HIGHLIGHTS FROM THE JANUARY 2009 ISSUE
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Commentary
Railroader of the Year
CSX’s turnaround CEO says teamwork did it, and he shares his honor with other people on the team.
For video highlights of Railway Age Editor William C. Vantuono's interview with Michael Ward, CLICK HERE. Video sponsored by Plasser American and Western-Cullen-Hayes.
CSX Chairman, President, and Chief Executive Officer Michael J. Ward has led a remarkable turnaround at CSX. Through his leadership, he has brought a level of consistency and profitability to the railroad that many just a few short years ago doubted was possible. Ward, 58, is a strong defender of at least three fundamentals of running a good railroad: safety, capital investment, and growth. Despite a difficult proxy challenge, Ward and his management team remain focused on running the railroad and moving forward with strategic initiatives that will have long-term benefits. Far from cutting capital expenditures, Ward is pressing ahead with a well-thought-out plan that will see $5 billion in capital improvements in three years.
Railway Age has chosen CSX’s Michael Ward as our 2009 Railroader of the Year. Ward is the 46th recipient of the rail industry’s most prestigious award. He will be honored on March 17 at Chicago’s Union League Club.
Last month, Railway Age Editor William C. Vantuono talked with Michael Ward about CSX, and about his 31-year career. Part one of this three-part article focuses on Ward’s efforts to turn the railroad around, and where he wants to go with it. In part two (p. 38), Ward discusses his years growing up in Baltimore, and the events and people that influenced his career. Part three (p. 52) is taken from an address Ward gave at “The New Railway Age” conference this magazine hosted in Washington, D.C. last month.
Railway Age: CSX has often been referred to as a hodgepodge of a lot of different railroads that came together. Maybe you looked at it as a tapestry rather than a hodgepodge. But you know, CSX is a pretty big ship, and big ships are tough to turn.
RA: You’ve used the term “flavor of the month operating plans” to describe how things used to be. How did you change that?
RA: What about the economy, which we know is tough? We do see railroad traffic dropping. Sustaining the company in tough times, getting through this period: What sort of things are you looking at?
RA: Many of your suppliers will be reading this story. They’re understandably concerned about scalebacks in capital spending, because that’s their bread and butter, their livelihood. What can you say to them that might be a little reassuring?
RA: How long do you see this downturn lasting? One year, two years, three years? Does anybody really know?
RA: Would you agree with this statement: In tough times like this, rail really proves its value, its sustainability?
RA: So, if you stay the course in terms of offering good service, keeping the physical plant in good shape, continuing your plan for accommodating growth, then when the tough times are over, as they eventually will be, whenever that might be . . . .
RA: There’s a new Administration coming in. There’s a lot of uncertainty. There’s concern over things like re-regulation. What are your feelings?
RA: The President-elect has talked about wanting to make his number one priority creating what he calls a “new energy economy.” Railroads will be a big part of that?
RA: We’ve seen imports from China dropping. Interestingly, as international intermodal traffic has dropped off, domestic traffic is on the rise. What adjustments do you anticipate for your own intermodal service and terminals to accommodate more domestic intermodal traffic?
RA: Some in the industry have said that some manufacturing will shift from the Pacific Rim to North America, but it won’t necessarily be in the United States. It may be in Mexico, for example, or wherever the lowest manufacturing cost provider is. That’s going to create some shifts in traffic patterns.
RA: Does that impact CSX more, because CSX hosts the most passenger trains?
RA: You also have a major initiative to reconfigure and regionalize your CAD (computer-aided dispatching) system. What is behind that? You’re not the only railroad to do it. Does it have more to do with the company growing through mergers and the Conrail integration?
RA: The proxy battle is over. You’ve got four hedge fund board members seated. Where do you go from here?
For video highlights of Railway Age Editor William C. Vantuono's interview with Michael Ward, CLICK HERE. Video sponsored by Plasser American and Western-Cullen-Hayes.
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Michael Ward: We have a great franchise with our geographic reach, so I don’t view it as a hodgepodge. I think the real key is we have really great people on this railroad and they want to do the right thing, so it’s really more a matter of letting them know where we want to take the company. Among my most satisfying accomplishments is helping to focus the power of 34,000 dedicated, loyal railroaders on significant and sustained improvements in safety, service to our customers, and financial performance. That would not be possible without an energized and motivated workforce, intent on continuous improvement in everything they do. They come in every day wanting to do the right thing. There were really a couple of key aspects to it. One was getting the right team in place with a vision of where we can take the company, that put consistency into where we are going as a company. I think back to our history. At times we probably changed too often where we were heading as a company. What that really did was lead to some confusion among our people. So we wanted to be very clear about what we were intending to do because we knew if we did that, our employees would get behind that and help drive it there. We outlined some real core values that we had to believe in as a company. They’re very basic to our business and very appropriate for our company:
• People make a difference.
