A response to John Oliver's critique of E. Hunter Harrison and 'precision scheduled railroading'

On Sunday, Emmy award-winning comedian John Oliver set his sights on the railroad industry in a 28-minute segment. His critique is summarized well in this article in The Guardian: John Oliver on the 'terrifying' state of America's freight train industry. Excerpt:

The industry used to be heavily regulated but there were pressures to deregulate in the 1970s to compete and a large number of companies whittled down to just six "massive, extremely powerful companies" all watched by the Federal Railroad Association ("FRA"), a "fairly weak regulator" that only has the capacity to oversee less than 1% of activity.

It means that "railroads themselves have the primary responsibility" which led Oliver to share the equation: industry + deregulation – government oversight = episode of Last Week Tonight.

There is then "limited insight into what's actually happening" with neither the FRA or anyone else knowing where most trains are or what they contain.

It means danger is often scarily nearby, with volatile, highly explosive crude oil being carried next to the Hudson river for almost 50 miles. "That is not unique to the Hudson rail line," he said. "Trains that contain combustible cargo are regularly referred to as 'bomb trains', which is terrifying. Bomb Train doesn't sound like anything that should be on a railway. It sounds like a Jason Statham movie that has 27% on Rotten Tomatoes."

Oliver took particular aim at legendary railroad executive E. Hunter Harrison, who pioneered precision scheduled railroading ("PSR"). Oliver claimed PSR was created to aggressively pursue efficiency and squeeze margins in order to please investors – to "make Wall Street idiots extremely happy."

Well, I was once one of those "Wall Street idiots"... I invested (and made healthy profits) in two railroads after Harrison took over, Canadian Pacific – now Canadian Pacific Kansas City (CP) – and CSX (CSX).

I also had the pleasure of meeting Harrison, who passed away six years ago this week, and studied him closely (for more about him, I recommend reading Railroader: The Unfiltered Genius and Controversy of Four-Time CEO Hunter Harrison)... and I have had many conversations with railroad industry insiders.

I think Oliver's attack on Harrison and PSR was grossly unfair and highly misleading for seven main reasons...

1) Oliver claimed that longer trains, which are a key element of PSR, "helped top execs get cash," at the expense of safety... But, in fact, long trains reduce accident frequency per carload, are more efficient, increase train speed and on-time performance, and lower costs to the shipper and the environment (fewer emissions).

The numbers are staggering. In the first four years under Harrison's leadership, according to a CP press release dated April 7, 2016:

• Train length increased by 19%.
• Locomotive productivity rose by 40%, allowing the retirement of more than 40% of the company's fleet.
• Fuel efficiency increased by 14%.
• Trains spent 19% less time in terminals.
• Network speed jumped 40% and travel time between Calgary and Toronto dropped by 27%.
• Most important (and contrary to what Oliver would have you believe), CP had the lowest accident frequency for 10 consecutive years.

As a result, on a mere 18% increase in revenue from 2012 to 2015, earnings per share grew 133% and free cash flow soared from $93 million to nearly $1.2 billion.

This was not only great news for shareholders, but all stakeholders, as the environmental impact was reduced dramatically, customers got much better service, and CP was able to invest in growth and modernization.

Ah, but one group lost: union leaders, as the number of employees at CP dropped from 20,000 to 14,000 (more on this below).

2) Oliver spent a good part of his segment focusing on blocked road crossings, which are inconvenient for drivers waiting for a train to pass and can pose safety issues if, say, an ambulance can't get to an injured person.

This is indeed a problem, but it's not due to PSR. The total number of minutes of blocked crossings is lower if you have one 100-car train than two 50-car trains because the road is blocked for some time in advance of each oncoming train.

3) Oliver grudgingly acknowledged that accidents are down 44%, but dismisses that massive improvement by explaining that it's because railroads are running far fewer trains. Well, yes: There are fewer accidents because railroads are moving more freight with fewer, longer trains, which is what Harrison figured out and implemented via PSR.

Keep in mind that train accidents generate far fewer deaths and accidents per "gross ton mile" of freight moved than the alternative, trucks. But of course train accidents, in the rare instances that they occur, tend to be much bigger and hence capture headlines... whereas hundreds of truck crashes don't.

4) Oliver warned that railroads are carrying toxic and hazardous freight – creating scary sounding "bomb trains" – but in fact trains are common carriers and have no choice but to transport these things.

5) Oliver claimed that the FRA is a "fairly weak" regulator and that employees who report safety issues face retaliation, but in fact there are incredibly extensive regulations and rules, to which employees provide oversight. Every railroad has an anonymous tip line and a complaint section on its website. It's truly anonymous and gets used. Any employee can contact the FRA, and nobody will know.

6) Oliver said that railroads have cut staffing to dangerously low levels, often with one-man train crews and few train inspectors, who are overworked. To the extent this is happening, Harrison isn't to blame – he opposed it, and this has nothing to do with PSR.

Also, note who is complaining about low staffing levels: union leaders whose personal compensation is tied to the number of members in their union. When management makes recommendations that improve safety, pay, and quality of life, but eliminate silly rules that keep the head counts high, guess who opposes this? Union leaders, of course...

Concerning work hours, there are extensive rules – which are absolutely adhered to – about how many hours each type of employee can work.

It's true that some of the conductors and engineers miss some nights home with their families. That's part of the job, just like being in the Navy, military reserves, or being a pilot, flight attendant, or truck driver.

But they would have far fewer nights away if they approved the rule change proposed by the railroads that would allow for crew switching. This would enable a crew, for example, heading from New York City to Chicago to stop halfway and swap with a crew on a train heading from Chicago to New York City. All the employees would be able to get home to their families and this would save the railroad lodging costs – but it would reduce head count, so the union prevents it.

Similarly, unions prevent railroads from adopting technology that could inspect the equipment faster, cheaper, and more accurately.

In truth, the conductors, engineers, and inspectors have amazing jobs, which they almost never quit, but the union leaders ensure that they are always feeling aggrieved and abused. That is the wellspring of the union leaders' power.

7) Lastly, Oliver attacked Harrison personally – accusing him of sacrificing safety to improve profits and that he had "blood on his hands."

In reality, Harrison was a great and compassionate man. If there was ever an accident in one of his yards, he would run out and cradle the injured person until the emergency medics arrived. He started as a laborer himself. He was one of them and cared deeply about their safety. Every board meeting at the companies he ran began with an in-depth discussion safety – at least 30 minutes and sometimes far longer.

There are many causes of safety issues, but one shouldn't overlook (as Oliver did) the unions, which won't allow management to fire employees, even for repeated safety-code violations or cocaine use!

To understand what a hatchet job Oliver's piece was, his team only reached out to one major railroad (that prefers to remain anonymous) 24 hours before the segment aired, which obviously wasn't enough time to respond.

In summary, while I have appreciated Oliver's criticisms and scathing takedowns of other industries in the past, this is a good reminder to not blindly take this sort of thing by itself at face value...

Best regards,

Whitney

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