Norfolk Southern’s new business strategy drew applause from Wall Street on Wednesday, but a report posted on the website of Trains magazine noted it also drew some skepticism.
NS CEO Alan Shaw said during an investor’s day event this week that NS would refrain from furloughing operating personnel when traffic drops during economic downturns and would be more focused on providing consistent service and seeking traffic growth rather than looking to reduce expenses at every turn in pursuit of an ever lower operating ratio.
But the Trains report said some Wall Street analysis must be persuaded that the Atlanta-based Class 1 carrier can reach its 2019 service levels and maintain them.
The views of the analysts were expressed in notes written to clients and in interviews conducted by Trains.
One analyst agreed with Shaw that maintaining the existing work force during traffic downturns would hurt short term profits but prove beneficial in providing better service and reducing the recovery costs inherent in having to hire and train new personnel once the economy recovers.
Traditionally railroads have furloughed workers during economic downturns in an effort to reduce expenses. The assumption has been that once traffic picks up furloughed workers will return to their jobs. That has been less the case in recent years.
One analyst who approved of the NS approach said that increasingly railroad earnings are becoming dependent on volume growth, which can be difficult to achieve when service quality is lackluster.
Some of the notes written by investors said the new NS strategy may face a test in 2023 if the economy continues to slow and freight volume is reduced with it.
As for the skepticism, one analyst wrote in a note to clients that the rail industry in the past decade has not seen its traffic volume keep pace with economic growth.
NS alone has lost 4 percent of its traffic volume during that period with much of that loss coming from a 52 percent fall in coal traffic.
That and other notes said NS will have to show it can achieve the consistent service it claims to be seeking with its new approach and that it can, indeed, divert to rail freight that is now moving on highways.
The Trains article can be read at https://www.trains.com/trn/news-reviews/news-wire/wall-street-analysts-welcome-norfolk-southerns-service-and-growth-plan/