Norfolk Southern digs its way into a volume hole

Posted by Bill Stephens
on Tuesday, January 26, 2021

An eastbound Norfolk Southern merchandise train rounds a bend at Otis, Ind., in June 2020. David Lassen
What are we to make of Norfolk Southern’s place in railroading’s volume basement?

Every Class I railroad lost traffic last year thanks to the economic impact of the pandemic, which took an unprecedented toll on rail volume in March, April, and May. Intermodal has come roaring back, some carload segments have rebounded to pre-pandemic levels, and let’s just forget about coal.

You’d expect these trends to play out roughly the same across the big six Class I systems. And that’s exactly what happened out West, where BNSF Railway’s 2020 traffic sank 7.6% and Union Pacific’s was down 7%. Up North, Canadian Pacific was down 2.2%, while Canadian National’s traffic was off by 6.1%. The difference is relatively easy to explain: CN was the victim of illegal blockades in February, which shut down key routes; CP won some business that had been handled by CN; and a larger percentage of CP’s traffic is in the bulk category, which was unaffected by the pandemic and thus provided a source of stability. 

Which brings us to the East, where NS was down 11.9%, or twice as much as the 5.7% decline at rival CSX Transportation. It raises eyebrows when two railroads that compete in the same region have such different trajectories, says Allison Landry, an analyst at Credit Suisse.

A glance at the head-to-head volume figures reveals some obvious reasons for the divergence.

First, coal: NS was down 37%, or 12 points deeper than CSX. This is largely beyond the control of NS. If the power plants and steel mills it serves don’t order coal from NS-served mines, the coal is not going to move. Simple as that.

Norfolk Southern CEO Jim Squires says his railroad was disproportionately affected by the pandemic. “A lot of that has to do with our energy commodity franchise and a disparate impact on our utility coal business, for example,” he told the National Railroad Construction and Maintenance Association earlier this month. 

Indeed, NS took it on the chin in several energy related traffic segments. Its petroleum products shipments were down 30% in 2020, vs. just 2% for CSX. Stone, sand and gravel – a category that includes frac sand used in natural gas drilling – was down 19% on NS and just 7% on CSX.

But the NS volume differences extend far beyond energy-related commodities. In fact, the only major traffic segment where NS outperformed CSX was motor vehicles. In every other major merchandise category – including grain, chemicals, forest products, paper, metals – NS lost more volume than CSX.

And despite having by far the biggest intermodal network in the East, NS’s volume was down 5.3% in 2020 – the third straight year of intermodal declines at NS. CSX intermodal volume grew 1.6% last year after two years of declines related to the railroad’s paring of low-density origin-destination pairs on and off its system. 

What’s going on here? Simply put, beyond the pandemic-related traffic declines NS dug its own hole by focusing on rate increases to boost profitability. The pandemic only accelerated volume trends that were already under way in the East. CSX’s merchandise volume has outperformed Norfolk Southern’s for the past two and a half years.

To please investors, NS has been trying to close a yawning 5.6-point operating ratio gap with CSX. CSX embarked on Precision Scheduled Railroading a year and a half sooner under the late E. Hunter Harrison, and independent analyst Anthony B. Hatch suspects that NS has been following the usual PSR path of shedding some lower-margin business.

NS has traditionally favored volume growth over price, and as a result its profit margins have lagged the rest of the industry, Landry notes. The railroad’s “yield up” strategy aims to fatten its profit margins. It’s working, but it’s also driving some business to the highway. “The NS pricing strategy has to have a meaningful impact in terms of pushing some share to truck that they may not think fits the return profile for the network,” Landry says.

Shippers also say that NS is losing jump-ball traffic when CSX offers a competitive option, such as in the Conrail shared asset areas and on short lines that connect to both of the big Eastern roads.

With trucking rates through the roof and capacity tight, NS can continue to raise rates for a while longer without sacrificing much more volume, Landry says. But truckers have ordered more rigs, which means later this year there will be more trucking capacity. “That’s when it will become a problem,” Landry says of NS pushing on the pricing lever.

NS has plenty of room to improve its operating ratio, she says, but at some point the railroad will have to pursue volume growth, too.

You can reach Bill Stephens at and follow him on twitter @bybillstephens 

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