Norfolk Southern shoots for 60 percent operating ratio target under PSR

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ATLANTA — Norfolk Southern’s embrace of Precision Scheduled Railroading will put the railroad’s operational house in order and improve financial results, including a 60-percent operating ratio by 2021.

“We decided to adopt Precision Scheduled Railroading because it works,” Norfolk Southern CEO Jim Squires said in kicking off the railroad’s investor day presentations on Monday.

NS over the next three years will follow the playbook the late CEO E. Hunter Harrison used at Canadian National, Canadian Pacific, and rival CSX Transportation.

Executives’ investor day presentations often touched on the five principles of PSR: Serve customers, manage assets, control cost, work safely, and develop people.

NS officials say the implementation of Precision Scheduled Railroading will produce familiar results, including lower costs, higher profits, and better service all while using fewer people and smaller locomotive and car fleets that roll through fewer yards.

But NS also is departing from the Harrison playbook in significant ways.

First, it’s working with customers as it redesigns local service through process it calls clean sheeting. Shipper input is sought at the outset, during the design of service changes, and then after the new service is put in place.

Second, NS is increasing the frequency of local service to daily, up from three or five days per week, across most of the system.

Third, it’s building the new operating plan from the ground up by teaching field employees PSR concepts and involving them in service-design changes in local and regional yards.

NS also aims to keep growing its overall traffic volume and revenue while it transitions to the new operating plan. Executives did say, however, that they will continue to prune lower-margin merchandise and intermodal traffic, as the railroad has done in recent years.

NS laid out specific goals for the next three years:
•An operating ratio of 60 percent by 2021, down from 65.4 percent in 2018. The operating ratio this year should settle around 64.4 percent. The goal matches CSX’s 60-percent goal for 2020, although CSX executives said last month they expect to beat the goal this year.
•Revenue should grow at a compound annual rate of 5 percent, led by intermodal and merchandise. Coal revenue is expected to fall slightly as demand falls.
•A 500-unit reduction in the active locomotive fleet.
•A reduction of 500 employees this year, and 3,000 by 2021 — or 11 percent of the total — with most of the layoffs coming through attrition. The headcount reduction will come from productivity gains. Fewer crews will be needed as tonnage moves on longer, heavier trains, and smaller locomotive and car fleets will require fewer shops and mechanics.
•Maintain capital spending at between 16 and 18 percent of revenue.

The changes are weighted to the second and third years of the plan because NS won’t begin implementing its new Thoroughbred Operating Plan 21, or TOP21, until around July 1, after the clean-sheeting process is complete at all yards across the system.

NS will blend traffic from its four service networks — intermodal, automotive, merchandise, and bulk — to boost train length, reduce terminal dwell, improve crew and locomotive utilization, and create capacity.

The railroad also will strive to balance its network by operating the same number of trains in each direction every day, which executives say keeps crews and power in the right places at the right times.

The railroad expects to close or downgrade some yards as cars are handled fewer times en route. NS did not provide details.

Executives said they don’t expect to spin off lower-density routes to create short lines.
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