ATLANTA — Norfolk Southern’s third-quarter earnings fell sharply due to the mounting toll of the East Palestine, Ohio, derailment, lower volume, and higher costs related to carrying more train crews as part of the railroad’s service resilience strategy.
“We are making smart investments in safe, reliable, and resilient service,” CEO Alan Shaw told investors and analysts on the railroad’s earnings call today (Oct. 25). Those long-term investments will weigh down earnings in the short term until volume recovers, Shaw says.
Costs related to the Feb. 3 derailment and hazardous materials release in East Palestine, Ohio, totaled $163 million in the quarter, a figure that reflected $25 million in insurance recoveries. The total tab of the wreck, including environmental cleanup and legal fees, is now $966 million. That figure may be offset in the future due to potential additional insurance payments and recoveries from third parties.
Third-quarter operating income declined 41%, to $756 million, as revenue fell 11%, to $2.97 billion. Earnings per share dropped 49%, to $2.10. Adjusted for the impact of costs related to the East Palestine derailment, earnings per share declined 35%, to $2.65.
The railroad’s operating ratio rose 12.6 points to 74.6%. Adjusted for the impact of East Palestine, the operating ratio was up 7.1 points, to 69.1%. “We are clearly not satisfied with these results. We will recover from these short-term impacts to our operating ratio,” Shaw says, adding that the railroad aims to maintain long-term profit margins that are in line with the rest of the industry.
Overall volume declined 2% for the quarter. Merchandise traffic fell 3%, intermodal was down 1%, and coal volume dropped by 9%.
Shaw said NS remains committed to keeping a buffer of crews and locomotives during downturns so the railroad can maintain service levels and capture more volume when freight rebounds. The costs related to not furloughing train crews will be more than offset by higher volume and higher revenue down the road, he says.
“Balanced against the challenges of the quarter there were several encouraging developments that demonstrate progress on our strategy and point to growth and profit improvement in the quarters ahead,” Shaw says. “Notably, service in the third quarter improved both year over year and sequentially, allowing us to onboard more business. Volume improved as well and appears to have turned a corner, with each of the past four weeks running above 136,000 carloads — that’s a level we haven’t seen consistently since the second quarter of 2022. In part this is a function of customers awarding us new business.”
NS said service improved during the quarter. Average train speed was up 7% compared to a year ago and by 10% compared to the second quarter. Terminal dwell improved by 10% compared to a year ago and was at the lowest level in two years, Chief Operating Officer Paul Duncan says.
NS is taking advantage of the lull in volume: It has 250 conductors in engineer training and is qualifying train crews on new territories after negotiating with unions to update antiquated labor agreements that placed limits on where crews could work from their home terminals. Both moves will provide NS with resilience and operational flexibility by improving crew availability, Duncan says.
The railroad is slowing the pace of conductor hiring to normal levels now that staffing is adequate at most terminals to handle current and anticipated volume.
“We expect to see slow volume recovery amid uncertain economic conditions,” Chief Marketing Officer Ed Elkins says.
The railroad also aims to grow in a down market through new service offerings. Among them: An interline intermodal deal with Canadian National that links Atlanta and Kansas City with points in Canada, and new domestic and international interline intermodal business with Florida East Coast Railway. Both services were launched this month.
Industrial development efforts, meanwhile, are paying off, Elkins says. A cement transload, ethanol terminal, and grain elevator expansion all opened on NS during the quarter and will result in 7,800 new carloads annually.
“We’re not sitting back and waiting for carloads to come to us,” Elkins says.
NS is seeing a muted fall intermodal peak season this year. Short-haul international intermodal business has come roaring back, Elkins says, while domestic intermodal remains sluggish due to low truck rates.
The NS train accident rate has improved 9% for the year to date, while the mainline accident rate improved by 43%. The railroad’s personal injury rate rose slightly, however.
The facts are coming out, and in the end Norfolk Southern probably did nothing wrong over East Palestine. Why not the smarty here name something that NS actually did wrong in East Palestine?! Bet you can’t. This is about a wheel bearing failure, which can happen at anytime.
That’s karma for you.
No, so far, NS did nothing wrong in East Palestine…!
I’m sure the government isn’t done yet which will take more money from the bottom line.
Obviously with volume down 2%, revenue -11% do not explain the huge drop in profits. It seems to confirm that playing fast-and-loose with safety, abusing the workforce and cutting beyond the bone to manage the system to PSR principles had severe consequences. They have dug a billion dollar hole imitating Hunter Harrison. A bad idea.
NS’ stock dropped 5% immediately after the earnings call. Ouch!!!