For Norfolk Southern, a 180-degree turn on Precision Scheduled Railroading NEWSWIRE

NORFOLK, Va. — It would be an understatement to say that Norfolk Southern’s views on Precision Scheduled Railroading have evolved.

In November 2015, Jim Squires had been chief executive for barely six months when the wolf — dressed as Canadian Pacific CEO E. Hunter Harrison — came banging on the door. CP wanted to merge with NS and “Hunterize” its operations by implementing Precision Scheduled Railroading.

Squires unleashed full-throated criticism of Harrison’s operating model, calling it a “short-term, cut-to-the-bone strategy that could cause Norfolk Southern to lose substantial revenues from our service-sensitive customer base.” The PSR hyperfocus on a lower operating ratio, Squires contended, would drive away truck-competitive traffic.

Now — after Harrison slashed costs and boosted profits at NS rival CSX Transportation — NS has changed its tune.

“We decided to adopt Precision Scheduled Railroading because it works,” Squires said in kicking off the railroad’s investor day presentations last week.

The conventional wisdom says that mounting pressure from Wall Street was behind Norfolk Southern’s 180-degree turn on PSR. Squires was in the hot seat during the railroad’s earnings call in July, when Wall Street analysts peppered him with questions about why NS couldn’t be more like CSX.

But the conventional wisdom is wrong. Why? Because it doesn’t fit the timeline of how NS quietly began testing PSR-based operational changes 18 months ago.

That’s when NS hired Mike Farrell, a PSR veteran with experience at Canadian Pacific and Canadian National, as an operations consultant. The goal at the time was to design lower-cost, more efficient, and more reliable local and terminal operations.

Moving from terminal to terminal, Farrell worked with local operating officials, customers, short lines, and interchange partners to redesign local and yard service using the principles of Precision Scheduled Railroading.

Farrell began consulting for NS at precisely the same time that CSX was tied in knots due to Harrison’s rapid-fire operational changes. Shippers were complaining, CSX’s service problems became front-page news, and federal regulators were putting CSX under the microscope. And it was anything but clear that CSX would right itself and go on to reap dramatic financial improvements.

Not surprisingly, NS was skeptical of what would ultimately become its clean-sheeting process.

“At the beginning, NS had one toe in and one foot out, all along testing PSR strategies,” Farrell, now senior vice president of transportation, said on investor day.

It took positive results from the initial phases of clean-sheeting to convince NS that a kinder, gentler implementation of PSR would produce lower-cost, more reliable service — all while still handling growth in merchandise and intermodal traffic.

Asked what was different about NS’s implementation of PSR compared to those of Harrison-led changes at CN and CP, Farrell replied: “We’re not doing it to our customers, we’re doing it with our customers.”

There are other significant differences. NS is increasing the frequency of local service, building its new operating plan from the ground up with input from field employees, and aims to continue growing while making broad operational changes.

It’s also relying on attrition to reduce employee headcount by 11 percent. The projected employment declines at NS — a reduction of 3,000 positions in the next three years — line up almost precisely with the rate at which workers retire or leave the railroad on their own.

But the core PSR tenets remain straight from Harrison’s playbook. They include serving customers, managing assets, controlling cost, working safely, and developing people.

“You’ve seen these principles before at every railroad that is undertaking transformation because they are fundamental,” Chief Operating Officer Mike Wheeler says.

And NS is taking familiar PSR steps to reshape its operations. As Squires put it: “We will operate fewer, heavier trains; balance network and asset flows; decrease circuity; reduce reclassification events; fully integrate local and system operations; and drive down costs.”

The Wall Street pressure undoubtedly did prompt NS to step up the pace of its operational changes and to set new financial targets that analysts have called aggressive.

But Squires & Co. seem to be ahead of the curve — not behind it — as they looked to find a way out of an operational funk that had hurt service, slowed the railroad, and raised its costs. Now NS trains are moving faster, cars are spending less time in yards, and the railroad has fully embraced its own version of an operating model it once dismissed.