(The following article by Don Phillips was posted on the Washington Post website on December 16.)
JACKSONVILLE, Fla. — CSX is not John Snow’s railroad anymore.
In the 11 months since Snow left the eastern railroad system to become Treasury secretary, his successor as chief executive has moved the corporate headquarters here from Snow’s chosen city of Richmond, ushered out the few remaining managers most closely connected to the Snow era and acknowledged that CSX for years paid more attention to its finances than to the condition of its track.
CSX, with 23,000 miles of track, blankets the East from Canada to Florida and from the Mississippi River to the Atlantic Ocean. MARC and VRE commuter trains rely on its track in the Washington area, as does Amtrak.
Today, the company is undergoing a catharsis. Even as it struggles with high costs and weak earnings, CSX is pouring money into an under-maintained track structure. Officials at passenger railroads that depend on CSX to operate their trains say they are seeing a new attitude.
New chief executive Michael J. Ward also has not taken long to shed his reputation as a manager too nice and too entrenched to shake things up.
On Sept. 11, he fired a longtime colleague and friend, chief operating officer Alan F. Crown, and assumed the operating duties himself. Then, on Nov. 10, Ward sent a memo announcing that he would cut three layers from the current 11 layers of management, resulting in the elimination of 800 to 1,000 non-union employees.
“The smaller, more incremental changes we made over the last 12 months have not been enough to create the dynamic, entrepreneurial culture we need,” Ward wrote in the memo. “The slow pace of our progress frustrates customers, investors and each of us.”
In the latest round of cuts, 20 vice presidents were eliminated in one day last week.
Ward said in an interview that he decided to act after seeing operating and financial numbers for the third quarter, in which the company’s earnings declined 15 percent from the same period a year earlier despite an improving economy. He said there were reasons for poor performance in the first two quarters, when the eastern United States was pounded by snowstorms and a hurricane. “But as we got into the third quarter, and it wasn’t improving, I had to sit back and say, ‘Where are we going?’ ”
Ward inherited a railroad plagued by years of embarrassing wrecks and criticism by federal regulators of its physical condition. A scathing Federal Railroad Administration report in 2000 effectively put CSX on probation for two years.
After two Amtrak trains derailed on CSX tracks last year, the FRA inspected all CSX track on which passenger trains ran and concluded that more than 10 percent of it did not meet CSX’s own safety standards. The Transportation Department inspector general expressed concern last Wednesday in a memo to FRA officials that, while CSX was doing more in some ways, it had replaced its track ballast, the rock base on which crossties sit, at a level “significantly below” all other major railroads over many years. Alexis M. Stefani, a DOT assistant inspector general, suggested that the FRA work with the railroad “to determine whether CSXT ballast practices represent a safety issue.”
Ward and other officials concede that CSX for years limited capital spending in part to make its finances look better. It began reducing spending in the late 1980s, shortly before Snow became chief executive. From 1991 to 1998, CSX spent less per mile of track than any other major railroad, regulatory filings show. Meanwhile, from a loss in 1991 and earnings of only 10 cents a share in 1992, CSX Corp. earnings soared to a record $4.17 a share in 1997, and CSX’s stock price nearly quadrupled.
“We got pretty good at stretching a dollar,” said Tom Schmidt, CSX’s vice president for engineering. “But that rubber band got stretched a little too thin in the late 1990s. By 2000, time caught up with us.” Shortly after the interview, Schmidt got caught up in the management downsizing and retired.
In 1999, Snow passed over Ward for the president’s job at CSX in favor of Ronald J. Conway, then executive vice president of operations at Conrail, parts of which were being merged into CSX after being acquired two years earlier. “Ron Conway recognized the problem immediately” and made clear he wanted major investments in track and facilities despite plummeting earnings, Schmidt said. From 1999 to 2000, CSX’s expenses per mile fixing tracks, signals and the like shot up from about $18,000 a mile to more than $27,000, according to regulatory filings. CSX said a comparison of the years 1995 to 1998 with 1999 to 2002 showed the number of ties replaced per mile up 31 percent and the rail replaced per mile up 19 percent.
Snow fired Conway just nine months after naming him president in a disagreement over how Conway handled the FRA safety probe and replaced him with Ward, a CSX veteran. But Conway’s programs were preserved. Since 1999, track-caused derailments are down significantly. Main lines also have far fewer “slow orders” — temporary speed restrictions imposed because of the condition of the track.
“We believe we were on the right track before the FRA” report in 2000, Schmidt said.
Snow, through his spokesman Rob Nichols, declined to comment for this story.
Even after the FRA audit, CSX suffered wrecks that appeared to be caused by track or track maintenance mistakes, including the derailment of Amtrak’s Auto Train in Florida on April 18, 2002, and Amtrak’s Capitol Limited on CSX track in Kensington on July 29, 2002.
Another wreck, a July 18, 2001, derailment and fire in the Howard Street Tunnel in Baltimore, may well have not been CSX’s fault. But it did illustrate a new attitude in how the company has dealt with its problems.
