The challenges in timely delivery of international intermodal containers are more about the wider congestion issues facing the supply chain and less about any capacity limitations on Norfolk Southern’s network, executives said during NS’ second-quarter 2021 earnings call on Wednesday.
“It’s not an issue of capacity. It’s an issue of throughput,” said NS Chief Marketing Officer Alan Shaw during NS’ (NYSE: NSC) earnings call on Wednesday.
Shaw explained that the accessorial program for the international intermodal product is to help encourage the more timely movement of boxes. NS’ customers had wanted additional capacity at the terminals, and the accessorial program has been a means to bring about that capacity, Shaw said.
“Our customers in certain locations needed more space for storage. And so, we responded to the market: We added satellite lots in some areas, we reconfigured … at Landers, our heavily international facility in Chicago, and we’ve been able to accommodate a lot more international units, dwelling on our terminals because that’s what our customers need. Our accessorials in this case are an activity-based service and price that we apply to the market,” Shaw said.
He continued, “We are absolutely focused on programs that encourage the fluidity of our operations, and our hope clearly is that the accessorials go away because that means customers are pulling more closely from our terminals, and as soon as customers pull boxes from our terminals, we can inbound more boxes into our terminals. It’s not an issue of capacity. It’s an issue of throughput, and we’re working on some programs to encourage dual missions with the drayage community. And so that anytime they in-gate a box, they out-gate a box as well.”
NS is still working to repair the over 5,100 chassis that had been taken offline because of a manufacturing defect, and about 40% of those chassis have been repaired in the first six weeks, according to Shaw. He expects about three-quarters of the affected chassis to be repaired by the end of August.
Despite the congestion in the supply chain, NS sees a longer-term interest in its intermodal franchise, particularly as companies seek to forward-position their inventories as well as fulfill their sustainability goals by utilizing trains over trucks, according to Shaw.
NS’ intermodal channel partners “absolutely want to shift business from highway to rail. They are concerned about the overall throughput throughout the supply chain. … I am confident that as our network fluidity improves, as we resolve these chassis issues as the drayage community, [NS’] productivity improves as warehousing productivity improves.”
He continued, “Our channel partners are starting to talk a lot more confidently about next year as well. So there’s a lot of runway to the macro environment for us. And we’re intent on addressing the issues that are within our control and working with our channel partners on things that we can do to help them grow.”
NS plans to grow intermodal capacity by improving on-time performance of its train network, which allows customers to schedule their appointments with more specificity while also improving overall equipment utilization, Shaw said. NS will do this through investing in its terminals from both a physical capital perspective and a technology perspective. NS is also rolling out a terminal-based operating system for intermodal this year, he said.
Meanwhile, networkwide operational adjustments include utilizing longer trains, which has been helped by deploying more distributed power on the trains, according to NS Chief Operating Officer Cindy Sanborn. NS is also “blending” more traffic types on the same train, and it plans to extend sidings on key routes to accommodate longer trains, she said.
“We are committed to continuing to improve service levels and running a faster railroad, not just because a faster railroad is a lower-cost railroad, but also because speed generates capacity for us to take on additional traffic within our existing train network,” Sanborn said.
NS reported record second-quarter 2021 net income of $819 million, or $3.28 per diluted share, compared with $392 million, or $1.53 per diluted share, in the second quarter of 2020.
For NS’ second-quarter 2021 financial results, click here.