The changes, which will occur next week, will “enable us to rework many of our Southeastern intermodal flows for improved service, lower cost and additional growth capacity,” said Norfolk Southern (NS) Chief Operating Officer Cindy Sanborn during the company’s third-quarter earnings call on Wednesday.
After the Macon conversion, NS will have curtailed operations at six humps in just the past 18 months, leaving the company with four high-volume hump yards, Sanborn said.
NS didn’t say during the call how many yards in Atlanta it would be idling.
Sanborn, who has worked for Union Pacifc (NYSE: UNP) and CSX (NASDAQ: CSX), described other operational changes that NS is implementing as it deploys its version of precision scheduled railroading (PSR), an operational model that seeks to streamline operations. All the Class I railroads with the exception of BNSF (NYSE: BRK) have adopted PSR.
“PSR at its core is just very basic railroading. And focusing on making every move count and accelerating asset intensity or improving asset intensity is the core of it. And no matter which railroad I’ve worked for, that has really been the effort as we implemented PSR,” Sanborn said. “I don’t see things different at Norfolk Southern. I see a workforce and a team that I’ve inherited that is very focused and very energized about what we’re working on. They understand just how much work it’s going to be. And I think we’re going to be able to close the gap with any railroad in the country.”
NS is putting more focus on railcar velocity, which “represents a big opportunity to convert structural change into gains in fuel efficiency, train size, equipment utilization and service levels,” and it is seeking to manage train lengths, Sanborn said. Both are ways to improve productivity and grow network capacity, she said.
The company will also seek to tweak changes it has made to its network thus far, Sanborn said.
“The team has redesigned traffic flows through the terminals, and we’re continuing to do that with the make and change that we’re talking about. But once we sort of go through it the first time, we don’t stop looking. We go back to areas that we’ve looked [at]— that we’ve converted — and we continue to optimize the operation through those areas,” Sanborn said.
Rail’s prospects in the fourth quarter and for early 2021
NS is eyeing some headwinds in the fourth quarter, including low energy prices, which could be a “drag” on energy volumes such as coal. Automotive volumes are also likely to decrease amid the plant downtime associated with model changeovers.
But tailwinds include “strength” in the soybean export market and e-commerce, as well as a tight truck market, executives said.
“We’re in a very unique truck environment. What you’ve seen is that truck capacity is inelastic with demand. And so spot rates are at two-, three-year highs. Capacity is about as tight as it’s been and we’re in the midst of a prolonged inventory replenishment cycle,” said NS Chief Marketing Officer Alan Shaw.
“We’re getting record volumes in domestic [intermoda] right now, and our international business is ticking up into positive territory. So I’m very confident about where we’re going the remainder of this year and next year,” he said.
NS still aims to achieve an operating ratio (OR) of 60%. OR is a measurement some investors use to gauge the financial health of a company, with a lower OR implying improved health. Other Class I railroads have sought to have an OR in the mid- to upper-50s range.
“Our goal is to close the OR gap with our peers. And along the way, we will naturally get to 60% operating ratio. We believe we have line of sight to 60% during 2021 through a combination of cost reductions and revenue growth,” said NS President and CEO Jim Squires.
He continued, “But we’re not going to stop there, and we’ll continue to drive harder and get that OR into the peer range and as low as we possibly can, which ought to generate a great deal of shareholder value. The progress will come from a combination of productivity and efficiency initiatives, as we’ve been discussing already this morning and revenue growth in sight during 2021.”
Third-quarter financial results
Coal chiseled away at NS’ operating revenue for the third quarter of 2020, with a 38% decline in coal revenue dragging overall revenue down by 12%.
Operating revenue was $2.5 billion for the quarter, compared with $2.8 billion in the third quarter of 2019. Of that, coal revenue was $250 million, compared with $403 million a year ago.
Meanwhile, merchandise revenue was nearly $1.6 billion, down 10% from $1.7 billion in the third quarter of 2019. Intermodal revenue fell 1% year-over-year to $700 million.
Third-quarter volumes fell 7% year-over-year, while revenue per unit slipped 5%.
The company reported net income of $569 million, $2.22 per diluted share, in the third quarter, compared with $657 million, or $2.49 per diluted share, a year ago.
But its adjusted third-quarter net income was down by only 2% to $643 million, or $2.51 per diluted share. The adjusted figure accounts for an impairment charge of $99 million, which helped to lower third-quarter operating expenses from $1.67 billion to $1.57 billion. The impairment charge is related to the carrying value of an equity method investment, NS said.
|Norfolk Southern||2020 Value||2019 Value||Y/Y Gross Change||Y/Y % Change|
|Freight revenue (in millions)||$2,506||$2,841||($335.0)||-11.8%|
|Carloads incl intermodal (000s)||1,768||1,901||-132.80||-7%|
|Revenue per carload||$1,418||$1,495||($77)||-5.2%|
|Intermodal revenue per carload||$655||$668||($13)||-1.9%|
|Gross ton miles (in billions)||82.2||92.4||-10.20||-11%|
|Revenue ton mile (in billions)||$41||$48||($6.8)||-14.1%|
|Employee counts (average)||19606||24,002||-4,396.00||-18.3%|
|Train velocity (mph)||22.6||22.6||0.00||0%|
|Dwell time (hours)||19.4||18.1||1.30||7.2%|