Tweaking existing operations and layering on the new operating plan for intermodal and bulk movements have been key activities for Norfolk Southern in the second quarter as the railroad seeks to improve service to customers, according to executives on NS’ earnings call on Wednesday to discuss second-quarter 2022 financial results.
One of those tweaks is to reconvert the flat switching yards at the Macon Terminal in Georgia and the Bellevue Terminal in Ohio back to hump yards. NS (NYSE: NSC) converted these yards to flat switching in 2020, but “switching demand has increased in both locations since that time, and we have begun the process of resuming conventional operations at both facilities to provide the capacity we need to move expeditiously and efficiently serve our customers with negligible upstart or ongoing costs,” said NS Chief Operating Officer Cindy Sanborn.
NS executives defended the measure during the earnings call, saying that the change doesn’t bring substantial upfront or ongoing costs, and whether the railroad decides to keep the yards as hump yards in the short term or long term, the change should be viewed as an example of company resiliency.
“The productivity gains that we generated when we idled them the first time, we’re going to be able to hold on to most of those … that was part of the thinking that went into returning to service. … It’s meant to help us do our No. 1 goal here, which is to return our service levels,” Sanborn said, adding that NS will always have the opportunity to evaluate returning them back to flat switching yards.
Said NS President and CEO Alan Shaw: “One of the keys to the humps is making sure that you’re not running cars out of route just to have them humped. And so we installed that discipline when we closed these two hump yards during the pandemic. … We just installed a new operating plan, and opening the humps just makes those switching operations more efficient.”
Another tweak has been to change train schedules on the network, which NS executives say was done in consultation with customers. The schedule changes have reduced the number of train meets on NS’ network and makes operations more fluid, executives said.
“They really want us to have an executable train schedule. They want to have a predictable service product. And so they have been highly collaborative with us as we’ve gone through the top SPG process [the new operating plan for intermodal movements], to look at the changes that were necessary to improve the executability of our product,” said NS Chief Marketing Officer Ed Elkins.
The schedule changes, which have reduced the number of train meets on NS’ network, makes operations more fluid and executable because they help NS balance network flows for railcars and locomotives and allow for “realistic schedules” to avoid bunching, or the piling up of railcars, executives said.
“What it does is it really improves the executability of our operating plan, which means we’re going to be more consistent, more reliable, more on schedule. Those are the principles of PSR [precision scheduled railroading]. That will reduce the friction costs associated with slowness in our network,” Shaw said.
These changes align with NS’ new operating plan, TOP|SPG, that the company deployed in the second quarter, and they shouldn’t detrimentally affect the margins that factor into calculating NS’ operating ratio, executives said.
TOP|SPG stands for thoroughbred operating plans and service, productivity and growth. A thoroughbred horse is part of NS’ logo.
“We fully believe that service and margin improvement are complementary. They support each other, and our trajectory for service improvements and the attendant improvement in OR belies that fact,” Shaw said. “We’ve got balanced objectives of service, productivity and growth in our new operating plan that provide some sort of insight as to how we’re thinking about this thing. Our priority is to improve service. As service and fluidity improve, you’re going to see significant volume uptick and productivity gains, which will collectively drive margin improvement.”
Incremental costs coming from overtime, drayage costs and other factors will lessen as service improves, according to NS CFO Mark George. NS is also still deploying longer and heavier trains, both of which are productivity measures under PSR, Sanborn said.
Second-quarter 2022 financial results
NS’ net profit was flat year over year, with both the second quarter of 2022 and the second quarter of 2021 showing net income of $819 million.
But diluted earnings per share was $3.45 in the second quarter of 2022, compared with $3.28 in the second quarter of 2021.
Operating revenue increased 16% to $3.25 billion amid gains for all three of NS’ segments — merchandise, intermodal and coal — while operating expenses rose 21% to nearly $1.98 billion amid higher fuel and materials costs.
Income from railway operations increased 9% to $1.27 billion.
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