CSX Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
October 20, 2022

There are 20 speakers on the call.

Operator

My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the CSX Corporation Third Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer followed by the number 1 on your telephone keypad. Thank you.

Operator

It is now my pleasure to turn today's call over to Mr. Matthew Korn, Head of Investor Relations.

Speaker 1

Thank you, operator. Good afternoon, everyone, and welcome to our Q3 call. Joining me on today's call are Joe Hinrichs, President and Chief Executive Officer Jim Foote, our outgoing President and Chief Executive Officer Kevin Boone, Executive Vice President of Sales and Marketing Jamie Boycek, Executive Vice President of Operations and Sean Pelkey, Executive Vice President and Chief Financial Officer. To our earnings presentation, you will find our forward looking disclosure on Slide 2, followed by our non GAAP disclosure on Slide 3. And with that, it's my pleasure to introduce our President and Chief Executive Officer, Joe Hinrichs.

Speaker 2

All right. Thank you, Matthew, Hello, everyone, and thank you for joining our conference call. I'm excited to be here with you today on my first earnings call as President and CEO of CSX. The entire CSX leadership team is here with me this afternoon and we appreciate the opportunity to discuss our strong Q3 results with you. Our whole team is very motivated to build on our current momentum, strengthen our key relationships, provide better service to our customers and deliver profitable growth for years to come.

Speaker 2

We will achieve this through our OneCXX culture, which at its core means one team working together to serve all our key stakeholders. As Matthew mentioned, also joining us for tonight's call is Jim Foote, who as you all know led this company through its remarkable remarkably successful transformation over these last 5 years. Jim cares deeply about this railroad and its employees, and he has already been a great resource during my 1st several weeks in this role. I'll be happy to have his invaluable advice in the months ahead and I want to thank him for all the help he has given me personally as I get the privilege to follow him. Jim, on behalf of everyone here at CSX, thank you.

Speaker 3

Thanks, Joe. As I have said on every earnings call since I took over as CEO 5 years ago, I am incredibly proud of every CSX employee who has been by my side as we transform this organization into the best run road in North America, to a company that's safer, more efficient, more profitable and far more successful than when we started. I have the utmost confidence that Joe and this team will take this organization to even higher levels of success. This transition process has been underway for a long time. It was critically important that the Board and I ensure that a succession plan was in place when the right time came.

Speaker 3

Having seen CSX through the initial phases of our transformation, past some unusual, to say the least, challenges. And now with our operating performance starting to get back to normal, It's the right time for me to step away. Joe is a great guy. He is very talented and he brings a tremendous amount of operations experience in running a large complicated industrial company. To his years working with a diverse, unionized workforce will clearly serve him very well.

Speaker 3

It's truly been an honor to serve as President and CEO of CSX, and I wish all of you and everyone connected to this railroad the best. And now back to Joe.

Speaker 2

Thanks, Jim. I promise you this team won't let you down. I am honored to be here on behalf of the entire CSX team. I've spent the last month traveling all across the network, visiting our facilities and meeting with our customers, our employees, union leaders, regulatory partners and government officials. At this point, I can tell you 2 things for certain.

Speaker 2

First, this is a fantastic railroad. Our people and our infrastructure are second to none and the principles of scheduled railroading that drive our successful resilient operating model are deeply embedded throughout the company. I knew that CSS was a very impressive place when I started, but I did not appreciate how impressive it really is until I saw for myself how this team of skilled, dedicated men and women who work together to move thousands of boxcars and containers for our customers each and every day. 2nd, for as much as this company has achieved over its transformation during the last several years, there is still so much more that CSX can do. Rail is a low cost freight solution.

Speaker 2

Rail is a freight solution with low emissions. Manufacturing investment in

Speaker 4

the United States is accelerating.

Speaker 2

We have great advantages in this market and our customers should have every reason to ship more by CSX rail. But we have to focus our efforts to make this happen. We have to make it easier for our customers to use our service. We have to provide better service to our customers. We have to engage with all of our employees, especially those out in the field serving our customers every day to ensure that we deliver the reliability that we promise.

Speaker 2

And we have to challenge ourselves to nurture the kind of culture that fosters a nimble, creative and market leading company while staying true to the operational discipline that makes this all possible. The concept of One CSX as one team working together to accomplish great things can be very powerful. We have to bring One CSX to life. We'll talk more about that in a few minutes. But now let's turn to our presentation to review the financial highlights for the Q3 of 2022.

