Asok Chaudhuri is a 26-year veteran of CSX Corp. and a predecessor company.
By the time he left in 2005, he had been senior vice president of corporate development with CSX Corp. and CSX World Terminals.
In more than two decades of rising in the executive ranks, he saw firsthand the company’s strategy — formulated and implemented; development; performance improvement; and acquisitions and sales of business units.
He expects more change — although different — from new CSX CEO Hunter Harrison over the next four years, assuming shareholders approve his contract in the next month or so.
Having analyzed CSX and other railway companies, Chaudhuri predicts more job cuts at CSX, possibly thousands more throughout the system’s operating territories.
That would be on top of the 800 management positions eliminated this month, including 500 in Jacksonville.
CSX says on its website the company employs nearly 28,900 people.
Chaudhuri wouldn’t be surprised either to see Harrison take a legacy leap to merge Jacksonville-based CSX with a Canadian railroad or a western U.S. railroad to create the first transcontinental system.
Harrison has been on the job since March 6, although he warns he could walk if shareholders don’t agree to an $84 million earnings payment to cover what he left at Canadian Pacific Railway Ltd. to run CSX.
“Hunter’s 72 years old but very passionate, energetic and, of course, knows railroad operations better than anybody else,” Chaudhuri said.
“Knowing Hunter and what he has done at the other railroads, one can assume that he will produce more than what has been achieved thus far at CSX,” he said. That team had been led by longtime CSX Chairman and CEO Michael Ward and President Clarence Gooden, who both retired.
Ward took the leadership of CSX in 2003, after 26 years with the company. Gooden joined a predecessor company in 1970, becoming president in 2015. Together, that adds up to 87 years of experience.
26 years at CSX
Chaudhuri’s speculation is based on his analysis of his time there and his analysis since.
After leaving CSX in 2005, he has been a principal with Jacksonville-based Heritage Capital Group, a mergers-and-acquisitions firm with global activities. His services include assisting business owners, executives and boards with strategies and purchases and sales in all industry sectors, including logistics companies.
Before he launched a career with British Petroleum in 1976, he earned degrees in physics, mathematics, applied statistics and a doctorate in operations research and planning.
He bases his insights on what he learned during those 26 years with CSX that started in 1979 with the predecessor Chessie System.
In 1990, Chaudhuri joined Jacksonville-based CSX Transportation and then CSX Automotive and CSX Intermodal before moving to CSX Corp.’s headquarters in Richmond, Va., as senior vice president of finance. Those headquarters moved to Jacksonville in 2003.
Chaudhuri’s last post with the company was senior vice president of corporate development with CSX World Terminals in Charlotte, N.C., from 2003-05.
During his time with the company, Chaudhuri played a leadership role in implementing CSX Corp.’s strategic decision to transform the company from a global multimodal transportation conglomerate into a pure rail transportation company.
He also led the company’s sale of the global port business to Dubai Ports and assisted in CSX’s acquisition and integration of Conrail.
‘Even if you’re good, you can be better’
It was during Chaudhuri’s six years serving on the board and audit committee of TTX Co., a supplier and manager of rail equipment, that he met Harrison, another board member.
Harrison was at Illinois Central Railroad at the time, which was later acquired by Canadian National Railway. He turned around both companies before joining Canadian Pacific.
“I saw him up close,” Chaudhuri, describing Harrison as “a passionate and tenacious guy with deep knowledge of the railroads” and focused on cost-efficiency and asset productivity.
“He is probably the single most revered and respected rail executive in the country today in the sense of producing results,” Chaudhuri said.
Chaudhuri also knew most of the top CSX management that left this month in advance of Harrison’s arrival.
Canadian Pacific Railway Ltd. announced Jan. 18 that Harrison was leaving his CEO post early. Hedge fund Mantle Ridge, led by CEO Paul Hilal, was working for Harrison to take the CEO role at CSX.
That wasn’t the first time a hedge fund has forced change at CSX, although not to Hilal’s degree. Chaudhuri said CSX has been making improvements.
CSX said it serves 23 states, the District of Columbia and two Canadian provinces. It said its network connects every major metropolitan area in the eastern United States, where nearly two-thirds of the nation’s population resides. It also links more than 240 short-line railroads and more than 70 ocean, river and lake ports with major population centers and rural towns.
Chaudhuri lauded management under Ward for stabilizing the company and making steady progress. He also noted that the railroad’s critical commodity — coal — is down by almost 50 percent because of lower demand, representing almost $2 billion in lost revenue.
Chaudhuri said Ward and his team had done a good job overcoming some of the challenges, but there was more to do, generating an opportunity for Hilal and Harrison.
“Any large company, even if you are good, you can be better tomorrow, at least in terms of certain metrics,” he said. Harrison is charged to make that happen.
He said the most important metric in the rail industry is the operating ratio — expenses divided by revenue.
