On Wednesday, Eastern Class I railroad Norfolk Southern (NYSE: NSC) reported a solid operating beat for the fourth quarter of 2024, surpassing Wall Street expectations for earnings even on revenue that was slightly down.
The company has gotten leaner under EVP and COO John Orr’s operational leadership, reducing overtime by 20% in the second half of 2024, accelerating its trains and cutting down on terminal dwell.
A renewed focus on asset utilization saw NS put 500 locomotives into storage over the course of 2024, allowing it to juice a performance metric that Orr started reporting in the first quarter of the year: GTMs per available horsepower, or average gross ton-miles moved per day divided by available (locomotive) horsepower. The number measures the efficiency with which the railroad uses its power units to generate revenue; the more gross ton-miles moved for every locomotive, the better the railroad is at assigning work to its assets. GTMs per horsepower got as low as 94 in the second and third quarters of 2023; by Q4 2024, it was up to 129.
When Paul Duncan ran operations at Norfolk Southern, the railroad reported car-miles and GTMs per transportation and engineering man hour. Car-miles are simply the terminal-to-terminal linehaul distances traveled by the railcars, which indicates something about network fluidity and length of haul, but not necessarily profitability. (Are these cars necessarily loaded? Not according to Norfolk Southern’s definition.) GTMs per man hour measures labor efficiency, but after a year of cuts and reduced overtime, there likely isn’t much more juice to squeeze there. Orr’s preferred metric, GTMs per horsepower, directly gets at how much revenue is being generated by the railroad’s most expensive assets, and it will be exciting to see how it continues to improve as train lengths increase.
“The refreshment of the new operating plan is really the next iteration of continuous improvement,” Orr said on Norfolk Southern’s Q4 earnings call. “We’ve been churning out improvements in our terminals — that was our starting point, on-time performance and over-the-road speed. And as we’ve moved through the progression of improvement on our network health, our asset efficiencies and our customer-facing metrics, the next evolution is tightening down standards. So, connection standards and terminals, creating better yield for our train weights, for our customization of the service that [EVP and CMO Ed Elkins] needs in order to be competitive and to grow the business.”
In the fourth quarter, the railroad reported an adjusted operating income increase of 11% to $1.06 billion, even as revenues saw a slight decline of 2% to $3.02 billion. The rail earned $3.04 per share, beating the Wall Street consensus by a dime.These figures underscore the company’s effective cost management and operational efficiencies.
A key metric highlighting Norfolk Southern’s financial efficiency is its operating ratio — operating expenses divided by revenue — which improved by 1.6 points to 65.8% for the full year when adjusted for one-time events such as line sales and the aftermath of the East Palestine, Ohio, accident. For the second half of the year, the adjusted operating ratio stood at 64.1%, roughly meeting the company’s expectations.
(The Outbound Rail Container Volume measures the number of containers moving by rail on a daily basis. Chart: SONAR. To learn more about SONAR, click here).
Looking ahead, Norfolk Southern has guided for a conservative but achievable financial outlook for 2025. The company anticipates 3% revenue growth, aiming to generate $150 million in productivity savings and improve its operating ratio by 1.5 points. The capital expenditure plan for the year includes a substantial $2.2 billion, signaling continued investment in infrastructure and technology. Additionally, after pausing share buybacks in response to the East Palestine incident, Norfolk Southern plans to resume these programs, reflecting confidence in its financial stability and prospects.
On this week’s Q4 earnings call, CEO Mark George hinted that under the right economic conditions, Norfolk Southern was poised to grow opportunistically and take its operating ratio down even further.
“And with regard to the long-term OR, I think we definitely have the self-help opportunities here to continue to improve OR,” George said, answering a question from Wells Fargo’s equity analyst, Chris Wetherbee. “We put out the 100-to-150-basis-point improvement guideline on the long-term basis on kind of a regular where-we-are volume environment. And once we get the kind of the surge, the economic recovery that we’re expecting, that’s kind of the turbo boost where I think we’ve got a path to that 60 range.”
Central to these positive developments are the leadership transitions at Norfolk Southern, influenced significantly by activist investor Ancora Holdings. In May, Ancora successfully secured three seats on the Norfolk Southern board, a strategic move that has reshaped the company’s governance landscape. The board, now comprising a mix of seasoned professionals and recent members brought in by Ancora, has shown remarkable unity and commitment to the company’s “Better Way” strategy. This strategy focuses on boosting volume and profits by ensuring consistent and resilient service through varying economic conditions.
The appointment of Lori J. Ryerkerk to the board marks a significant shift in Norfolk Southern’s leadership dynamics. Ryerkerk, with over three decades of global leadership experience in the energy, manufacturing and chemical industries, brings valuable operational acumen to the board. Her insights as a large rail customer are expected to drive Norfolk Southern toward customer service and sustained growth.
Mark George’s ascension to the role of CEO following the departure of CEO Alan Shaw has been pivotal in steering Norfolk Southern toward its current trajectory of improvement. Under George’s leadership, the company has implemented several operational enhancements, including a 10% increase in average train speed, a 15% reduction in terminal dwell time and a 20% decrease in unplanned-recrew rates. These measures have not only improved efficiency but also contributed to significant cost savings estimated at $300 million, surpassing the company’s spring targets by $50 million.
Furthermore, Norfolk Southern’s focus on Precision Scheduled Railroading (PSR) 2.0, led by Orr, has been instrumental in driving both efficiency and service improvements. The successful execution of PSR 2.0 is evident in the improvement of the intermodal service composite by 7 points and merchandise trip plan compliance by 6 points compared to the previous year, although both on-time/service metrics slipped quarter on quarter.
The company’s commitment to safety has also seen substantial improvements. Norfolk Southern’s overall Federal Railroad Administration train accident rate improved by 27% for the year, and its mainline accident rate declined by 44%. These safety metrics, however, were slightly offset by a 5% rise in the personal injury rate. Nevertheless, the overall safety enhancements reflect the company’s dedication to maintaining high safety standards while expanding its operational capacity.
Norfolk Southern’s strategic initiatives extend beyond operational efficiencies to include significant investments in fuel efficiency and mechanical improvements. The establishment of a “need for speed” war room is aimed at reducing bottlenecks that can impede service and negatively impact fuel economy. By challenging every permanent and temporary slow order, the company is actively working to minimize stops and drive additional fuel efficiencies across the road network.
Right-sizing the workforce and locomotive fleet took most of 2024, but in 2025, Norfolk Southern is in position to capitalize on any growth that comes its way.
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