr. Harrison implement PSR.
Jamie Boychuk, executive VP of operations
He worked at CN for 20 years before joining CSX in 2017.
Wayne King, CSX management consultant
Mr. King was PSR specialist at CN, where he worked for 36 years.
Edmond Harris, VP of operations, 2018 to 2020
Mr. Harris worked at Illinois Central and CN with Mr. Harrison and Mr. Foote.
Mark Wallace, VP of sales
Mr. Wallace held various roles at CN and CP, including chief of staff for Mr. Harrison at both companies.
Norfolk Southern Corp.
Hunsdon Cary, VP of operations efficiency
Mr. Cary worked at CN in operations roles from 2003 to 2018, and at Union Pacific from 2019 to February, 2021.
Rickhi Misra assistant VP of PSR, 2019 to April, 2021
Mr. Misra worked in operations at CP from 2002 to 2016. He led the implementation of PSR in Australia for miner Rio Tinto’s railway operations from 2017 to 2019.
Michael Farrell VP of operations, 2018 to 2020
Mr. Farrell held senior operations roles at CN and CP.
Pacific National railway, Australia
Mike Cory, president and operations chief
Mr. Cory worked at CN for 40 years, leaving as COO in 2019.
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