ATLANTA – Norfolk Southern service and safety improved in the fourth quarter, but higher operating costs, lower revenue, and the impact of ongoing expenses related to the East Palestine, Ohio, derailment dragged down earnings.
“Last year was historically challenging, with a major derailment to start off the year, followed by network disruptions and compounded by a stubbornly weak freight market,” CEO Alan Shaw told investors and analysts on the railroad’s earnings call this morning. “The eastern Ohio incident tested our resolve. I’m proud that our team responded decisively and responsibly.”
Shaw reiterated the railroad’s commitment to improving safety and service while “making things right” in East Palestine.
The Feb. 3, 2023 hazardous materials derailment in East Palestine has now cost NS a total of $1.1 billion, a figure that includes insurance recoveries and $150 million of cleanup and legal expenses from the fourth quarter. Including costs related to the derailment, NS’s quarterly operating ratio rose 10.2 points to 73.7%.
Adjusting for the financial impact of the derailment, NS’s fourth-quarter operating income fell 19%, to $958 million, as revenue declined 5%, to $3 billion. Earnings per share declined 17%, to 59 cents. The operating ratio increased 5.3 points to 68.8%.
Overall volume was up 3% for the quarter. Merchandise volume was flat, intermodal was up 5%, and coal was up 1%. But revenue declined in all three business segments.
To reduce costs, NS said it would eliminate 7% of its management and staff positions through a voluntary severance program. The cutbacks will offset hiring in the operating department, including new mechanical jobs.
Chief Operating Officer Paul Duncan says the railroad will begin to shed costs as merchandise operations improve this year. Higher average train speeds, lower terminal dwell, and better on-time performance will improve crew, locomotive, and car utilization, he says.
NS is aiming for at least a 10% improvement in terminal dwell this year and is focusing on on-time departures and adherence to the operating plan, Duncan says.
Shaw said NS expects to improve its merchandise service like it did with its intermodal network, which in the fourth quarter posted its highest on-time performance in more than three years. And he defended the railroad’s long-term service resiliency strategy, which includes not furloughing train crews during freight downturns so that the railroad can capture volume and maintain service levels as volume rebounds.
“Our whole strategy is outperforming during the upcycle. Our franchise is built to outperform during the upcycle,” Shaw says. “You’ve seen us recover from network disruptions much faster than we have in the past. So there’s a proof point as well. We’re not calling when that upcycle occurs, but when it does we do believe that we will outperform and we will attract new business with high incremental margins.”
But analysts were skeptical of the railroad’s cost cutting and profit margin improvement plans.
NS’s 2024 outlook includes revenue growth of about 3%, higher profit margins as productivity increases through the year, and capital expenses of $2.3 billion, which is flat compared to 2023. NS will incur an additional $1.65 billion in capital expense related to the acquisition of the Cincinnati Southern Railway from the city of Cincinnati in March.
For 2023, NS reduced its train accident rate 11% and its mainline accident rate 42%. The employee injury rate increased 7% for the year but was the second-best figure in the past eight years.
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