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Norfolk Southern launching operational plan for intermodal and bulk

Norfolk Southern is preparing to launch the next stage of its streamlined operational plan, with improving intermodal and bulk moves being the target, executives said during the company’s first-quarter earnings call Wednesday morning.

The plan, Top SPG, which stands for service, productivity and growth, will be launched sometime late in the second quarter of this year. It is a continuation of the precision scheduled railroading-inspired Top 21 plan that targeted creating efficiencies in NS’ manifest network in 2019. 

The anticipated deployment of this plan comes as NS (NYSE: NSC) and its Class I railroad peers are seeking not only to combat deteriorating rail service but also to restore shippers’ and regulators’ faith in freight rail. 

NS was one of two Class I railroads testifying before the Surface Transportation Board on Tuesday on subpar rail service and the role that increasing company headcount might have in mitigating current service issues. The hearing continued on Wednesday, with Union Pacific (NYSE: UNP), BNSF (NYSE: BRK.B) and the two Canadian Class I railways scheduled to speak.

“To be clear, our first priority is restoring our service and our entire organization is laser focused on delivering that objective,” NS President Alan Shaw told investors on Wednesday’s call. “Once we’ve gotten that near-term goal, we are going to perform a retrospective analysis on how we got to this position. And we’re going to understand what signals we missed, how we can improve the process and what mitigants we can put in place going forward. 

“We firmly believe that right now it’s a combination of our employee level and our service plan [that will restore service], which is why we very quickly implemented … initiatives to increase our hiring and to redesign our operating plan,” he continued. “That redesign of the operating plan is going to improve our balance. It’s going to improve the simplicity of our product. It’s going to improve the [execution] of our product” in the merchandise, intermodal and bulk franchises.

The new plan resulted from NS reviewing how it links its major markets and then determining how to simplify those connections between terminals.

“This will include ensuring we have assets flowing across our network in a balanced fashion so that less intervention is required for resources to be in the right place at the right time,” said NS Chief Operating Officer Cindy Sanborn.

The plan includes incorporating operational efficiencies for intermodal and bulk trains, such as deploying longer trains in some areas, including the Midwest. 

“What we’re really doing is matching the train to the locomotive pulling power and capability,” Sanborn said, noting that using distributed power on the trains also helps with increasing train size. 

“Train length really helps us right now. It improves or lessens our labor intensity,” Sanborn said. “Now there is a point at which if you’re unable to meet trains at multiple locations on a particular district, it could work against you. … But I think where we are finding opportunities to move more traffic with one crew, that is really to our advantage.” 

NS’ hiring initiative to grow its ranks of train and engine employees as a means to shore up network capacity has been well underway, with plans to grow that headcount sequentially through the remainder of the year, Sanborn said, adding that there are more than 800 conductor trainees on the railroad’s property.

NS is also keeping active the portion of its locomotive fleet that responds to network surges, she said. 

As NS looks to the remainder of 2022, it expects continued consumer demand to lead to year-over-year revenue growth, according to NS Chief Marketing Officer Ed Elkins. But NS is also “closely monitoring the base of uncertainty in the macro economy, including inflation at levels we haven’t seen in over 40 years, rising interest rates and evolving post pandemic labor market and ongoing global geopolitical conflict,” Elkins said.

Norfolk Southern’s Q1 2022 financial results

The Eastern U.S. railroad saw a 4% increase in net profit in the first quarter of 2022, with higher revenues offsetting higher expenses.

First-quarter 2022 net income was $703 million, or $2.93 per diluted share, compared with $673 million, or $2.66 per diluted share, in the first quarter of 2021.

Revenues grew 10% to $2.9 billion despite a 4.5% decline in overall volumes year-over-year. A 16% increase in revenue per unit drove operating revenues higher, NS said.

Operating expenses rose 13% to $1.8 billion, driven by higher fuel costs, purchased services and equipment rental expenses.

Operating income was $1.08 billion, a 7% increase year-over-year as well as a first-quarter record.

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