Norfolk Southern bullish as traffic rebounds, despite economic uncertainty

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A lengthy Norfolk Southern manifest train passes through Otis, Ind., in June 2020. NS, running fewer but longer trains, made a significant reduction in crew starts during the second quarter.
TRAINS: David Lassen

NORFOLK, Va. — Norfolk Southern executives are encouraged by the strong rebound in intermodal and automotive traffic, but say it’s uncertain how durable the recovery may be amid rising coronavirus cases and its potential impact on the economy.

“Who knows what the rest of the year may hold?” CEO Jim Squires said this morning while announcing second quarter earnings that were down sharply due to the pandemic. NS traffic fell 26% in the quarter, the deepest decline among the Class I railroads.

Operating income declined 43%, to $610 million, as revenue slumped 29%, to $2 billion. Earnings per share fell 43%, to $1.53.

The railroad’s operating ratio increased 7.1 points to 70.7% as a 21% reduction in costs could not keep pace with the rapid volume declines in April and May.

For the quarter, coal volume sank 57%, merchandise volume fell 29%, and intermodal traffic was off by 16%.

NS does not expect coal to rebound. Competition from low-cost natural gas makes coal an unattractive fuel for power generation, while weakness in export metallurgical coal is likely to persist, Chief Marketing Officer Alan Shaw says.

Merchandise volume is recovering thanks to the resumption of auto production across North America and slowly rising manufacturing output in other industries, Shaw says. Intermodal is buoyed by growth in consumer demand and tightening truck capacity. 

“The consumer segments are doing really well,” Shaw says, with intermodal and automotive volume higher in July than it was in June, and June’s levels higher than May.

Chief Financial Officer Mark George said NS’s decision as the pandemic hit to keep some crews on extra boards helped the railroad handle 12% higher volume in June than in May without service disruptions.

The railroad’s key operating metrics improved to record levels during the quarter, with average train speed up and terminal dwell down. Trip plan compliance, a measure of on-time performance, also hit record levels but NS did not provide specifics.

“We are a fast, fluid railroad ready to take advantage when volumes return,” Squires says.

Average train weight was up 6% as the railroad moved tonnage on fewer but longer trains. Train starts were down 28%, or two points more than the decline in traffic volume. 

NS will seek to make many of the crew-start reductions permanent even as volume recovers, Chief Operating Officer Mike Wheeler says, noting that train starts are down 20% so far in July despite traffic being down 10% year over year.

Blending different types of traffic into the merchandise network means NS can add volume to existing trains without having to add train starts, he explains.

NS, which closed the humps at its yards in Linwood, N.C., and Bellevue, Ohio, during the quarter, continues to look for opportunities to close additional terminals as it refines its operating plan, Wheeler says.

The idling of the humps will save NS $20 to $30 million annually, George says.

NS remains committed to its 60% operating ratio target, although the railroad no longer has a date for achieving the goal due to ongoing economic uncertainty.  “We will get there as fast as we possibly can,” Squires says.

Squires was asked a two-part question about the potential sale of New England regional Pan Am Railways: Is NS interested in buying the railroad? And what would the impact of a sale to another Class I railroad have on Norfolk Southern’s joint venture with Pan Am in the Pan Am Southern, which provides NS with access to the Boston area?

“Well, Pan Am Southern is an important part of our network,” Squires says. “It is our presence in New England and we’re committed to maintaining a presence in New England as part of our overall network footprint. And let me leave it at that.”

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