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A Look at Kansas City Southern's Plan to Jump-Start Efficiency

Asit Sharma, The Motley Fool

North American rail freight provider Kansas City Southern (NYSE: KSU) is the latest railroad to adopt principles of precision scheduled railroading (PSR) in order to enhance efficiency. The company relayed to investors in January that it's assigned a cross-functional team among its top executives to implement PSR throughout its operations.

KCS has also hired Sameh Fahmy as a consultant to facilitate the effort. Fahmy, a former executive with Canadian National Railway , trained under the late Hunter Harrison, the legendary executive who led multiple implementations of PSR and launched CSX 's (NASDAQ: CSX) current successful implementation before passing away in late 2017.

Over the last month, KCS executives have presented at no fewer than four industry conferences; most recently, CFO Mike Upchurch recapped current company performance and goals on March 19 at the Bank of America Merrill Lynch 2019 Global Industrials Conference. Through these presentations, investors have some visibility into Kansas City Southern's early approach to PSR. Below, I'll recap the most important takeaways as we await initial results of the productivity exercise in mid-April, when the railroad is set to report on first-quarter 2019 earnings.

A Kansas City Southern locomotive emerging from a tunnel at dusk.

Image source: Kansas City Southern.

KCS is tailoring its approach to PSR

The extent to which railroad companies dive into PSR can vary greatly. CSX, which has launched a disciplined, textbook example of the process, has decreased reliance on hump (elevated switching) yards, developed simplified point-to-point routes where possible, enforced strict rail schedules with customers, reduced headcount significantly, and demonstrated a bent for shedding assets , from crews to locomotives to real estate.

Competitor Union Pacific (NYSE: UNP) has chosen to utilize "principles" of precision scheduled railroading as part of its broader "Unified Plan 2020" productivity program. Union Pacific is keen to derive the benefits from the process without too drastic an impact on near-term operations.

Similar to Union Pacific, KCS is eager to adopt principles of scheduled railroading while maintaining its own approach to productivity. Yet this doesn't mean that the company isn't embracing the philosophy behind PSR.

"Reduction" is an important theme for the railroad

KCS's management is focusing most visibly in its first phase of PSR on reduction initiatives that seek to wring higher productivity out of fewer resources. The company has set a near-term goal of reducing its locomotive fleet, which currently numbers approximately 1,100 units, to fewer than 1,000 locomotives.

Management relays that it's already seeing the benefit of removing locomotives from service in the form of lower depreciation, repair, labor, lease, and fuel expenses.

Concurrent with this asset optimization, the company is following a classic PSR practice of improving network fluidity by revamping the way routes are serviced. KCS has increased the utilization of intermodal trains, consolidated traffic having the same destination, and reduced work and repair events in the last few months.

The fruit of this service design project is most apparent in the company's routes south of the Mexican border, where it reduced its weekly crew starts by 84, resulting in savings on fuel and labor while freeing up new capacity in its system.

Over its entire network, KCS has seen a reduction of roughly 100 crew starts per week and believes that it can achieve a decrease of at least 100 additional crew starts weekly in the future.

In the next few quarters, the company intends to tackle train delays, unassigned locomotives, and its longest-dwelling cars to improve asset utilization. Within this general theme of achieving more with less, management also plans to reduce headcount in 2019, although investors will likely have to wait for the company's first-quarter report to receive estimated personnel reduction numbers.

Success will be measured in part by traditional methods

Kansas City Southern is still drafting a set of metrics by which it will gauge its PSR progress. However, in an initial set of measurements CFO Upchurch shared in his Global Industrials Conference presentation, the company included traditional metrics like train velocity in miles per hour, terminal dwell time in hours, and car length in feet. Such metrics are time honored in their ability to objectively measure efficiency, and they'll provide clear signals to investors that the investment of time and resources in the initiative is paying off.

To these, KCS is adding widely used if less-visible metrics such as cars online per revenue carload and fluctuations in monthly carload equivalents. And undoubtedly, management will soon isolate more metrics that are germane to each of the wider efforts discussed above. We'll have a more detailed view of initiatives, metrics, and management's preliminary thoughts on the new PSR program when KCS reports on first-quarter 2019 earnings in a little more than three weeks from now.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Canadian National Railway. The Motley Fool recommends Union Pacific. The Motley Fool has a disclosure policy .