NORFOLK, Va. — Norfolk Southern will slash capital spending 25% this year as traffic and revenue decline sharply due to the economic impact of the COVID-19 pandemic, the railroad said today as it announced lower first-quarter profits.
NS joined most of the other Class I systems in withdrawing its financial outlook for the year in light of economic uncertainty. But the railroad maintained its 2021 target for an operating ratio below 60%.
Executives expect broad traffic declines across the railroad’s merchandise, intermodal, and coal business segments this year and did not hazard a guess as to when volume might begin to rebound.
“We project year-over-year volume declines across all business groups, with large impacts in the second quarter, and future volumes depending on 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 investors and analysts on the railroad’s earnings call.
First-quarter volumes were down 11% overall as coal sank 31%, intermodal slumped 11%, and merchandise traffic was off 5%.
For the quarter, the railroad’s operating income declined 1%, to $953 million, as revenue fell 8%, to $2.62 billion. Earnings per share, adjusted for the impact of one-time items, rose 3%, to $2.58.
When adjusted for one-time items, NS’s operating ratio improved 2.3 points to a first quarter record 63.7% as the railroad cut expenses more deeply than the decline in revenue.
“Within the context of an 11% volume decline, they are remarkable achievements that demonstrate this team’s urgency to transform our company,” CEO Jim Squires says.
Squires praised NS employees for helping to move the economy and vital supplies during the pandemic. “It is truly inspirational to watch our employees rise to the challenge,” he says.
NS has three aims during the pandemic, Squires says: protect employees, serve customers, and exercise financial discipline.
The railroad has a strong balance sheet with plenty of cash on hand and access to credit that will help it weather the downturn, Chief Financial Officer Mark George says.
The $500 million reduction in capital spending, to $1.5 billion, is across the board, George says. The railroad remains committed to its DC-to-AC locomotive conversion program, however, and will trim maintenance spending by more precisely targeting where new rail, ties, and ballast are installed, Chief Operating Officer Mike Wheeler says.
As the third phase of its TOP21 operating plan was implemented, NS cut train starts more deeply than traffic declined in the quarter, Wheeler says.
Train starts were down 19%, outpacing the 11% volume decline and pushing the railroad’s train and engine service workforce to a record low. With traffic down 30% in April, train starts are down 30% as well, Wheeler says.
Helping to reduce train starts: Combining different types of traffic in the same train, even including shifting merchandise traffic into premium intermodal trains. “We have really blended all the different traffic types into our network. So we’re to the point now where a train is a train,” Wheeler says.
As part of blending traffic types, NS has opened some new lower-volume intermodal lanes by adding container traffic to merchandise trains. “No longer do we need to find enough density for a point-to-point intermodal train,” Shaw says.
NS’s key performance and service metrics all improved for the quarter as it set quarterly records for terminal dwell, train performance, shipment consistency, and intermodal availability.
“Our service is the best in Norfolk Southern history,” Shaw says.
I am guessing that other railroads will follow
Charles Landey and Scott Lyke share opinion I have long held about using slack traffic times to try new methods and equipment. It’s a good thing that a number f the more progressive roads did just that i n the late thirties or the transportation picture during the war would have been a lot more straitened than it was. Brian Solomon made a valuable observation about road crews and institutional experience in the current Trains. His main point was tIhat in shrinking road crews and instituting nanny enforcement of rules, the class ones have tripled switching times at customer spurs. The result has been to effectively eliminate an entire category of potential traffic. It’s way past time to rethink the entire business model at the operational level. Highways have neith erthe capacity nor maintainance to absorb growth. The result is a drag on the entire economy that must be rectified–the sooner the better. The model that offers the best potential is to have public ownership of the fixed assets–track, signalsl structures etc–and havde carriers bid on access. Scheduling must be rigorously enforced or the scheme doesn’t work. An alternative is open access to a joint service area a la n. jersey. Such arrangements have been around for over 100 years. The current climate is the toad to marginalization. Correction must be industry wide or it doesn’t work.
IN OTHER COVID NEWS – The auto columnist in detroitnews.com claims in the Thursday edition that Ford Motor Company’s project at Detroit Michigan Central Station will be a casualty of the COVID economic distress.
Which entirely misses the point. This project made zero fiscal sense during boom times. During the 2018 – 2019 economic boom FoMoCo was laying off engineers and designers in Dearborn and Allen Park. So why would anyone think the company should pay much much more than the going rate per square foot for office space in Detroit? This project would have bankrupted Ford no matter how good the market for its product.
The last time I brought this up on this forum someone actually agreed with me. That was before COVID.
Now let me turn from economics to architecture. It’s old, it’s big, it’s a railroad station. There were some great railroad stations from early in the last century (New York Grand Central, New York Penn, Philadephia, Newark Penn, Washington, Cincinnati, LAUPT, Chicago Union Station). Detroit Michigan Central isn’t in that class..
Look across Michigan Avenue where Tiger Stadium used to be. Tiger Stadium was torn down years ago. That’s what should have happened to Michigan Central. Tiger Stadium has a useful function and was a great place to spend one’s afternoon. Michigan Central failed at both.
A train is a train. My young godson can get behind that sentiment. He did like the trash train though, ’cause it was fun to say, and fun and easy to dislike. I will keep an eye out for a juice train + trash train combo.
SCOTT LYKE —- I “LYKE” your post. In fact I “LYKE” it very much. When things are tough and when the future looks difficult, then that’s the time to get off the collective butt and do something to make the future better.
My church was planning an addition we clearly couldn’t afford. Here’s what I told the fundraiser: When things are tight, that’s exactly the time to jump in and spend on a capital improvement. You don’t wait for better times because better times never come.
Interestingly the same fundraiser managed a beautiful new sanctuary for the church I attend when I visit family in a distant state. They couldn’t afford it either but they did it. The new sanctuary is four times the size of the old one but guess what, the pews are full.
PS Speaking (as you do) of road construction, in my state (Wisconsin) it’s proceeding completely as normal. (Unlike Michigan where it was halted.)
I don’t work in the field and maybe that will show with this comment. A traffic downturn seems the perfect opportunity to make capital investments aimed at the future. This is something along the lines of the people who in the face of reduced traffic with the stay-at-home orders say, “Do all the road construction right now.”
Been saying that about low volume intermodal lanes for awhile now.
Question is whether that works only for less service dependent international IM or whether it can work for domestic IM where trucks already provide the necessary service levels. Probably depends on the length of the lane, how much dray is required, and what fraction of the entire O/D trip has to ride in manifest service with “intermediate work events” unrelated to the lane.
Fattening the share price, their options, and bonuses obviously more important than infrastructure improvements, always. Sad.
Thanks Bill! One hopes they’ll conserve cash and credit till the economic picture becomes more promising.
Curt: The CFO says NS continued full steam with its share repurchases in the first quarter but is now going to take a more conservative approach that he called, “more muted.”
Robert Hoover: Yes, hope they don’t mix the “trash” and the “juice” (or perishable produce) too closely.
Bill; did NS say anything about suspending stock repurchases as a few other Class 1’s have done?