Class 1 freight rails: part 3 – Hunter Harrison, PSR, and investment implications
Burlington Northern Santa Fe, Canadian National, Canadian Pacific Kansas City, CSX, Norfolk Southern, Union Pacific
No analysis of the North American railroad industry would be complete without a discussion of Hunter Harrison as no single person has had a bigger impact on the operating performance of Class 1 railroads over the last 25 years. A lifelong railroader who began his career oiling railcars in the early ‘60s when he was just 19 years old, Hunter had turned around 3 railroads (Illinois Central, Canadian National, Canadian Pacific) and was on his way to reviving a fourth (CSX) by the time he passed away in 2017. The principles enabling the dramatic productivity gains at the companies he steered are codified as Precision Scheduled Railroading.
Before PSR took hold across the industry, trains would not depart until fully loaded. They would wait for every shipper’s car to be hitched, such that an outbound train to Kansas City could be idling in Oklahoma City for 14 hours until the arrival of an inbound train from Houston, which in turn would hold up the train from Kansas City to Chicago, etc. Waiting optimized for longer trains but also had the nasty side effect of congesting yards and impeding on-time delivery, much like globules of cholesterol clog the arteries of a circulatory system, preventing blood cells from delivering oxygen to organs. What Hunter Harrison envisioned was a fluid system, one where the right payloads would get to the right place at a scheduled time.
In a network, where nodes are reliant on other nodes for traffic, a constriction here can create delays over there, which can cascade into hold ups over there, etc. Anyone who has flown commercial intuitively understands this. Like airport terminals jammed with stranded passengers, yards of mounting railcar inventory are symptomatic of a sick network. It follows then that a healthy network is one where cars are in constant motion, as approximated by dwell time (the amount of time a railcar spends waiting at a terminal) and, relatedly, car speed (distance divided by time, with time going down as cars spend less time idling at terminals). A train with 200 cars is preferable to one with 80 – same fixed cost of fuel and crew spread across more payload – but those cost savings are for naught if the time spent building longer trains causes delays that create inefficiencies elsewhere. That’s not to say train length doesn’t matter. Just that it is optimized within hard scheduling constraints – fewer pickups with strict take-it-or-leave-it departure times – rather than according to the whims of a customer.
PSR dictates that a railroad optimize car movement across the entire network rather than hit local maxima. In the same way that UPS concerns itself with the on-time door-to-door delivery of packages than with the movement of its trucks, so too do PSR proponents emphasize the predictable delivery of carloads from origin to destination rather than the speed and on-time performance of its trains. It doesn’t matter if a train gets from one yard to the next in record time if the railcars it unloads just sit there awaiting pickup for days.
I certainly don’t understand the intricacies of PSR well enough to get into the fine-grained details of how this is done (and in any case, describing the nuances of a rail network in an essay is kind of like inferring the shape of a complex 3D object from its 2D shadow) but at a high level, scheduled railroading demands simplification, which in practice means: removing hump yards (hundreds of acres of track-laced land where incoming railcars are sorted according to shared outbound destinations), including the associated infrastructure and supervision required to manage its multiple processing steps, and switching trains at smaller flat yards instead; discarding underutilized lines and shuttling longer trains on more direct routes; commingling different freight types to drive incremental volume without additional train starts; and yes, pissing off customers forced to adapt their logistics to the rail rather than the other way around.
Managing network health holistically has all sorts of benefits. Point-to-point hauls lead shorter transit times and more reliable delivery, in the same way flying direct does. Keeping more trains in motion longer means fewer locomotives and railcars for a given volume of freight, which means fewer crew members to drive those trains, fewer mechanics to maintain them, and fewer yards to hold and switch them (with the freed up land either sold or repurposed into warehousing and transloading facilities that bind a railroad closer to their customer). It means the railroad can raise wages for the remaining workforce and still realize margin gains as trains haul freight over longer distances for every hour a unionized employee is paid. It means they can reserve less inventory, parts, and shop space to repair trains and mix toward a newer, lower maintenance fleet as the trains removed from action are the oldest, least fuel efficient ones most in need of care. It means they can stand behind superior service that shippers will pay up for.