• It starts with the customer.
• Safety is a way of life.
• Be fact-based.
• Get the right results the right way.
If you think about it, everybody in our company, whether they’re in headquarters or in the field, can relate to them. If you really think about it, if you do right by your customers and do right by your employees, you’ll make a lot of money and you’ll make a lot of progress. Over the last few years we really ingrained those core values into what we do as a company.
Now, that alone is not sufficient to make a great company. One of the things it allows you to do is challenge everything else you do. People generally are not usually that welcoming of change, but if they know they have the consistency of the core values that they can count on, it makes it much easier to accept change in other aspects of their life.
So, we’ve embraced these core values. We embraced our vision, which is to be the safest, most progressive North American railroad, relentless in the pursuit of employee and customer excellence. We’re using our core values to get there, and we have to challenge everything else. How do we get better? How do we improve the process?
It really has been well-received by the employees. They like the consistency of what we do. You know, one of the jokes around CSX was, “If you don’t like what’s going on around here, just wait six or nine months, and it will change.”
Ward: One of things I’m actually the proudest of is our One Plan Redesign, which looked at our entire scheduled merchandise, automotive and intermodal networks. In 2004, we needed to put consistency into running to plan, operating in a disciplined manner so that we could give our customers the kind of service they require. When we first rolled One Plan out, it really worked well for a couple of quarters. All of our key measures started improving. The customers felt better, and we thought, wow, this is really a good program. Then in the first quarter of 2005, all of a sudden we stopped paying attention. All those great improvements went by the wayside.
I’m really proud of what we did then. Traditionally or historically, we would have come out with a new program. But we said, no, we’re going to do the One Plan and we are going to do it right. So we went back and we examined what some of the issues were. One of them was that the locomotive plan was not adequately synched up with the train operating plan. We made those improvements. We rolled out the One Plan again, and ever since then, it’s been working well and we continue to improve it.
For the employees, that was a very strong sign of where we were going. We’re not going to continue to have new things all the time when something doesn’t work. That really helped build some momentum. Tony Ingram, our Chief Operating Officer, makes a huge push on two key things: Get the train out on time and do it safely. Obviously, if you don’t get the train out on time, it’s not going to get there on time. And so it’s adherence to the One Plan, having the discipline around executing day after day, that’s really becoming part of our culture.
The other big difference in that we decided we were going to hold ourselves accountable for what we committed to. In the past we were always very good at rationalizing, if we did not make a given goal. We could come up with lots of reasons—good reasons, actually—why we couldn’t make that goal. But we decided to change the culture to one of, if you committed to do something, you will deliver those results in the right way, which is one of our core values. We started holding ourselves accountable to deliver what we committed to and not allow ourselves to rationalize why we didn’t accomplish it. That has been a big change in our culture. That was a nice short answer to your question, wasn’t it?
Ward: We are a very long-term-oriented industry. When we get into positions where the economy is as weak as it is now, we need to continue to have our focus on that longer term. For instance, as we’re looking at our capital program for next year, we think we will generate sufficient cash flows to continue on the path we have committed to. We have said that in 2008, 2009, and 2010, we would make about $5 billion worth of capital investments. That’s a $1.6-$1.7 billion dollar pace per year. We anticipate spending that same amount of money in 2009. We think that the cash flows will be there, and we know we need to continue to invest in our track, our ballast, our ties, our rail. We need to continue to enhance the quality of our locomotive and car fleets and we don’t think it’s appropriate to take a respite from that because we need to ensure that we have a good infrastructure if we’re going to serve our customers well.
We intend to stay the course on our capital spend. On the operating plan itself, we’re actually doing a redesign, if you will, a rerunning of our One Plan, looking at the reduced volumes and how we can we meet those customers’ needs and perhaps run fewer trains. We’re in the process of doing that now. It’s a several-month process because it’s a very complicated computer model that looks at all the traffic demands, how to best block, how to best build the trains.
It isn’t just a computerized, headquarters-originated process. We take the preliminary results, we go out to the field managers and say, this is what we think you should or could be able to do; do you agree with this? Many times the local managers will have some refinements. Sometimes they’ll change what that recommendation is and will improve it and make it more executable, because we want to make sure it’s not just an exercise in computer modeling, but something that people feel like they can execute on a day-in, day-out basis. It takes a couple of iterations to really get it refined properly, and we’re in the process of doing that as well.
