U.S. railway CSX Corp. tried to reassure investors on Friday that its turnaround will continue after it announced that chief executive officer Hunter Harrison has gone on a medical leave for an unspecified illness.
Shares in CSX fell by 7.6 per cent after the Florida-based railway said the noted railroader is being replaced by chief operating officer James Foote, who will be acting CEO of the third-largest U.S. railway.
Mr. Foote declined to speculate on a return date for Mr. Harrison on a conference call with analysts before markets opened on Friday morning, and provided no information on the 73-year-old's condition.
Mr. Foote said Mr. Harrison had made "huge" changes since joining the company in March and that much of the "heavy lifting" had been accomplished. Changes include the closing of several rail yards, thousands of layoffs and a new train-schedule system. He also installed a new team of operating people.
"We're going to run the company in the same manner he would have," said Mr. Foote, who worked with Mr. Harrison at Canadian National Railway Co. and joined CSX in October. He said more details on financial progress will be provided at the company's investor event in March.
CSX shares closed at $52.93 (U.S.), down $4.38, on the Nasdaq stock market.
Mr. Foote said Mr. Harrison led one of his training seminars, known in the industry as "Hunter camp," last week. "Some time after that, he became ill," Mr. Foote said. "Beyond that, that's all we can say at this time out of respect to his family."
Mr. Harrison underwent heart surgery in 1998 when he was operating chief at CN. In 2015, health complications that followed leg surgery forced him to take a break from his CEO duties at Canadian Pacific Railway Ltd.
Lately, he has been working at home regularly and uses an oxygen tank to aid his breathing.
He told The Globe and Mail in late October he had no plans to step aside. "Am I leaving? No, I'm not planning on it," he said.
Walter Spracklin, a stock analyst at Royal Bank of Canada, said Mr. Harrison's departure means CSX's pace of cost reductions will slow. He reduced his outlook for CSX profit and operating ratio.
"Mr. Harrison did have medical issues while at CP," Mr. Spracklin said in a research note, "however, it did not require him to step down … which means from a risk perspective, we believe it appropriate at this point to assume for now that Mr. Harrison will not be returning to his post."
Fadi Chamoun, a Bank of Montreal stock analyst, said CSX has already implemented half of the planned $1.1-billion cost reductions, and expressed confidence in the acting CEO to continue rolling out Mr. Harrison's operating model.
"CSX has brought in around a dozen operating personnel from other railroads and placed them strategically around the network, restructured and simplified the operating structure," Mr. Chamoun said in a note to clients. "We think that Jim Foote has tremendous experience in precision railroading, and is well positioned to carry the ball forward."
Mr. Harrison quit as CEO of CP in January to pursue the CSX job, backed by U.S. hedge fund Mantle Ridge. Reports of his plans sent CSX shares up by 35 per cent.
CSX shareholders okayed Mr. Harrison's demand for $84-million to replace compensation he forfeited by leaving CP.
Mr. Harrison is widely credited with turning around three major North American railways – Illinois Central, CN and CP. He calls his operating model precision-scheduled railroading, which aims to maximize asset usage by running fewer, longer trains on a schedule. His arrival at a company generally heralds two things: layoffs and a higher share price.
For these reasons, he is loved by shareholders but loathed by unions. Some railway customers are also among his critics.
Mr. Harrison's efforts to turn around CSX have drawn the scrutiny of the U.S. regulator, the Surface Transportation Board, which has held hearings and is investigating complaints from CSX customers. Some shippers and industry groups complain service at CSX has deteriorated since Mr. Harrison's arrival.
Mr. Harrison has said the turnaround will take some time.