Norfolk Southern (NYSE: NSC) has begun to focus more on lengthening trains and increasing train weights as a way to keep costs down and increase network productivity, according to executives on the company’s fourth-quarter earnings call on Wednesday.
“Traffic coming back is our challenge and opportunity,” Norfolk Southern (NS) Chief Operating Officer Cindy Sanborn told investors and analysts on the call.
NS’ first steps in its deployment of precision scheduled railroading (PSR), an operating tool that seeks to streamline operations, were aimed at modifying NS’ infrastructure and removing excess assets. NS rationalized six hump yards and shed locomotives, and it redesigned its southern operations around Atlanta ahead of the 2020 peak season to improve network flow.
Now that these measures have largely been completed, the company has started to increase train lengths and train weights, which resulted in record fuel efficiency in the fourth quarter, Sanborn said. These measures were taken while deploying a trimmed workforce, she said.
Indeed, train lengths and weights increased by 10% over the fourth quarter of 2019, while fuel efficiency rose 3%.
“PSR is really about simplifying things and having very good asset turns” and absorbing volume growth into existing trains, Sanborn said.
Should traffic grow, especially in the second half of the year, NS can add resources but it will also consider other measures to help keep costs down, such as tactically adding extra trains or rebalancing the mix of existing trains, executives said.
The real mission is to keep railcars moving, and NS is pivoting more now toward increasing train lengths and weights, Sanborn said. But NS will always circle back and seek to increase car speeds, she said.
NS also plans to keep employee headcount in 2021 flat to lower compared with 2020 levels, depending on how and where incremental volumes recover, according to NS CFO Mark George.
NS is targeting an operating ratio (OR) of 60% for the year, which will result from anticipated higher revenues and volumes, coupled with lower expenses.
NS reported an adjusted OR of 64.4% for 2020. Investors sometimes use OR to gauge the financial health of a company, with a lower OR implying improved financial health. OR is a company’s expenses as a percentage of revenue.
“We see ample opportunities to affect more positive change and remain focused on closing the OR gap with the industry,” said NS President and CEO Jim Squires.
Fourth-quarter financial results
In the fourth quarter, NS occasionally took locomotives out of storage to relieve congested areas, but they were put back into storage after the congestion was relieved. NS also dealt with some COVID-19 impacts on its network because of employees out due to sickness or being in quarantine.
Congestion at the West Coast ports in the fourth quarter limited transcontinental volume, and it caused some of NS’ channel partners to allocate more assets there, said NS Chief Marketing Officer Alan Shaw.
Meanwhile, NS’ channel partners dealt with congestion in Chicago as a result of drayage availability and warehouses needing to comply with pandemic-related protocols. These factors slowed the turnover of chassis and boxes, but NS worked with its channel partners and customers to mitigate those impacts, Shaw said.
NS’ fourth-quarter net income rose 1% as an 8% decrease in operating expenses helped to offset a 4% decline in operating revenues.
Net profit was $671 million, or $2.64 per share, for the fourth quarter of 2020, compared with $666 million, or $2.55 per share, for the fourth quarter of 2019.
For more on NS’ fourth-quarter financial results, go here.
|Norfolk Southern||2020 Value||2019 Value||Y/Y Gross Change||Y/Y % Change|
|Freight revenue (in millions)||$2,573||$2,690||($117)||-4.3%|
|Carloads incl intermodal (000s)||1,781||1,803||-21.6||-1.2%|
|Revenue per carload||$1,445||$1,492||($47)||-3.2%|
|Intermodal revenue per carload||$674||$678||($4.)||-0.6%|
|Gross ton miles (in billions)||83||88.4||-5.4||-6.1%|
|Revenue ton mile (in billions)||$43||$45||($2.7)||-5.9%|
|Employee counts (average)||19,192||22,478||-3,286||-14.6%|
|Train velocity (mph)||21.9||23||-1.1||-4.8%|
|Dwell time (hours)||21.2||18.3||2.9||15.8%|