Speaker 2

CSX moved nearly 1,600,000 carloads in the Q3 and generated approximately $3,900,000,000 in revenue. Operating income increased 10% year over year to 1,600,000,000 which include the effect of additional labor and fringe expense related to the tenant agreements reached with our unions last month. Results this quarter also reflected lower real estate gains compared to last year. Earnings per share increased 21 percent to $0.52 a share. Our operating ratio for the quarter was 59.5%.

Speaker 2

Now let me turn it over to Kevin, Jamie and Sean for the details.

Speaker 5

Thank you, Joe. Turning to Slide 5. 3rd quarter revenue increased 18% year over year with revenue growth across all markets. Overall volumes were up 2% as modest volume growth in merchandise and intermodal more than offset a minor decline in coal. Merchandise revenue increased 14% on 1% higher volumes, driven by pricing that reflects rising cost inflation in higher fuel surcharge revenue.

Speaker 5

We saw strength in the automotive market where revenues rose 31% on 13% higher volume. Semiconductor challenges continue to ease and we see significant finished vehicle inventory that needs to move. Ag and Food was also a bright spot as improving cycle times as well as stronger demand for grain, wheat and ethanol resulted in revenue growth of 25% on 10% higher volume in the quarter. Fertilizers in Metals and Equipment both saw modest revenue growth despite volume declines in the quarter. Fertilizer shipments continue to be impacted by reduced phosphate shipments and production facility turnarounds.

Speaker 5

Lower metals and equipment shipments reflect volatile commodity pricing in Mill Maintenance Outages. Intermodal revenue increased 19% on 2% higher volume as yields remain strong and supported by high fuel prices. International shipments were partially offset by lower domestic volumes, which reflected tight equipment availability and softer truck market. Intermodal demand remained strong in the quarter with the team continuing to collaborate with customers and identify new opportunities, including a new international service lane that contributed to growth. Customers continue to recognize our industry leading service product in a challenging market as they seek lower cost in lower emission alternatives to truck.

Speaker 5

Coal revenue increased 36% on 2% lower volume as pricing continues to benefit from strong export benchmarks. Volumes remained limited in the quarter due to production issues at the mine, infrastructure constraints at the export terminals and general manpower shortages. Though our crew availability did show improvement into the end of the quarter, We were also able to reopen portions of our Curtis Bay terminal in September, which provides additional volume opportunities as operations normalize. Demand remains strong and we see opportunities to move more volume as some of these constraints ease. Trucking revenue increased 26%, mainly due to strong core pricing and higher fuel recovery.

Speaker 5

Other revenue increased largely due to higher intermodal storage and equipment usage fees. The strong sequential increase was driven by continued limited warehouse to capacity at customer sites. Looking forward, there is obvious macroeconomic uncertainty as the Fed remains committed to raising rates and addressing high inflation. Given this backdrop, the team is highly focused on its efforts to drive strategic growth to opportunities that target truck and expand CSX's addressable market. As you've seen, Our SelectSight program continues to facilitate new customer partnerships.

Speaker 5

Last month, a key emerging domestic lithium supplier for the EV and battery to the construction of a $600,000,000 refining and manufacturing facility on a CSX Serve site in Tennessee. We also have several other potential projects in various stages of development and continue to see customers investing in new projects across our network. We're also moving forward with efforts to facilitate ESG solutions for our customers. Before year end, we will be releasing an updated version of our carbon calculator that is integrated within our Ship CSX interface. This new calculator will enable customers to drive into much deeper detail and understand in real time to the environmental benefits that CSX Rail can provide.

Speaker 5

Finally, we are also encouraged that service performance is on an upward trend. We expect to turn this positive momentum into additional opportunities with customers. I will now turn it over to Jamie to discuss operations.

Speaker 4

Thanks, Kevin. Safety remains our top priority at CSX and operating safely is the foundation to our service restoration efforts. In the Q3, our personal injury rate and train accident rate decreased sequentially. Though we are not satisfied with our performance, I'm encouraged by our success, especially given the number of new employees across the network. As we mentioned last quarter, it is critically important to instill a culture of safety in our new T and E employees from day 1.

Speaker 4

That emphasis on safety does not end when new employees graduate from training. That requires continuous attention throughout every railroader's career. To reinforce this, we are actively engaging with new hires and all of our employees in the field to discuss recent injuries and accidents to ensure that we take each opportunity to learn from each other. In the Q4, our efforts will continue to focus on making sure our employees are protected from incidents that commonly occur as weather changes. Increased education and awareness of seasonal safety risks will help our team become safer.