A ratio of 70 percent, for example, means that for every dollar earned from a customer, 70 cents is spent on expenses — crew, labor, fuel, equipment and other expenses.
“The lower that number the better off you are,” he said.
Chaudhuri said CSX’s operating ratio as Harrison took over was just under 70 percent. That’s better that it was when Ward and his team took over in 2003. But as the accompanying table shows, its ratio is last among seven major railway companies.
In the U.S., railroads west of the Mississippi River also post better ratios in the mid-60s, he said. The ratio for the other Eastern railroad, Norfolk Southern, is similar to CSX’s, he said.
Among the reasons the ratios are different is geography. Canadian railroads traverse prairies, so they can travel thousands of miles without having to stop, he said. Western U.S. railroads also have less populated areas to cross than do Eastern companies.
“Those are advantages, whereas CSX and Norfolk Southern, they go through a lot of population centers in their network,” he said.
That means Harrison’s goal to reduce the operating ratio must tackle that challenge and the loss of coal revenue.
Chaudhuri said Canadian Pacific was the worst performing among the six North American railroads when Harrison took over. During his time there from 2012-17, it became one of the best performing railroads.
“Its stock price has gone through the roof. You have to give him the credit,” he said.
More job cuts?
CSX’s stock price rose 23 percent in one day when Harrison’s departure from Canadian Pacific was announced — and that he was headed for CSX. It closed at $45.51, up from $36.88.
It soared to $50 in the following weeks but has eased somewhat. It closed Monday at $46.21.
Chaudhuri said he believes Harrison’s expected improvements already were reflected in CSX’s highest stock price of $50.
“If Hunter can do even more than what is built into today’s higher price, then the market price will go up further. If he falls short of that, logic says that market price will come down,” he said.
Chaudhuri’s calculation is that Harrison would need to bring the operating ratio down to the high 50s to support the $50 stock price, or at least a 10-point improvement in the operating ratio.
“Can it happen?” he asked. “Probably it can, but it’s not an easy thing,” he said.
First, that would require more cost-cutting, and that includes people, followed by fuel and equipment, he said. Capital spending is another area.
“It is an area where cost-cutting without much near-term consequences are possible, but if it is not done thoughtfully, there will be adverse impact in the long-term,” he said.
Chaudhuri said that unless Harrison eliminates another 5,000 to 6,000 jobs throughout the system, not necessarily more headquarters staff, he might not be able to reduce the operating ratio to the high 50s.
“Then, the current stock price is not sustainable,” he said. Employment would need to drop to the low 20,000 range to support today’s stock price, he said.
Second, it would require more revenue. If even half of the coal revenue returns because of President Donald Trump’s promises to improve the coal industry, that could account for four or five points to assist Harrison.
“Then he will have to do his magic to bring it down, but all things told, I think for CSX’s ratio to dip below 60, something in the order of the high 50s, it’s a long shot without some external help such as the return of coal or a major technological breakthrough,” Chaudhuri said.
He said if cuts in the corporate income tax rates are enacted, that would help the stock price although not the operating ratio.
He said one theory is that Harrison let CSX leadership make the headquarters staff cuts before his arrival.
Harrison’s strength is running the trains. “The new management with Hunter’s leadership will have to streamline the operating practices,” Chaudhuri said. “That’s where he excels.”
Harrison is known for “precision railroading,” making the trains operate on time and on budget with the equipment and the assets. That optimizes both the cost of labor and the use of equipment.
“That’s what he’s famous for. That’s his magic,” Chaudhuri said.
Harrison cut 30 percent of the workforce at Canadian Pacific, which helped to improve the operating ratio from more than 80 percent to 60 percent in five years.
“That’s unprecedented,” Chaudhuri said.
Merger in the making?
It was about 2014 that Harrison and his hedge-fund partners wanted to merge CSX with Canadian Pacific. Chaudhuri expects Harrison to try again.
“If he is the architect of the trans-continental merger, then that would be a unique legacy. My sense is he probably will try,” Chaudhuri said. That would require concessions to win regulatory approvals.
For now, Chaudhuri believes Harrison will focus for his first 18 months on operating improvements. Then that leaves the remaining 21/2 years of his tenure to consider a merger.
“CSX then will be in a much better, stronger position to do the negotiation with whoever the partner is,” he said.
Even if a merger doesn’t occur before Harrison’s four-year contract is up, “at least he would have started and made good progress. It will still be his legacy.”
Chaudhuri doesn’t expect Harrison to move CSX’s headquarters from Jacksonville because that would be expensive, although some space consolidation will take place in the area.
EFFICIENCY RATIOS
Railway companies often are measured by their operating ratios (expenses divided by revenue). The lower the percentage, the more efficient. Figures are for 2016.
Canadian National 55.9%
Canadian Pacific 58.6%
Union Pacific 63.5%
Kansas City Southern 64.8%
BNSF Railway 65.5%
Norfolk Southern 68.4%
CSX 69.4%
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