If activist investor Ancora Holdings wins its Norfolk Southern proxy battle this week, its new management team aims to generate unprecedented growth in carload traffic over the next four years.
Ancora plans to run the same playbook that CSX has used since it shifted to a Precision Scheduled Railroading operating plan in 2017. Improve your service, the thinking goes, and you can get more wallet share from existing customers and grow merchandise volume in the process.
That’s a great strategy except for one flaw: It has not worked.
The CSX of 2023 handled 6.4% fewer merchandise carloads than the pre-PSR CSX of 2016.
Over this same stretch, carload volume fared even worse on Norfolk Southern. Its merchandise volume is down 10.1% from 2016 through 2023, which is likely due to erratic service and the “yield up” profit margin strategy that has raised rates. It’s a combination that pushed customers past their pain thresholds and they shifted their freight to trucks.
These volume declines follow the overall trend in the East this century. CSX and NS have lost a combined 1.8 million non-coal, non-intermodal carloads since 2000. That’s a punishing 27% decline.
Against this backdrop Ancora projects 10.1% carload volume growth at NS through 2027, enough to get carloads back to 2018 levels. “Improved service will win back volume from the highway,” Ancora proclaims — noting that its merchandise recovery assumptions are “conservative.”
“Wildly optimistic” would be a better term.
NS has never experienced four straight years of carload growth this century. The closest it’s come is growing four out of the five years following the Great Recession, when NS carload volume rebounded 9.7%. Yes, that’s close to Ancora’s four-year target. But we’re not coming out of the worst economic downturn since the Great Depression.
CSX and NS were able to grow carload traffic in the years immediately following the three recessions this century. Yet overall carload volume never returned to pre-recession levels, continuing the decades-long loss of market share in the highly truck-competitive East.
It’s hard to see NS regaining this carload volume amid the oodles of truck capacity currently available, which has sent trucking rates down. It’s also hard to see NS clawing back volume from CSX — at least not without igniting a rate war that would reduce the fat profit margins that Wall Street demands.
If you think all of this calls Ancora’s carload traffic projections into question, you’re right. And that’s not all. It also makes you wonder how Ancora can reach its projected operating ratio of 55.4% in 2027. If that 10% carload growth doesn’t materialize, then neither would its more than $750 million in revenue — or that 55% operating ratio. (If you factor in a 3% rate increase annually, the revenue figure climbs to $939 million.)
When deciding how to cast their proxy votes this week, Norfolk Southern investors would be wise to consider how realistic Ancora’s carload volume targets are, along with the financial assumptions that rest upon them.
If Ancora’s management team — former UPS executive Jim Barber Jr. as CEO and former CSX operating boss Jamie Boychuk as chief operating officer — can pull off a miracle and reverse the decline of merchandise traffic on Norfolk Southern, the entire railroad industry would rejoice.
But don’t count on it. Ancora’s carload growth expectations seem to be nothing more than a pipe dream.
You can reach Bill Stephens at bybillstephens@gmail.com and follow him on LinkedIn and X @bybillstephens
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