Speaker 4

Turning to Slide 7. We are encouraged by the recent improvement in our operational performance. These strong results are a testament to the One CSX team and their unrelenting devotion to serving our customers. If we only look at the 3rd quarter averages, train velocity, dwell and carload trip plan performance, All showed a deterioration versus the prior year, though intermodal tripline compliance continued to improve 240 basis points. However, the right side of each chart of this slide shows the substantial improvements we have made throughout the quarter and continuing into recent weeks.

Speaker 4

As shown here in the most recent 4 week performance, all of these 4 key operational measures are above the averages for the Q3 2022, but they're also ahead of Q3 2021 performance. We are confident that these metrics show that our efforts to hire, train and retain new employees are starting to take hold and make a difference for our customers. Though we are encouraged by the operational momentum, we will not let up. We will continue to push forward and take actions necessary until service is fully restored to a level that our customers expect. We are promoting new conductors, allocating the appropriate number of assets in improving the overall reliability and operational resilience of our network.

Speaker 4

Turning to Slide 8. In the Q3, active T and E headcount reached the highest level since March 2020. Though the quarterly average shows to increase of less than 100 employees, we exited the quarter with over 6,800 total. The hiring pipeline remains robust and we averaged over 500 trainees again in the Q3. We are determined to keep the pipeline full, allowing us to continue filling classes as we work towards our goal of 7,000 active T and E employees by year end.

Speaker 4

Currently, we have over 700 employees in training and have additionally started locomotive engineer training. The number of conductors that finished training and marked up was down slightly in the 3rd quarter as we cycled lower class sizes from earlier in the year. We anticipate this number to increase in the Q4 as the class sizes have remained elevated through the late spring summer months. Conductor promotions will continue to increase the active T and E headcount. Our efforts to minimize attrition that we highlighted in the last quarter are bearing fruit.

Speaker 4

New hire attrition in the preceding months have trended lower, and we believe our hiring initiatives and recent pay agreements for new conductors our contributing factor. I will now hand it over to Sean to review the financial results.

Speaker 6

Thank you, Jamie, and good afternoon. The favorable operating momentum Jamie discussed was accompanied by strong revenue growth of 18% or $600,000,000 including gains across all markets. Operating income was up 10% to $1,600,000,000 as top line gains outpaced expense headwinds from higher fuel costs, inflation and tentative union agreement impacts that I will discuss in more detail on the next slide. The operating ratio was 59.5%, which as a reminder includes roughly a 250 basis point ongoing impact from quality carriers. Interest and other expense was roughly flat as was income tax expense.

Speaker 6

The effective tax rate in the quarter was 21.9%, lower than our statutory rate as a result of a favorable state legislative change. As such, net earnings of $1,100,000,000 was up 15% with EPS up 21%. Now let's take a closer look at expense on the next slide. Total third quarter expense increased $460,000,000 versus the prior year. Fuel was up nearly $200,000,000 primarily due to higher prices.

Speaker 6

Inflation remains above historical levels with $82,000,000 of inflation across labor, PS and O and rents. Labor inflation alone was around $50,000,000 which reflects the proposed wage rate increase from the tentative union agreements. In addition, we recorded $42,000,000 of out of period expenses related to adjusting union labor accruals for the tentative agreements. The most significant piece of this is the impact of the proposed union bonuses. When you think about labor expense going forward, The $42,000,000 is a net catch up and will not recur.

Speaker 6

The base labor per employee excluding this impact is expected to be the new run rate for Q4 and into the first half of next year. Of course, comp per employee will also be impacted by seasonality, mix and other factors, but the full impact of the tentative union agreements is now in our base labor costs. Next, Quality and Pan Am combined for $46,000,000 of higher expense with the increase split about evenly between the 2. Quality expenses correlate with higher revenues, while Pan Am reflects the 1st full quarter of CSX ownership. The Pan Am integration process is well underway, and we continue to receive positive customer indications around strong growth opportunities as we invest to increase the speed and reliability of the former Pan Am network.

