Norfolk Southern's Volumes Navigating Anemic Intermodal Activity and Derailment Disruption

Norfolk Southern is a well-managed enterprise, and from the start of the rail renaissance in 2004 through 2008, it posted the highest margins among U.S. Class I railroads. However, its operating ratio (expenses/revenue) deteriorated to 75.4% in 2009 and remained stuck between 69% and 73% from 2010 to 2015. This paled in comparison to progress made by peers Union Pacific and Canadian Pacific, which lack Norfolk's exposure to Appalachian coal. However, by 2017 the rail was back on track, improving to an adjusted 60.1% in 2021. In recent years, Norfolk renewed its commitment to pricing discipline and adopted precision railroading principles. Despite setbacks in 2022 linked to labor constraints and service issues, PSR has yielded more efficient use of locomotive assets and labor. Norfolk is grappling with derailment disruption, wage hikes, and sluggish U.S. industrial production in 2023, but we look for OR gains to resume longer term as the firm optimizes network service and refines its PSR playbook. Of note, in late 2019, former Canadian National CEO Claude Mongeau (2010-16) joined Norfolk's board of directors to help bolster PSR efforts.