Rocky Mountain Trucking LLC

Norfolk Southern sees 2023 as an opportunity to further test its new operational plan amid considerable economic headwinds, according to executives’ comments during the railroad’s fourth-quarter ’22 earnings call.

Those headwinds include how inflation not only affects NS and its customers but also the broader industries, such as industrial production and manufacturing as well as consumer sentiment.

“Our outlook for 2023 reflects the uncertainty of a challenging macro landscape, in which the path of the demand environment and inflation are unclear,” NS President and CEO Alan Shaw said in prepared remarks to investors during the call. “At this time, we see [a] full-year revenue level with 2022 performance. We expect to be able to absorb volume pressure with share recapture, thanks to our proving service product. RPU [revenue per unit] will be down to flat as we deal with pressure from softening coal pricing, lower fuel surcharge revenue and the eventual unwinding of accessorial revenues as supply chains unblock. RPU will benefit from another year in core pricing gains.

“There are a lot of variables that are hard to predict in an uncertain environment. But in a flat revenue environment. It will be difficult to grow operating income in 2023, with the cost benefits from an improving service product being more than neutralized by inflation as well as the RPU headwinds I had just described.”

How NS achieves volume growth in 2023 and “how the top line evolves” will partly depend on whether there’s an economic recession and how it affects demand destruction, according to NS CFO Mark George. 

NS is swimming against headwinds, including inflation and wage increases, as well as accessorial revenue that could diminish in the back half of 2023, according to George. But tailwinds include strong core pricing and fuel efficiency gains. “[However,] the biggest variable is really going to be volumes,” George said.

Despite the economic uncertainties, NS executives have started to see the fruits of their efforts to change operations and improve service via TOP|SPG, the new operational plan primarily for NS’ intermodal and bulk movements. TOP|SPG stands for “Thoroughbred Operating Plans and Service, Productivity and Growth.” A thoroughbred horse silhouette is part of the railway’s logo.

“We finally have our service back to a place where we’re able to take on additional volume,” said Ed Elkins, NS chief marketing officer. “And we are seeing the benefits of that improved service right now. … The question I think that we’re all trying to answer is: Can we call back enough [volume] to overcome the demand destruction that’s present or might be present in the market in ’23?

“The way I would describe our position is we are guarded, but we are poised for opportunity. We have the right service right now. We’re building the capacity. As soon as the opportunity manifests itself, we’re going to be able to deliver.”

Domestic intermodal performance improved in the fourth quarter, with average container transit times reduced by 12 hours between Chicago and the Northeast, according to Paul Duncan, NS chief operating officer. The performance of NS’ merchandise trains has also become consistent, with improved velocity enabling more capacity, he said.

“Both trains are cycling at historic best transit turn times, maximizing our asset utilization across commodities. …,” Duncan said. “Our service product has turned the corner and we are focused on building further reliability and resiliency into our network that our customers expect moving forward.”

Meanwhile, initiatives to hire more work crews have “paid off,” according to Duncan, with much of NS’ network reaching the minimal staffing levels. NS will continue to shore up the remaining crew bases where the railroad is short in 2023. 

NS plans to modernize an additional 115 locomotives this year, converting them from DC to AC traction technology. The conversion will provide greater fuel efficiency and add pulling power to the locomotives, which in turn will increase productivity and enable longer trains. 

The railway also expects to invest $2.1 billion in capital projects in 2023. One is constructing longer siding between Cincinnati and Fort Wayne, Indiana, which NS said will provide the network with additional resiliency. 

The eastern U.S. railroad expects to still be competitive against the loose truck market, whose spot market is starting to stabilize amid an increase in used truck exports and a decrease in the number of motor carriers licensed in America, among other factors, according to Elkins.

“We have a fantastic partnership with our key customers,” Elkins said. “And that includes our key customers in that trucking space. I say it all the time: We’re not competing against trucks. We’re competing against the highway. Truckers are our customers. And that’s a great place to be.

“Sure, the current environment is challenging, but we’ve been there before. We’ve seen these cycles play out time and time again. The market is rebalancing right now. And I think when you look out past ’23, it’s clear that rail intermodal, specifically on Norfolk Southern, is gonna be a very compelling place to be for customers.”

Longer term, NS is looking at options such as redeploying the train conductor to work in a grounds-based position versus inside the locomotive cab, creating more predictable schedules for crews and improving their quality of life, according to Duncan. He said discussions with the unions about those options are ongoing. 

4th-quarter 2022 financial results

NS (NYSE: NSC) reported net income of $790 million, or $3.42 per diluted share, in the fourth quarter of 2022, compared with $760 million, or $3.12 per diluted share, in Q4 2021.

Operating revenue rose 13% to $3.2 billion amid increases within all of NS’ segments, with revenue per unit rising 15%. 

Operating expenses increased 19% amid increased claims costs and higher compensation and benefits. Operating income grew 5% to $1.2 billion. 

Subscribe to FreightWaves’ e-newsletters and get the latest insights on freight right in your inbox.

Click here for more FreightWaves articles by Joanna Marsh.

Norfolk Southern intends to acquire 300-plus-mile Midwest-Southeast short line

The post Norfolk Southern bracing for economic headwinds appeared first on FreightWaves.