Speaker 6

Real estate gains were $33,000,000 less than prior year, with volume and all other expenses increasing $66,000,000 While operating fluidity improved through the quarter, Our hiring focus remained and we incurred approximately $40,000,000 of incremental costs related to T and E training, higher locomotive count, to additional intermodal terminal activity and other congestion related items. Volume related costs and higher depreciation represented the balance of the expense increase. We do expect some of the congestion related expenses to continue into the Q4, but view these costs as the first efficiency opportunities to be realized as we achieve sustained improvements in network performance. Now turning to cash flow on Slide 11. Year to date free cash flow before dividends is down nearly $30,000,000 but up approximately $120,000,000 when adjusting for after tax cash proceeds from the Virginia transaction.

Speaker 6

This is despite close to $225,000,000 of additional capital spend as we continue investing for the health of our network to support the quality in Panium acquisitions and position for future growth. After funding all the capital needs of the business, shareholder distributions have exceeded to $4,300,000,000 this year, including over $3,700,000,000 of share repurchases and nearly $650,000,000 of dividends. Additionally, we ended the quarter with a strong balance sheet, including $2,400,000,000 of cash and short term investments. Looking forward, we expect to maintain our balanced opportunistic approach to returning excess cash to shareholders. And with that, let me turn it back to Joe for his closing remarks.

Speaker 2

All right. Thank you, Sean. Now let's conclude with a review of our outlook as shown on Slide 12. There is no change to our expectation for double digit revenue and operating growth for the full year, excluding the effects of the Virginia Real Estate transaction. While there is uncertainty in the global economy, we feel confident in our ability to deliver on this guidance as we look over the remainder of this year.

Speaker 2

As we mentioned in our earlier remarks, we are pleased with the positive momentum in our service metrics and we continue our hiring and training efforts to ensure that we have the resources needed to build on these trends and drive improved network fluency. We remain committed to returning excess capital to shareholders as you saw over this past quarter. And finally, we reiterate our priority to building a unified cohesive culture of OneCSX that will strengthen the relationships we have with our employees, customers and all other stakeholders. This is a great company and working together there is so much more that we can accomplish and that's why I'm so excited to be here. Thank you all.

Speaker 2

I'll now turn it back to Matthew for Q and A. Thank you, Joe. Now in the

Speaker 1

interest of time, I'd ask that everyone please limit yourselves to only one question. And with that, operator, please open up the line.

Operator

Your first question comes from the line of Ken Hoexter with Bank of America.

Speaker 7

Can you talk a little bit about your learning curve? Why your right background for the role? What you hope to accomplish? And I mean, it's a general question. And then I mean my more specific one would be on trucking, right?

Speaker 7

Like you talked about the ramp rate ramp and is that something that gets impacted by loose capacity or is the chemical business just different from the trucking side, but I'll stick with the big one on for you Joe to start with.

Speaker 2

Okay. Thanks, Ken. Well, I think Jim highlighted a couple of things, but certainly, The labor side of the business experience in the automotive industry is certainly very applicable to our situation that we're in now. When you look at working through with our labor union partners, tentative agreements and ratification and working through those issues. But more importantly, I had the opportunity to be a customer for 20 years of the rail industry and have shared a lot of those experiences with our team and have challenged us to continue to look at things from a customer perspective to make sure that we are holding ourselves to a higher standard of service and accountability for our side of this relationship.

Speaker 2

And I'm really proud of the work that Jamie and the operations team are doing to really show improvement in that area. Jim mentioned that Obviously, the auto industry is a complex business and so is the rail industry. There's different types of complexities. But from my background experience, I think a lot of that's applicable.

Speaker 4

But I would step back for

Speaker 2

a second and say at the end of the day, it's the workforce, it's the people here that serve our customers. And when we bring everybody together and align around our core objectives and around our opportunity to serve our customers better and work together better, we can create an even better CSX. And that's an opportunity for us to bring home and to bring to life and I'm really excited to be a part of that. I'll let Kevin handle the second part.

Speaker 8

Thank you.

Speaker 4

So Ken,

Speaker 5

I think if I got your question right on the chemical, you're asking about the chemical trucking quality and

Speaker 9

Yes, Kevin, I guess just obviously what we're seeing

Speaker 7

in the market is just how your pricing collapsing right on a spot basis. And I just want to Is the chemical business different in terms of the revenues we can expect from the trucking and other business? Or is that something that's maybe more sustainable?

Speaker 5

Yes. I mean, what you have to remember when we were looking at this business, it's a high touch. Customers really care about product quality and the brand awareness that they have for quality is very, very high. This is not business that typically moves around. And so What you've seen is, actually they've done a great job of attracting some drivers this year.

