Norfolk Southern’s third-quarter earnings call Wednesday touched on two themes that have been prevalent among the rails this earnings season: the need to attract and retain employees and the impact of labor shortages in warehousing and drayage on NS’ intermodal service.
NS (NYSE: NSC) has been hiring aggressively since the beginning of the year, said President and CEO Jim Squires during the call with transportation analysts. “We’re putting a lot of people through the pipeline and into the pipeline and into the field,” he said.
Chief Operating Officer Cindy Sanborn said growing employee headcount could address “lumpiness” in the network. The tight labor market has spurred NS to streamline its hiring and training process, and while more conductors-in-training are in the pipeline, it will take several months before they can go into the field, Sanborn said.
“We’re really managing through a very disruptive labor market, and it’s been challenging from the beginning of this year,” Sanborn said. “But we’ve been able to continue to find productivity improvements … and you’ll see it flowing through our financial results.”
She continued: “When I think about where headcount should be, it’s really a function of volume that we have on the network, as well as our productivity initiatives which we have quite a few, with long trains and other opportunities for productivity. So, thinking where we are right now, I’d like to see headcount up a little bit to take out some of the lumpiness of what we’re seeing, but longer term, we’re going to be focusing on using technology and other things.”
Meanwhile, NS’ intermodal franchise is exposed to labor and capacity shortages in the drayage and warehousing communities. If those labor pools get stressed, it puts pressure on NS’ intermodal network, and those pressures may remain into 2022, according to Chief Marketing Officer Alan Shaw.
Although NS’ intermodal revenue grew 16% in the third quarter of 2021 to $812 million and intermodal revenue per unit rose 22%, to $796, actual volume fell 4%, to 1.01 million units.
Compounding the disruptions, e-commerce giants are only just now hiring for the holidays at a time when the supply chain already could use about 25% more warehouse capacity, Shaw said.
Although safety concerns earlier this year surrounding defective chassis have been largely resolved, NS is leasing 1,100 chassis in the fourth quarter to ensure adequate network flows at the railroads’ intermodal terminals, according to Shaw.
NS’ longer-term efforts to expand its network capacity include running longer trains and converting train power to run those trains, Sanborn said. NS also has four or five siding extensions underway, with more being considered. The extensions allow trains to pass one another on stretches of the network where there is only a single line of track.
As NS and the broader freight rail industry interact with federal regulators and policymakers on rail regulations, NS executives hope the supply chain disruptions will give policymakers an understanding of the supply chain’s complexities.
Asked how federal regulators might handle reciprocal switching, a shipper issue that President Joe Biden’s July executive order asked Surface Transportation Board Chairman Marty Oberman to consider, Squires said the board needs to look at how freight moves today in light of the complexities in the supply chain.
“There is a growing sensitivity on the part of policymakers on the state of affairs in the supply chain,” Squires said. “My message is, at the very least, consider gathering additional facts and evidence. The supply chain is clearly in flux right now. It’s in the process of organizing itself.”
On the federal vaccine mandate, which calls for all federal employees and contractors to be vaccinated from COVID-19 by Dec. 8, Squires said NS studied the issue and determined that the railroad had to comply because of its role as a federal contractor for the U.S. Department of Defense.
NS last week sued three unions over the railroad’s ability to implement the vaccine mandate.
Although NS “sincerely hope[s] we won’t lose a single employee as a result of that mandate,” some could leave and the railroad will backfill positions accordingly, Squires said.
“Whether we agree with the policy or not, we are implementing it, but we are being very vocal about what it means to the supply chain and to the economy,” Squires said.
Third-quarter financial results
Net profit for NS in the third quarter was $753 million, or $3.06 per diluted share, compared with adjusted net profit of $643 million, or $2.51 per diluted share, in the third quarter of 2020.
The adjusted figure accounts for a $99 million expense charge incurred last year related to an equity method investment involving purchased services and rents.
NS achieved a record third-quarter operating ratio (OR) of 60.2%, compared with an adjusted OR of 62.5% a year ago. Investors sometimes look at OR to gauge the financial health of a company, with a lower OR implying improved health.
Operating revenues rose 14%, to $2.85 billion, while operating expenses increased 3%, to $1.7 billion. The third-quarter 2020 operating expenses figure includes the $99 million charge.
Subscribe to FreightWaves’ e-newsletters and get the latest insights on freight right in your inbox.
Click here for more FreightWaves articles by Joanna Marsh.
