Norfolk Southern Corp. said it had a profit of $702 million in the third quarter, a 39 percent increase over the same period in 2017. It said the increase reflected both an increase in income from railway operations and a lower effective income tax rate.
Railway operating revenues were $2.9 billion in the third quarter, 10 percent more than in the third quarter of 2017, due to higher volumes and an increase in revenue per unit, including higher fuel surcharge revenue as well as increased rates.
Overall volumes were up 5 percent when compared to the same period a year ago, with increased intermodal and merchandise traffic offsetting a decline in coal. Intermodal is benefiting from increased consumer spending and a contrained truck market, the company said.
Asked about the possible increase in tariffs on imports from by China, Alan Shaw, the chief marketing officer, said, “We’re seeing is a little bit of inventory stockpile or inventory pull-ahead. However, you take a look at the macro data, the inventory sales ratio remains flat and at a pretty low level, which indicates the demand for product is pretty strong. You take a look at manufacturing in September was up 5.1 percent year-over-year, the strongest gain in almost eight years. Retail sales in the third quarter were up 5.9 percent. So the economy remains very strong.
“The tariffs add some uncertainty to what our customers are thinking; however, the underwriting economy as represented in the macro numbers is very strong, which gives us a lot of confidence in our volumes and our revenue in the fourth quarter and well into 2019,” he said.
Compared to the third quarter of 2017:
• Intermodal volumes were up 8 percent and intermodal revenue was up 20 percent to $764 million.
• Merchandise volume was up 3 percent and merchandise revenue was up 9 percent to $1.7 billion.
• Coal volume was down 4 percent, but revenue from coal was up 3 percent to $464 million. The company said positive pricing and increased export volume growth was partially offset by declines in the interutility market.
“In the last few months, we have begun overhauling our railroad from top to bottom, leaving no stone unturned in the quest for efficiency, growth and shareholder value. ... We will collaborate with our supply chain partners and others to learn their best practices,” said James Squires, the company’s chief executive officer.
Squires said the company will implement precision scheduled railroading principles “where they lead to a better result for customers and shareholders.”
Precision scheduled railroading was popularized by the late Hunter Harrison, the railroad executive who at various times during his career headed Canadian National, Canadian Pacific and, just prior to his death last December, CSX —Norfolk Southern’s major competitor. While Harrison headed Canadian Pacific, the company made an unsuccessful offer to acquire Norfolk Southern. In September, Union Pacific also said it would adopt some precision scheduled railroading principles.
In a 2016 article, Canadian Pacific said Harrison “developed the concept of precision railroading more than 20 years ago, departing from the practice of holding trains until they were completely full. The old model, thought to be beneficial to railway efficiency, could often delay customer shipments. By contrast, precision railroading prioritizes delivery of a customer’s shipment from origin to destination as quickly as possible. It is similar to the airline industry where a plane will leave at its scheduled departure time regardless of whether all seats are filled.”
Squires noted, “We are open to all good ideas that will advance customer service and shareholder value regardless of the source.”
Norfolk Southern promised further details on its plans going forward next February, but Michael Joseph Wheeler, chief operating officer of Norfolk Southern, said “to drive further improvements in the velocity of our operation, we are undertaking the development of a new operating plan. The first step is to streamline the railroad, which will allow us to move assets faster and create capacity for our customers to grow.
“This process, something we refer to as clean sheeting, starts in the terminals and local serving yards where cars tend to accumulate as they navigate the first or last mile of their trip. The goal is to increase fluidity by reducing car inventories, accomplished in part by increasing service frequency for customers. We also work cooperatively with the customers to create efficiencies in service. We are encouraged by the results we have seen so far as clean sheeting underpins our new operating plan going forward,” Wheeler said.