Image: Norfolk Southern.
Railroad giant Norfolk Southern (NSC +0.28%) continues to deal with the huge transformation in its industry, as weaknesses in key energy markets like coal have held back both its performance and those of competitors like CSX (CSX +1.10%). In the long run, though, Norfolk Southern CEO Jim Squires and his team of executives still think that the railroad business has plenty of opportunities for growth, even as the company focuses on containing costs as much as possible. Let's take a closer look at Norfolk Southern and what its leadership thinks is its best potential for expanding revenue and earnings in the future.
"This year obviously has been a challenging one. We didn't deliver the kind of improvements you and we expect. But looking to 2016, we are confident that with a reasonably stable economy and our own intense focus on service returns and growth, we are poised for better results." --CEO Jim Squires
Norfolk Southern saw big declines in its financial results during the third quarter, with earnings falling 17% from last year's record level. Squires blamed the softness in the commodities markets, especially coal, for the decline. Nevertheless, Squires noted that Norfolk Southern has taken the opportunity to move forward on key restructuring initiatives that have enhanced efficiency and expanded service. In the end, Norfolk executives agree that the efforts they've taken should pay off in the long run when overall conditions improve.
"The strength of our diverse network, including our intermodal and automotive system, transfer terminals, and alignment with our short-line partners and the customers they reach, gives us the opportunity to continue to provide ripe opportunities for growth." --Chief Marketing Officer Alan Shaw
The decline in coal and oil prices has hit Norfolk Southern's hard, with falling volumes of energy products as well as the raw materials needed to produce them. Yet Norfolk Southern has worked tirelessly to find ways to replace lost business from the energy sector with other opportunities. In particular, the railroad thinks that even with lower fuel prices benefiting the trucking industry as well, Norfolk Southern can build on its competitive advantages and continue to evolve to capture the most profitable business possible.
"In addition to the efficiencies we're seeing with our improving operation, we're continuing to make strategic reductions associated with our decrease in coal volumes." --COO Mark Manion
Norfolk Southern has done a good job operationally, with injury ratios down year to date compared to 2014 and with rising train speeds and falling dwell-related delays. Yet at the same time, it has had to address hard realities, and that has required Norfolk Southern to clamp down on unnecessary costs in the declining coal business. Cutting its workforce, changing routes, and redirecting capital spending to where it's most needed are just a few of the ways that the railroad is responding to changing conditions, and the hope is that Norfolk Southern will match what the market demands of it going forward.
"Fuel surcharges are the primary driver of the revenue decline we have been discussing since the first quarter. The third quarter marks our largest expected quarterly drop in fuel surcharge revenue, with a $255 million decrease." --Shaw
As much as falling fuel costs have helped Norfolk Southern cut its expenses, they have also crushed its ability to impose surcharges on customers to help cover fuel costs. The net impact has been negative, showing up most clearly in the railroad's revenue figures but also hitting the bottom line. Soon, year-over-year comparisons will get more favorable as the prior-year figures start to incorporate lower fuel costs, but for now, investors are still feeling the full impact.
"I think we're going to make a lot of progress on the operating ratio, and we have the ability to lower the operating ratio significantly and we're confident that we can do that." --Squires
One area where Norfolk Southern has lagged behind CSX and some of its other rivals is in the extent of its improvement in operating ratios, which just recently fell below 70%. Although Squires knows where Norfolk Southern stands compared to its peers, he nevertheless is looking at different ways to become more efficient, with some of those strategies already in place and others still under development.
Overall, Norfolk Southern has a long way to go, but it has also come a long way in dealing with a tough industry environment. Going forward, Norfolk Southern needs to keep executing well in order to maintain positive momentum and keep investors excited about the railroad's future.