Speaker 5

And so that's been, I think they've done an excellent job versus the market there. And Pricing has been very, very good and continues to remain that way. And so that's what we continue to see. It's a very, very different market. It's not People have to be highly trained, highly skilled to do that business and they have a great workforce doing it.

Speaker 10

Great. Thanks, Joe. Thanks, Kevin.

Operator

Your next question comes from the line of Scott Group with Wolfe Research. Your line is open.

Speaker 11

Hey, thanks. Afternoon, guys. Sean, maybe just any near term color or guidance on the other revenue, to the labor comp per employee, anything on operating ratio in Q4? And then Joe, just sounds like more of a focus on service culture, so So maybe I guess more of a growth focus. I guess how are you thinking about the ability to grow and improve operating ratio over time?

Speaker 11

Or is it more just about growth? Or is it both? Just your big picture strategy going forward.

Speaker 6

Scott, I'll start with the sort of modeling questions. In terms of other revenue, what we've said for a while here is that we do expect it to normalize as supply chains get back to normal. Clearly, that didn't happen here in the Q3 with the increase that we saw in the other revenue line. But the expectation remains the same that we should see it come down in the Q4 and again into next year. To your other point around comp per employee.

Speaker 6

I think the best way to think about that is to take the $42,000,000 we talked about, which was the out of period expenses related to the tentative union agreement, strip that out of labor and that's the comp employee run rate that you probably going to want to use going into Q4 as well as into the first half of next year, before the next increase takes place in July of 2023. I'll let Joe take the second part of

Speaker 2

the question. Thanks, Sean. Thanks, Scott. I think the way I'd like to describe it, really is to step How we're looking at this is just to step back for a second. So I had the opportunity throughout the summer with all my conversations with Jim and the Board to really take a to get educated on scale railroading and to get educated on CSX.

Speaker 2

So the way I like to describe it, how we're looking at things is, to the 5 guiding principles of the scale of Ritter Holding are really around improved safety, improved customer service, control costs, and improve your asset utilization and engage and then ultimately value and evolve your employees. And so if you take a look at all five of those things, they're all very important. And so operating ratio is a big part of looking at controlling costs and your asset utilization and frankly a number of other pieces that go in there. So clearly that's a very important number for us and very important part of our objectives. Improving safety, as Jamie talked about earlier, is really important and we'll never ever get away from that in this industry.

Speaker 2

The other two areas around our customers and employees are opportunities for us. So how do we leverage our strong operating model all that we have here and that Jim and the team have built over a number of years to continue to improve the service we provide our customers and to the experience and the engagement our employees feel as part of OneCSX team. Now, how does that lead to growth? I'll tell you a couple of ways. 1, with the increased service performance and the manpower that we're putting on, that increases our capacity, which we now can leverage to quickly provide for our customers.

Speaker 2

I've had the opportunity to reach out and have video calls with about 8 of our largest customers over the last couple of weeks and almost every single one of them has told me directly to our CEO or COO of all those customers. They've all told me that when we deliver better service and more reliable, predictable service, we want to do more business with you. So we don't have to chase growth by trying to do unnatural things. We need to continue to do the things we're doing, leverage our operating model to continue to deliver better service and with the end increase the headcount and with that come the opportunity to serve our customers better and because we're lower cost, to better for the environment because of all kinds of other reasons, there's opportunities for us to grow the business that way. And that's the way we look at the opportunity to better customer service, through increased capacity through Manning, we have the opportunity to serve our customers and there's more opportunity for us there.

Speaker 2

Thanks.

Operator

Your next question is from the line of Ben Nolan with Stifel. Your line is open.

Speaker 12

Yes, thanks. I appreciate the time guys. I wanted to get back to the coal side of it a little bit. Those outages have kind of continued both at the mines and the and appreciating that we're sort of now getting back to normal. Given the demand that you're seeing from your customers, is it possible to give any color as to how much incremental volume is achievable, let's say, in the next 6 months or however long it takes for some of these bottlenecks to normalize.

Speaker 12

How Much better is it than it used to be or than it currently is, do you think?

Speaker 5

Yes. I think probably the gating factor as we get into next year and we obviously are confident in resolving our to what can the producers actually produce. Coal mines are have been undercapitalized quite frankly and Now have a lot of money and they're looking for equipment, reinvesting, and so I anticipate it will get better. We also do have a mine coming online middle of next year that who will help us and we have a number of them that are still ramping up. So production looks like it could be up next year.

