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After a strong quarter, Norfolk Southern management asked: why aren’t you more like CSX?

  Photo: Shutterstock
Photo: Shutterstock

The strong earnings report issued last week by CSX is reverberating through the quarterly release of class 1 railroad earnings, which is now at an end.

Last week, CSX reported an operating ratio of 58.6%. Wednesday, in its own second quarter earnings report, Norfolk Southern reported a record quarterly operating ratio of 64.6%, improved from 66.9% a year earlier. It was the 10th consecutive quarter in which Norfolk Southern recorded an improved operating ratio.  

That difference with CSX (NASDQ: CSX) was in a quarter in which Norfolk Southern (NYSE: NSC) had record income from operations (up 18% from 2Q 2017), record net income (up 43% from a year earlier) and record earnings per share (up 46% from a year ago.). Michael Wheeler, the company’s COO, said NS volumes were a near record quarterly total and were a record for the second quarter. Average train length was a record as was crew productivity. “We handled 6 percent more volume with just a 1 percent increase in crew,” he said.

But on the earnings call with analysts, the questions about the OR and its comparison against CSX, (and to a lesser degree, Canadian National, which also came in at less than 60%) and what it meant, kept coming steadily. Similar questions were directed at the management of Union Pacific, (NYSE: UNP) whose earnings and less attractive OR were released last week one day after the CSX earnings.

One analyst was blunt, asking CEO James Squires why NS can’t put up numbers like CSX. Similar questions were answered by Squires with an indirect suggestion that there is a balance between seeking short-term profits at the expenses of long-term service, though Squires would not take the bait and criticize any railroad directly.

Questions were also posed to Squires whether NS needed to adopt more of the features of precision railroading, a practice developed primarily by the late CSX CEO Hunter Harrison, who died unexpectedly late last year. Harrison had honed his approach previously at Canadian Pacific and Canadian National. Precision railroading involves several steps, but generally is associated with lesser staffing, fewer hump yards and other operational changes.

“We are always open to best practices driving for shareholder value, and I am very confident we are on the right track,” Squires said. “We will pursue a balanced plan and we’ll produce great results for our shareholders.” A version of that statement was issued by Squires several times during the call

NS is adding personnel (though headcount is down year-on-year); CSX is cutting staff. That was the focus of another question to Squires. “We are an asset and resource-intensive business,” Squires said. “We are making sure we have the right level of people. We also have to make the investments in order to grow. We are going to keep people on the staff needed to generate the growth.”

Another analyst asked whether there was “a case to restructure a little quicker, to take the service hit but be generating the same growth rate at a much better OR.”

Squires said there are operational changes being made at NS. For example, the centralization of dispatchers, which has occurred at other railroads but not NS so far, is being undertaken at Norfolk, Squires said, with all dispatchers to be centralized in Atlanta. And while the company reopened a hump yard in Chattanooga, it has closed hump yards in recent years, he said.

But in an industry whose service levels began plummeting about a year ago, Squires said the customer needs to be the primary area of attention. “We are very focused on getting customer service back to where it needs to be,” he said. Adding head count now is part of that, Squires added.

Despite the questioning of the Norfolk Southern management, investors appeared to focus more on the strong earnings report. At approximately 12:30 p.m., Norfolk Southern stock was up about 1% to $162.15, though most transportation stocks recovered after Wednesday’s severe selloff even as broader market indices were mostly lower.  

Norfolk Southern does not give pricing guidance, and does not disclose the rate of agreed-upon price increases. But Alan Shaw, the company’s chief marketing officer, said there had been a strong performance by the Norfolk Southern intermodal division, driven in part by the truck market. “We felt like the tight truck market would lead to an improvement in pricing well into 2019, and that is what we are seeing now,” Shaw said. The NS intermodal division had a 20% increase in revenue, an 8% increase in volume (both to record levels) and a 6% increase in revenue per unit adjusted for fuel.  

Michael Wheeler, the Norfolk Southern COO, said intermodal pricing “remains strong, but it did flatten out relative to the first quarter.”

Shaw said Norfolk Southern’s intermodal franchise is “the best in the east. We’ve made investments in this over time, and that is bearing fruit for us, and that is why we are able to deliver 20% growth in each quarter this year.” The company is in a position to “leverage the tight truck market into 20% growth.”


  1. James Wolfe

    I suppose if you run a completely mismanaged company, anger all of your customers, reduce the number of trains you run by half, and layoff most of your employees, you can achieve what CSX has. If someone said they could take your dollar and give you a 200% rate of return on it or take a hundred million dollars and give you a 3% return you would choose the 200% return on that buck because 200 is bigger than 3. But then again basic economics isn’t for everyone.

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John Kingston

John has an almost 40-year career covering commodities, most of the time at S&P Global Platts. He created the Dated Brent benchmark, now the world’s most important crude oil marker. He was Director of Oil, Director of News, the editor in chief of Platts Oilgram News and the “talking head” for Platts on numerous media outlets, including CNBC, Fox Business and Canada’s BNN. He covered metals before joining Platts and then spent a year running Platts’ metals business as well. He was awarded the International Association of Energy Economics Award for Excellence in Written Journalism in 2015. In 2010, he won two Corporate Achievement Awards from McGraw-Hill, an extremely rare accomplishment, one for steering coverage of the BP Deepwater Horizon disaster and the other for the launch of a public affairs television show, Platts Energy Week.