On the first day, Ellen M. Fitzsimmons, senior vice president for law, sent agents to Baltimore with instructions to immediately pay all expenses and the cost of property damage for affected homes and businesses along Howard Street — no strings attached — “even if it was a hot dog stand.” This, from a company with a history of fighting lawsuits and trying to hold down settlements as much as possible.
Fitzsimmons said cultivating such goodwill will help the railroad lose fewer lawsuits and reduce settlements. “It doesn’t matter if you were right,” she said. “If you were clumsy about it, you’ll die the death of a thousand cuts.”
The outspoken Fitzsimmons is also point person in CSX’s attitude toward passenger trains. Among other things, she said, when the railroad system becomes congested or delayed by weather, passenger trains come first under all circumstances. Fast freight trains are next in the pecking order and bulk trains, such as coal trains, are last.
The railroad has traditionally maintained an adversarial relationship with commuter agencies and Amtrak, and Ward appeared to endorse that stance in his first interview after being named chairman Jan. 31. “We don’t make any money” operating passenger trains, he said at the time. “The fees are not worth the priority they get.”
CSX officials and commuter authorities agree that the change has its roots in a major snowstorm that slammed the East Coast just two weeks after Ward became chairman.
The railroad canceled all service in the Washington-Baltimore area, including all Virginia Railway Express and MARC commuter trains, for days and refused to let rival Norfolk Southern use relatively clear CSX tracks between Alexandria and Washington to run Manassas line trains. Commuter agencies had a hard time reaching any railroad official and then were sometimes brushed aside. One CSX official in Jacksonville reportedly barked, “I don’t have time to worry about commuters.”
While CSX could not keep open its lowland route from Washington to Richmond, Norfolk Southern kept open its mountainous Virginia main line, where weather conditions were much more treacherous.
“When we made decisions that were the opposite of Norfolk Southern, it was hard to see why we diverged,” Fitzsimmons said. Ward put it in more blunt terms: “I thought we were taking more hits than we needed to in some publications.”
CSX operates 60 trains for Amtrak, more than any other freight railroad, and until recently it usually ran them late. Now, the statistics tell a different tale.
Between 1999 and 2002, during the high-delay summer months from June through September, CSX paid $3.88 million more in late-train penalties under the Amtrak contract than it received in on-time incentives, including a $2.8 million payment in summer 2002. This June through September, however, CSX was $1.5 million in the black. The summer months are considered the best period to measure a railroad’s passenger on-time performance because this is when crews do most of their major maintenance work and when hot weather can force trains to slow down to avoid accidents from buckling track.
VRE, which issued scathing public statements about CSX’s failure to operate in last winter’s snowstorm, sent a letter to Ward on Oct. 1 praising the “extraordinary measures” CSX took to try to keep trains running during Hurricane Isabel.
As Isabel bore down on the East Coast, CSX brought in hundreds of maintenance personnel with equipment to remove fallen trees and repair track. Dozens of new electric generators were installed at road crossings so gates would continue to work when power lines fell.
There is no shortage of skepticism that CSX will stick with its changes for the long term, but even critics acknowledge and welcome them.
“Actually, CSX has been trying to do better,” said Amtrak President David L. Gunn, who has not been shy in criticizing CSX. “The things they can control short term, they are doing.”
The broader, long-term picture for CSX is less clear.
It has the industry’s highest “operating ratio” — 88.4 percent — meaning that the railroad spends 88.4 cents on operations for every dollar it earns. The mid-70s is considered good. Other key metrics, such as how long cars spend in yards and the average speed of freight cars, are not improving.
Speculation has abounded that CSX could be a takeover target for the Union Pacific Corp. Ward said, “There are absolutely no discussions between Union Pacific and us about a merger.”
Roger Nober, chairman of the Surface Transportation Board, which regulates railroads, said CSX seems to have been affected by a number of factors, including “external events and a lack of focus.”
“Clearly CSX has had some issues over the past year,” Nober said. “Are they in crisis? I don’t think they’re in crisis.”
Nober said he has heard no complaints from CSX customers about service. But he said a lot of customers think Ward may eliminate some of the longtime customer service managers with whom they have become comfortable.
Linda J. Morgan, Nober’s predecessor and now an attorney with Covington & Burling in Washington, expressed surprise that Crown was the first to go. “I’m always concerned when I see a person with that talent and dedication no longer be in the industry,” Morgan said.
For all of CSX’s problems, Ward notes that it is not in danger of a financial collapse. The railroad’s debt-to-equity ratio had fallen from a high of 62 percent, under the heavy load of the Conrail purchase, to 54 percent now — with a goal of 50 percent.
“We’re not in a meltdown mode,” agreed Jim Valentine, a railroad analyst for Morgan Stanley.
Morgan said CSX needs to improve its financial condition, and the Ward plan “obviously looks like an important step in that direction.”
But she adds, “I think the jury is still out on whether it will work or not.”