Saving Pennies to Bolster an Exective Image

Cancellation of the steam program, putting a posh executive resort up for sale and now not sending the executive train to the Masters golf tournament in Georgia.

None of those actions that have been undertaken by Norfolk Southern will do anything to improve the company’s bottom line, but they will have symbolic value in the months ahead as the NS board of directors continues to fight an unwanted takeover bid by Canadian Pacific.

Trains magazine reported last week that NS didn’t send its executive train to the golf tournament in Augusta, Georgia.

It remains to be seen, but chances are the executive train won’t be going to the Kentucky Derby either.

In both instances, NS has historically sent its executive train to both high-profile sporting events to entertain shippers, public officials and executives of other railroads.

Just as predictable as flowering trees in the spring, the NS executive train has departed Altoona, Pennsylvania, in the morning and passed through Northeast Ohio on the Fort Wayne Line about a week before the Derby, which is held on the first Saturday in May.

But when you are trying to cut costs, executive perks can become expendable. It is all about promoting an image.

“We do not have business cars at the Masters,” NS spokesman Rick Harris told Trains. “It was an internal business decision.”

CSX and BNSF do have their executive trains in Augusta, but they are not currently the target of a takeover bid by CP or someone else.

Norfolk Southern is not cutting expenses because it is unprofitable.

NS may be suffering from lost coal traffic, but it is not losing money. It is far from being Penn Central or Erie Lackawanna, two railroads that served the Eastern United States that lost a gondola load of money, seeking bankruptcy protection as a result.

No, the issue is a matter of how much money NS makes and whether it is doing enough to make more of it.

In that regard, the primary concern of NS executives is not just prevailing over CP as it is pleasing Wall Street analysts who can influence the buying and selling of NS stock.

That is not to say that the CP takeover bid in unrelated to what Wall Street analysts think.

When a company is unable to increase its financial performance with substantial new business, it often tries to make itself look good by cost cutting.

There is a saying that you can’t cut your way to growth, but you can make your financial statement look better in the short term, which is mostly what Wall Street cares about.

Hence, NS has announced a five-year strategic plan to achieve $650 million in annual savings and reduce its operating ratio to 65 percent or lower by 2020.

The plan also talks about finding new business. The strategic plan is filled with long-term goals and objectives, but it was created for short-term benefit.

Whether the five-year plan ever achieves its objectives is largely immaterial at this point. It shows that current management is doing something now to bolster the balance sheet.

In the short term, NS management is most concerned about the May 12 annual meeting at which interests representing CP will propose a resolution directing NS to discuss a merger with CP.

NS CEO James Squires will point to a laundry list of actions his company has undertaken to reduce costs as a way of arguing against the resolution and against the need to merge with another company.

Not operating the executive train to a golf tournament will save only a few pennies in the scheme of things, but keeping the executive horses in Altoona will be worth valuable debating points.

The last thing Squires needs is a dissident shareholder harping about how NS is spending money on “frills.”

Squires needs to create the impression that he and the current NS management are doing all they can to turn things around and that they know what they are doing.

It is all about building an image that instills confidence in the current management among stockholders.

That might be enough to persuade enough of them to vote down the CP-sponsored resolution.

Saving pennies is the sort of thing that you do when you are in a tough situation that has no easy or immediate solution. You play for time and hope to ride out the storm.

It must gall Squires and the NS directors that CP’s E. Hunter Harrison has all but called them incompetent by saying that if Harrison were the CEO of NS he could realize $1.2 billion in savings by implementing his precision railroading operating plan.

In time, NS will either chase Harrison away or succumb to him. In either case, it seems likely that the NS executive train will be back at the Masters in 2017.

If NS triumphs over CP, it will be able to return to a sense of normalcy, which means wooing shippers, politicians and other railroad executives by taking them for a train ride.

If Hunter gets what he wants, he, too, will need to reach out to the same constituencies.

And what’s spending a few pennies to do that? It won’t affect the bottom line but could go a long way toward helping build a badly-needed positive image.

Tags: Canadian Pacific, Class 1 railroad mergers, CP-NS merger, CP-NS merger talks, executive trains, Masters Golf Tournament, Norfolk Southern, NS annual meeting, NS executive train, railroad mergers