Business Strategy and Outlook| Matthew Young, CFA |
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, and it has achieved solid OR improvement since (on average), including an adjusted 60.1% in 2021. In recent years, Norfolk renewed its commitment to pricing discipline and margin gains, particularly via adopting precision railroading initiatives. Despite setbacks over the past year from the onset of labor constraints, PSR has generally yielded more efficient use of locomotive assets, labor, and fuel. We expect incremental gains in the years ahead as the firm continues to refine 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 the rail's PSR efforts.