Eastern Railroad Discussion > Fred Frailey's PSR article in latest Trains magazine

Yes, another PSR (Precision Scheduled Railroading courtesy of the late E Hunter Harrison) thread!

Myself, being an operations person, have been very interested in following what has been happening with the wild fire spread of this "concept" to pretty much all the Class One railroads, usually with much fear to myself as to what this is going to do to the industry.

Today, I read Fred Frailey's article in the latest Trains magazine, and it left me more questions, than answers, about PSR, and its out comes.  Fred talked about the obvious things that has been done at the railroads in which EHH has been a CEO, mainly the whittling down of the companies to their bare bones, so to get as much efficiency out of the companys' assets as possible.  However, then he went on talking about how these companies are doing, in some cases, 10 years after PSR had taken control of their operations, primarily talking about CN.  I felt like I was reading an industry trade publication article, like something I'd read in Railway Age, where all that is talked about is the positive aspects of the subject matter, unfortunately.

I think what really got me was how Fred talked about the incredible traffic gains that CN has seen in the past couple of years, but he left out some obvious other factors that probably had a much greater role in CN getting those gains.  Things like, picking up major customers that defected from CP (CN's primary competitor) after they implemented PSR, higher oil prices and a booming oil production region, a booming US and Canadian economy, and other factors like luck in busy agricultural transportation markets (ie, lots of grain trains) and other unit train commodities.  As I see it, CN's big booming business may have more to do with just plain good luck than PSR.  Now I'm not saying CN hasn't done anything to help its position, as they have been very good at strategic planning when adding to their system, which has put them in some great markets and opportunities, but I don't think PSR is what made this possible.

In fact, it seems like the facts would support that PSR has done just the opposite.  Another obvious item that was left out of Fred's article was how CN has collapsed under the weight of all this bulging traffic, even to the point that its CEO resigned!  Now this problem, at least in my opinion, is absolutely, direct tied to PSR, and it's after affects.  It seems to me that CN parred down it's assets to that bare minimum that PSR requires, such that CN could not handle growing or expanding its business; however, the luck of fate (and some good strategic planning on gaining new routes) has given them a growing business regardless of PSR.  In fact, PSR itself has been a huge detriment to the expansion of CN's business.  

I wonder if CP, CSX, and now UP, NS, KCS, and has Fred has hinted at, BNSF, will have as good of luck in the end....

And I am disappointed in Fred's article, I really expected a more balanced, and thorough, article from him.

When a cost benefit analysis, etc is prepared, there are often alternative scenarios. Assume that traffic grows 5% annually,for example. Or, assume that labor cost grows by 10% annually, driven by health care and disability costs. Assume that high margin chemical traffic grows by 7% annually, and we can raise rates.

Management will often decide that some scenarios aren't worth considering. The second track on a line that has abundant spare capacity, already. Perhaps you're already paying taxes on that extra track, and maintenance expense is assumed to increase by some factor. A new pipeline will siphon off crude oil traffic.  In the EHH mindset, he clearly intended to drive off what he saw as unprofitable traffic.  Taken together, these factors mandate the second track comes up. 

But, an unexpected surge in oil, chemical, grain, happens.  Or Ottawa and Victoria talk an expected new pipeline into oblivion.

Lots of unexpected stuff happens. That's life.  But, maintaining a cushion of capacity, or being ready to pivot toward Plan B is essential.  Autocrats like EHH believed you were on his team, all in, drinking his Kool-Aid, or you were the enemy.  Regardless of the quality of your proposals and alternatives.

BNSF had a similar meltdown in 2013-2014 under unexpected increases in traffic. Seems they even shut down Amtrak for a period. BNSF is widely lauded as the "anti-PSR" model. Thank goodness that Berkshire-Hathaway could avert their eyes while the BNSF dumped hundreds of Millions of dollars into the property. I suppose CN needs to be a little more circumspect in their approach to throwing money at problems.

 

I took a different message from the last paragraph of Failey's article.  The fundamental question he raised is: Who does the business work for, the stockholders or the customers?  If the management focuses on benefit to the stockholders (EHH's model), then you can ignor the customers.  You run the railroad for efficiency and the customers can take your service as is or they can leave it.  That may work for a monopoly (and much railroad business is just that); but not where there is competition.  Gerry

I always felt that the PSR model was finance/operating ratio based. Maximize shareholder equity while minimizing your customer base. I don't understand how this can be a long term operating plan. At some point the customer base will have eroded enough to not be able to maintain that super low operating ratio and/or the past interactions of the railroad will drive all customers or potential customers to different transportation modes. I would agree with the OP on CN being a little lucky to have its current growth rate, yet at the same time the management has made an effort to go out and woo former or new customers and provide service to them.

