- The second quarter of 2020 will be the toughest yet for Norfolk Southern, executives said on a Wednesday earnings call. "We project year-over-year volume declines across all business groups with large impacts in the second quarter and future volumes dependent upon the depth of the downturn and the timing of the reopening of the economy, as well as energy prices," Chief Marketing Officer Alan Shaw told analysts.
- To contend with the volume drop, the railroad will accelerate precision-scheduled railroading (PSR)-related tightening efforts. "That means crew start reductions going forward, a hard look at our yard and facilities network, blending more trains, the kind of step straight out of the PSR playbook to continue to drive down costs," CEO Jim Squires said.
- Network redesigns associated with the railroad's PSR strategy are complete now, said Squires, though he added some further yard rationalization may be on the way. The cost cuts needed to weather the financial hit from coronavirus will come from more efficient operations and selling, storing or scrapping equipment.
Though Norfolk Southern withdrew its 2020 guidance Wednesday, the railroad is still committed to reaching an operating ratio below 60 in 2021. Operating ratio represents operating cost as a percentage of revenue and is the KPI of choice for railroads and investors in the age of PSR. In Q1, Norfolk Southern's reported an OR of 63.7% — down from 64.7% in Q4 2019 despite less freight on the rails.
In better times, more efficient operations plus volume on the rails would make the sub-60 goal possible. With total volume and intermodal down 11% year over year in the first quarter, Squires conceded that future OR improvement will have to come from further cost-cutting. The railroad will cut spending in 2020 by 25%.
"You don’t cut $500 million or 25% out of your annual capital spend easily," said CFO Mark George. "We haven’t been here since 2010 in absolute dollars."
With most network changes in the past, Norfolk Southern is also a very different railroad than it was ten years ago. Executives reiterated that the railroad's PSR transition was "flawless" and that it is now blending trains with merchandise, bulk and automotive freight.
"We are to the point now where a train is a train. So our Phase 3 implementation is really in place," COO Mike Wheeler said.
Intermodal trains are now being blended in too, in light of down volumes, which would bring shippers better service, George said.
"It also benefits us and our customers in that it provides us with a broader product offering, and no longer do we need to find enough density for a point to point intermodal train," the CFO said.