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Norfolk Southern Poised To Start Next Stage Of New Operating Plan

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Norfolk Southern Poised To Start Next Stage Of New Operating Plan

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Norfolk Southern (NYSE: NSC) expects to have the next stage of its new operating plan in place by the end of July.

July is "where we really go in and reconfigure [NSC's] operating plan itself," NSC president and chief executive Jim Squires told investors during the company's first quarter earnings call on April 24.

In this next stage, which NSC dubs "TOP 21," the railroad will seek to run heavier trains and have them run faster along some routes. TOP21 follows an initial stage called "clean sheeting," in which marketing, customers and yard employees worked at the local level to determine where capacity could be freed up at the yards.

Both TOP21 and clean sheeting are part of NSC's wider efforts to incorporate precision scheduled railroading, an operating tool which seeks to schedule railcars on a fixed schedule, throughout Norfolk Southern's network. NSC seeks to reach a full-year operating ratio of 60 percent by 2021, with capital expenditures at between 16 percent and 18 percent of revenue.

As NSC implements TOP21, the railroad also plans to close more classification yards and reduce headcount as a result of faster velocities and less need to "recrew" trains.

"Some of our small local serving yards we've actually already kind of taken out and stopped using them. And there are just little ones here across different areas of the network that we got out of clean sheeting," Norfolk Southern chief operating officer Mike Wheeler said.

"On the large terminals, as we implement the new train plan, the work will go away at some terminals. And as that work goes away, then we will rationalize those assets," Wheeler said.

In order for Norfolk Southern to rely less on its major terminals and establish a more fixed train schedule, the railroad plans to expand its use of distributed power, which places locomotives at the head and middle of the train and allows a train to carry heavier volumes.

NSC also said it wants to drive more unit train business to its manifest trains. Unit trains carry a single commodity, such as grain or coal, while manifest trains pull different types of railcars, such as boxcars, tank cars and hoppers, on one train. Manifest trains can consist of merchandise commodities such as forest products, automotive and metals.

The company said these two measures will enable NSC to run some merchandise trains at 60 mph along certain routes, which is the speed that intermodal trains run. By speeding up the manifest trains, Norfolk Southern will be able to "co-mingle" its intermodal and merchandise networks.

"As we co-mingle traffic on trains, a train becomes a train, and we really don't want to have an intermodal speed and a merchandise speed out there," Wheeler said. "So we've raised them up where appropriate to all run at 60 mph and take advantage of the velocity improvements and keep everything moving."

So far in the first quarter, average train speed was 21.7 mph, a 14 percent increase from the 19 mph average in the first quarter of 2018. Terminal dwell time, or the time that a train spends at a terminal, was down 23 percent to 22.2 hours in the first quarter of this year compared with 29 hours for the same period in 2018.

NSC plans to focus its TOP 21 efforts on its general merchandise, unit train and automotive segments this year. After that, it will focus on intermodal.

NSC executives said the company is watching how it can entice customers to ship via rail instead of truck, particularly in the intermodal segment. Norfolk Southern expects to see intermodal volumes grow, albeit at a slower place than 2018, amid improved service, a tight truck market and forecasted growth in consumer spending.

"We've been able to grow our intermodal franchise in tight truck conditions and in loose truck conditions. Right now, the truck market is not nearly as tight as it was last year, but it's still tighter than overall balance. And there is an inherent advantage to intermodal relative to truck in terms of cost structure," Norfolk Southern's chief marketing officer Alan Shaw said.  

The company reported record first quarter net profit of $677 million, a 23 percent increase from $552 million in the first quarter of 2018.

Image sourced from Pixabay

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