The last I had heard, when CP owned the southern end of the D&H they had only 1 online customer between Binghamton and Mechanicville. This customer count was down substantially from when they took over the railroad. This is a great example of how the PSR model creates the loss of customer base, at least how EHH implemented it. Sure the operating ratio went down, and equipment and crew numbers went down, but you are shrinking your market. I feel this is totally driven by Wall Street and in particular by "activist" investors who like to wring every last cent out of a company until it is a shell of itself and is no longer viable. This is certainly not unique to the RR industry (see General Electric), but it is a disturbing trend that I don't really see passing any time soon.
    

GPutz Wrote:
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> I took a different message from the last paragraph
> of Failey's article.  The fundamental question he
> raised is: Who does the business work for, the
> stockholders or the customers?  If the management
> focuses on benefit to the stockholders (EHH's
> model), then you can ignor the customers.  You
> run the railroad for efficiency and the customers
> can take your service as is or they can leave
> it.  That may work for a monopoly (and much
> railroad business is just that); but not where
> there is competition.  Gerry

And this is why I so disagree with the federal or state governments giving huge amounts of corporate welfare to the railroads for new operations projects, like CSX tunnel and corridor clearance projects.

Yes, the far right, or left, definition of capitalism says that a business only has to answer to it's owners, but everyone knows that this is not the case in reality.  Every person, and business, also has a responsibility to communities, people, the environment, etc.

mrbill11 Wrote:
-------------------------------------------------------
> I always felt that the PSR model was
> finance/operating ratio based. Maximize
> shareholder equity while minimizing your customer
> base. I don't understand how this can be a long
> term operating plan. At some point the customer
> base will have eroded enough to not be able to
> maintain that super low operating ratio and/or the
> past interactions of the railroad will drive all
> customers or potential customers to different
> transportation modes. I would agree with the OP on
> CN being a little lucky to have its current growth
> rate, yet at the same time the management has made
> an effort to go out and woo former or new
> customers and provide service to them.
>
> The last I had heard, when CP owned the southern
> end of the D&H they had only 1 online customer
> between Binghamton and Mechanicville. This
> customer count was down substantially from when
> they took over the railroad. This is a great
> example of how the PSR model creates the loss of
> customer base, at least how EHH implemented it.
> Sure the operating ratio went down, and equipment
> and crew numbers went down, but you are shrinking
> your market. I feel this is totally driven by Wall
> Street and in particular by "activist" investors
> who like to wring every last cent out of a company
> until it is a shell of itself and is no longer
> viable. This is certainly not unique to the RR
> industry (see General Electric), but it is a
> disturbing trend that I don't really see passing
> any time soon.
>

I think you bring up a good point here.  What hasn't been talked about with PSR, and this driving away of customers to only appease to the few, most profitable one's, is that railroads are still a hugely capital intensive businesses with a great deal of fixed costs.  With fewer and fewer customers, these large fixed costs are now being supported by fewer and fewer customers and lower revenues.  You can only cut back so far on the variable costs in this industry, as there will always be a large fixed cost component.    

This example also creates a triangulation of private profit from public investment, along with semi monopoly controls. Like the cable industry "owning" entire towns.

Back when any long haul required three or four railroads, the players had to hustle to keep business.

Posted from Android

spwolfmtn Wrote:
-------------------------------------------------------
> this
> driving away of customers to only appease to the
> few, most profitable one's,

...which is pretty much what John Kneiling was advocating 40 years ago.

TAW

Totally agree with SPWOLFMTN's original post comments. Just my opinion, but nobody ever considers that the growth at CN is possibly also a portion of the business that was driven away by EHH's cutting and downsizing, being brought back. In fact, that's exactly what the post-EHH management at CP and CSX have been working at (and probably at CN too), regaining lost business and bringing closed or reduced assets back online. Mr. Frailey and others never seem to notice that "PSR" isn't responsible for anything to do with business growing once post-EHH management starts reversing aspects of "PSR".

Hopefully we have just about closed the book on Kneiling's ideas. I'm glad he didn't have a hedge fund at his disposal.