Burlington Northern Santa Fe's (BNI) Matthew Rose is not the only railroad CEO who has captured the attention of a high-profile billionaire investor. So has E. Hunter Harrison, chief of Montreal-based Canadian National Railway (CNI), of which Bill Gates' private investment firm Cascade owns 7%, making it the company's largest shareholder. (The Bill and Melinda Gates Foundation owns another 1.67%). Harrison, a 63-year-old Memphis native who has worked on railways ever since he dropped out of college in 1964 to crawl beneath rail cars and squirt oil on their bearings at the St. Louis-San Francisco Railway Co., estimates that Gates has netted $1.8 billion since he first invested in CN in 1997. "I was bringing that to the attention of his advisers who are doing the investing," Harrison says. "And they said that will take care of his tax bill." Harrison has never met Gates. Through spokespeople, Gates declined to comment. A call to his financial adviser was not returned.
The key to CN's high returns has been Harrison's mission to transform the company into what he calls a "precision" or "scheduled" railroad. Since becoming the chief operating officer of Canada's largest railroad in 1998, Harrison has run the company's freight locomotives like passenger trains and airplanes—on a strict schedule. Many railways send locomotives off only when their cars are filled to capacity. Harrison found that when he gave up waiting for every car to fill to capacity, he ended up running cars at about 80% capacity but was able to run many more cars through the railway's system since it was operating more efficiently. What CN lost in capacity is made up on volume—being able to turn around its locomotives more efficiently. "Everything we do revolves around the rail car and getting it to the customer on a predetermined schedule," Harrison says.
Earnings Spike in Four Years
The different approach has enabled CN to become arguably the industry's lowest cost operator. Harrison slashed the railroad's fleet by more than 1,000 locomotives, while more than doubling the number of miles traveled daily by each car to approach 200. He also boosted the tons hauled by the company's trains by nearly 20 times, to 20,000. "You make the asset sweat so you don't have to have as many assets," says Harrison. "That's part of the power of this." Since becoming CEO in 2003, CN's profits have more than doubled, to $1.8 billion at the end of 2007 from $669 million at the end of 2002.
Now, Harrison wants other railroads to convert to his philosophy. He believes the next frontier for CN's growth will involve running freight trains as fast as 90 mph. Today, the maximum speed is 60 mph. But trains generally run at 28 mph through CN's network, in part because other railways have not adopted similar precision railroading practices. CN's trains, like other railroads' trains, average out at the slower speed because of bottlenecks—like long waiting times at logistics centers—which could be improved (it wouldn't completely solve the problem) if everyone agreed to run on schedules. "If we bring a shipment from Toronto to Chicago and hand it off to another railroad, we can schedule it to Chicago. But we can't deal with the whole trip," he says. CN has to drop the shipment off at a rail yard for another company to pick up that is not on a strict schedule. So CN has no control over how long a load may end up waiting in the rail yard to be reloaded. "One of the things that is the biggest challenge for us to fully take advantage of the model is to get other railroads to come along."