Ward: I can only speak to our own capital spend. We intend to spend on a similar basis to what we did in 2008 and we think the cash flows are there to do that and we intend to do so. A number of our cars, as you well know, are owned by private-car owners, and they may be making different decisions, so I can’t give much comfort on that. But certainly, as far as what we intend to do, we think the Board will approve us continuing to spend to build for the long-term future we see in the Rail Renaissance.
Ward: I don’t think anybody knows, but this is very extraordinary. The credit markets are obviously very challenged right now. A lot of people are very concerned about where things may be going. I guess my biggest concern is, will people just get into a mode where they take a lot of short-term actions that may not be appropriate in the long term? I can’t control others, but I can control how we behave as a company, and we intend to take that longer-term focus. But trying to predict? I think you could probably ask a dozen economists and get a dozen different answers, because I really don’t think anybody knows. There is a relatively unusual set of circumstances out there in the marketplace today.
Ward: Yes, and I would actually expand it. I think rail proves its value every time and in every kind of circumstance. We’re seeing more and more as the highways get more congested. Fuel prices are high, and there are driver shortages in the trucking industry. The value we bring as a railroad is being more and more recognized by our customers, by policymakers. Now, it may be accentuated a little bit when the economy slows down because people are looking to save a little bit of money. I think it’s a wonderful opportunity for us, if we deliver a high level of service to them in this sort of period. When the economy picks up again, they’re going to want to use even more of our services. But I would broaden it to say, I think we’ve created a great value, provided great value for customers in good times and in bad times.
Ward: We’re there and ready to serve our customers and grow with them.
Ward: We as an industry are very fortunate. Transportation and infrastructure are very much bipartisan issues, not ones where you get a big divide between the Democrats and the Republicans. There’s a growing awareness in this country, as many of the comments by the Obama transition team are really focusing on infrastructure. I think it’s all infrastructure, obviously highways, but railroads, airports, and waterways. There’s a recognition in America that we do need to upgrade and increase our infrastructure.
Freight demand is going to increase 80% to 100% over the next 20 to 30 years and I think there is a growing awareness that we need to prepare our country for it. What’s really encouraging to me is a much larger awareness of the role that freight rail can play in relieving highway congestion, in helping energy independence by our fuel efficiency. We’re three to four times more fuel efficient than trucks, with lower emissions—one of the most environmentally sensitive forms of ground transportation. So even with the change of Administration, I think there’s a great awareness that we are essential, and a key part of infrastructure.
Now, there are some customers that have been calling for re-regulation of the industry pretty much since the Staggers Act passed in 1980. They’ve been out there for many, many years, and they’re actually a select subgroup of our customer base. It’s some chemical customers, some western grain shippers, and some of the coal receivers who feel strongly about this. But a lot of our customers are very happy with what’s happened since the Staggers Act. Their services improved, the safety of the transportation of their products has improved greatly. On a real basis, they’re paying much lower rates for much better service. I think they do appreciate that and realize the challenges of over-the-road trucking.
If there is going to be real serious discussion about potentially re-regulating the industry, there are enough people who remember the bad old days who will speak up and say we do not want to go back to that. If we were re-regulated, we would have an obligation to our shareholders to probably reduce capital spending. If we can’t earn an adequate return on capital because of re-regulation, we will spend less and I don’t think that’s a good thing for the country. So, while there is a change of Administration, I think the need for freight rail and the role we play in this economy will be recognized and there will not be unwise re-regulation of the industry. In general, policymakers in Washington come up with wise policies. They look at all sides of the equation and decide what the appropriate thing is.
Ward: Absolutely. We’re much less fuel intensive than trucks, much more environmentally benign. We’ve had an ad campaign where we talked about the 423 ton-miles per gallon that you can get by train. It’s amazing to me that, when I go to the dentist or meet someone in the grocery store, that idea has really stuck with them. I think people became much more aware of the price of fuel with the run-up in the price of gasoline this summer, and that really strikes people. That and the 280 truckloads that could be on one train. So more and more people are realizing the environmental and the energy independence values we bring. Interestingly, I think the trucking companies are realizing that, too.
More and more truckers are wanting to partner with the railroads in intermodal movements. Many of the younger entrants into the workforce don’t particularly find the lifestyle of the over-the-road trucker all that appealing, where they’re away from the family for two or three weeks at a time. For the trucking companies, this is a very nice blend of us working together where they can do the local pickup and delivery and give that TLC the customers that don’t have a rail infrastructure need, get their drivers home to their families every night, and let the railroads do what they do really well, which is moving freight between major city pairs and getting the environmental and energy conservation benefits of using rail in the interim. We’re going to see more and more of that over time.
Ward: The trend is toward containerization. Obviously it’s been in place for many years on overseas traffic, but even on the domestic side, we’re starting to see a move toward containerization. An example is Schneider National, which has decided to move from trailers to containers. I think you’re going to see more and more of that over time because that allows us, on import or domestic moves, to take advantage of the great economies of the doublestack train network.
