ATLANTA — Norfolk Southern’s second-quarter earnings took a hit from costs related to the East Palestine, Ohio, derailment, which more than doubled to $803 million and consumed 42% of the railroad’s operating income.
“Our financial results were challenged this quarter … They reflect the decisive actions we have taken to advance our strategy and keep our promises in East Palestine,” NS CEO Alan Shaw told investors and analysts on the railroad’s earnings call.
Shaw reiterated the railroad’s commitment to its long-term service, productivity, and growth strategy. “Our commitment to that strategy was tested on Feb. 3, with the derailment in East Palestine,” Shaw says. “Adversity reveals character and tests resolve. I’m proud of the way our team rose to the challenge.”
The costs related to the East Palestine derailment, including environmental remediation and payments to residents and businesses, were $416 million in the second quarter. They do not reflect the potential for insurance reimbursements or recoveries from third parties such as GATX and OxyVinyls, the owner and shipper of the car that is believed to have caused the East Palestine wreck. NS is suing both companies.
Shaw has pledged to “make things right” in East Palestine, including launching a medical compensation fund for area residents and a program to backstop property values for homeowners. Neither initiative is factored into current derailment-related costs.
NS’ quarterly operating income plunged 55%, to $576 million, compared to a year ago, while revenue was down 8%, to $3 billion. The operating ratio was 80.7%, a 33% increase from a year ago. Earnings per share of $1.56 was down 55%.
Adjusted for the impact of the derailment costs, NS’s operating income declined 22%, to $992 million, while earnings per share fell 14%, to $2.95. The adjusted operating ratio was 66.7%, a 5.8-point increase from a year ago.
Volume declined 6% overall due to a softening economy and the impact of service disruptions related to the derailment and subsequent steps NS took to tighten its train makeup rules.
Intermodal declined 9%, merchandise 1%, and coal volume was flat compared to a year ago. Executives said they believe the railroad lost out on $175 million to $200 million in revenue as customers shifted some of their freight to trucks or other railroads while the NS merchandise network was congested for much of the quarter.
NS service has bounced back since both main lines were returned to service in East Palestine this month and executives were upbeat about accelerating volume growth trends over the past few weeks.
Nonetheless NS reduced its financial outlook for the year and now expects revenue to be down about 3%. The railroad previously expected revenue to be flat for the year compared to 2022.
Just looking at how stuff runs on the railcams, train makeup (and asset utilization) may have actually gotten worse as a result of these weird “quasi-safety” train makeup rules. Couple that with trains continuing to be cut and now intermodal yards closing, not much hope they can turn this around.
I give the CEO credit. He took the heat straight on and followed through on his promises.
Maybe, just maybe, if you kept some of your secondary routes better maintained traffic would have had better alternatives on reroutes.
Yes! Doesn’t NS have a route around East Palistine that could be used for traffic between Pittsburg and Allince, Oh.?