Ward: Traffic patterns are always changing, because people are always trying to find better ways to do things to deliver value to their customers. Obviously, the predominant port for imports is Long Beach-L.A., but we’re starting to see the East Coast ports growing at a faster pace from a smaller base. When the Panama Canal work is completed in 2015, you’re going to see even more vessels going through there to ports like Jacksonville and Norfolk and Savannah and Wilmington and Baltimore. There’ll be continued growth on the West Coast as well moving into the heartland. If some manufacturing improves in the Midwest, you’ll see the reverse moves, with those containers moving overseas. So, we have to remain dynamic and flexible, because the world economy and traffic patterns are constantly going to be in flux.
RA: What about technology? There’s a legal requirement for Positive Train Control.
Ward: We need to have PTC by the end of 2015 on routes that have co-mingled commuter and freight operations, as well as those routes where there’s TIH (toxic inhalation hazard).
Ward: Yes, but clearly what would impact us the most are the requirements for TIH. For most of the Class I railroads, it means that probably 70% to 80% of their systems would have to have PTC. One of the clarifications that may be required: If there’s a customer that ships a few cars on a branch line, is PTC a requirement? If so, how is that paid for, because PTC is not inexpensive. So, it’s going to be a major initiative to roll all of that out over the time frame.
What’s more exciting to me is some of the technologies that are available today with satellite communications. We have something we call ERAD (Event Recorder Automated Download), which feeds train handling [data] to a satellite: what notch it is in, whether it’s in dynamic brake. We are now mapping our entire system in GIS (Geographic Information System)—what’s the curvature, what’s the grade, what’s the track profile. Then we’re creating algorithms that will allow us to save a configuration for a train, be it a 110-car coal train or an 80-car merchandise train, and what the proper train handling is for that particular train. Then, we’ll be able to get downloads from the computer to give feedback to the engineer on how he handled his train against the ideal. We think they’ll like that feedback, because our employees come to work wanting to do a good job, wanting to do the right thing. If they can get some better feedback as to the best train handling possible, I think we’ll be safer, and more fuel efficient.
There’s lots of technologies that can be deployed like that. We’re deploying a lot more detection equipment, you know, for instance the WILD (wheel impact load detectors), so we can try to catch potential failures through technology rather than through a derailment. The last way you want to find a flaw is through a derailment.
We have hotbox detectors throughout our system as all railroads do. But right now, until you get to a certain temperature, it really doesn’t set off an alert. Depending on your spacing, that may or may not create a burned off journal. We’re starting to feed that data from those individual hotbox detectors and trend it. So, if a wheel is having a problem, you can see it gradually heating up and giving an earlier alert. We’re doing this as an industry, where we can hand off data to one another and catch potential problems before they create a derailment. With the technology becoming less expensive, it allows us to do these kinds of things to really improve our safety and productivity.
Ward: There is a combination of factors. We actually embarked upon this about five years ago. You need to refresh your dispatch system every so often, and we decided it was time to do that, to put some better programming in, some better aids to our dispatchers. With Conrail, we now have dispatch centers in Indianapolis and Albany. When we looked at this redesign, we wanted to make sure that we had good portability. Before, everything was centrally hard-wired here in Jacksonville. The new dispatch system is much more portable and flexible. There’s real value of having dispatching close to the actual operations. We’re bringing many new employees into our industry, and it’s my view that having the dispatcher closer to the operations is actually very beneficial. They get to know the people, they get to know the territory better. It makes it less of a video game, realizing that there are physical locations, there are sidings, and understanding the ebbs and flows. Having dispatchers closer to the field operating people, where they can learn and they can learn from one another, is much more effective.
Ward: The proxy contest was quite heated. But they now have four board members seated. We had one board meeting since finalization of the results. So far, it’s been very good. We’ve been spending a lot of time filling them in on a bunch of inside information about the company. Obviously, there’s only so much they can know about the company as to where it’s heading from outside public records, so we’ve been having them in for orientation sessions to review what some of our longer term plans are. The attitude of all of the board at this point is, we’ve been creating great value for our shareholders here over the last five years, and all of us want to continue to do that. If there are good ideas that can help us do that, we’re going to embrace them.
One thing that was part of their philosophy was that the company ought to be extremely leveraged. I think they changed that viewpoint, given what’s going on in the credit markets. They do agree with our philosophy that we should be an investment-grade company. So far there’s been no acrimony. I’m very hopeful we’ll continue on that path, but it’s a little early to take an exact read of how all that plays out.
Copyright © 2007. Simmons-Boardman Publishing Corp.