Speaker 5

Knock on wood, we probably would have said that last year at this time too. So there's a lot of things that can happen as you we mentioned previously on the call with we've had some mines that have who struggled but are coming out of that here recently into the Q4. So optimistic on the production side. There's Clearly a need when you look at the utility coal mines or the utilities that we serve, particularly in the south, they have a lot of inventories they need to replenish. And so we anticipate a lot more consistent deliveries over the next year to really replenish those levels.

Speaker 5

And we've continued to see the export market very, very strong and a lot of geopolitical risk out there and Europe and other areas where you probably didn't see as much demand A year ago, I continue to have a lot of demand. So the mines want to serve that. It's profitable for them. And we anticipate to have the resources to be able to deliver going into next year.

Speaker 12

Okay. I appreciate it. Is that sort of if you're just categorizing areas of the business that probably the one area that we're looking into next year, there's the best growth potential, maybe to think of it that way.

Speaker 5

I think on the volume side, we remember, kind of move with the commodity price on the international market. So depending on what that does, they're at very, very healthy levels today, a little bit hot and down from the highs that we saw previously in the year, but I think that will be the biggest back to as we look at overall coal revenue for the next year.

Speaker 12

Right. All right. Appreciate. Thank you.

Operator

Your next question is from the line of Amit Mehrotra. Your line is open.

Speaker 13

Thanks, operator. Hi, everyone. Joe, hearty congratulations to you. Wish you the best. And Jim, we'll miss you.

Speaker 13

I'm sure you'll miss all the 50 conferences and all the questions that we ask you, but hopefully, you'll find something else to do. So congratulations to both of you all. Sean, I wanted to ask you about the cost structure ex fuel, obviously, the 4th quarter, but I'm really kind of interested in how you think about it for 2023, because that we're obviously still in a pretty high inflationary environment. And just related to that, Kevin, once Sean talks about that, can you just talk about You're confident in being able to grow the franchise enough to actually see earnings growth and EBIT growth next year relative to 2022. Just what your level Confidence is in given some of these idiosyncratic volume factors netted out against obviously some uncertainty on the macro side.

Speaker 6

Thanks, Amit. I'll get started on the cost question. So I mean, think about to the fact that the labor cost has now been reset. So we know what our base is kind of going into next year. Inflation doesn't show any signs of abating here more broadly outside of labor and recognize that some of our costs are based on lagging indicators, meaning they'll get set based on where the inflationary rates are in 2022 for next year.

Speaker 6

So there's no doubt we'll be in a sustained inflationary environment going into next year between labor and some of those outside party contracts that we have. That being said, We've been carrying extra cost here throughout the year as the network has not operated the way we would have wanted it to based on not having enough crews in the right places. That problem is rapidly getting fixed here. You can see it in the numbers over the last couple of weeks. And Some of those costs are probably going to be a bit sticky going into the Q4, but as we get into next year, I think there's plenty of opportunity for us to drive some efficiencies and take some of the cost out to help offset the inflationary headwinds that we're going to see.

Speaker 5

Yes. My confidence level I'll tell you where my confidence level is. I'm confident in what the team is doing, what we're going to be able going into next year. And there's a number of factors, obviously, that are out of our control, but we have a tremendous amount of initiatives that are really taking hold and are really going to capitalize on the service product that we expect to deliver next year. As Joe mentioned, There's a lot of customers that want to give us more share of what they're producing and what they're making out there.

Speaker 5

And so we have a lot of those initiatives in place that will reap benefits as we move into next year and that's where my confidence lies. We started the process very, very early in terms of looking at those realizing that there could be different markets that could move around on us next year. But we know through the what's during the pandemic is the railroad, in particular all of us, really haven't participated in the growth that existed out there. And so that's as our objective to position ourselves no matter what the economy holds that we're taking our fair share and then more of it. And so that's where the confidence is very, very high across the whole team and we were just with our short line partners and I think there's a lot of confidence there that they have opportunities to go out into the market and take share from truck.

Speaker 13

Yes. That makes sense. And Sean, I just wanted to follow-up just one quick point what you said. So if I look at your cost base ex fuel this year, it's kind of like $7,300,000,000 It seems like 4%, 5% inflation off that number is kind of the right structural costs that go up, but I guess what you're saying is listen, there's a lot of inefficiencies, dollars 40,000,000 a quarter in 2022. So maybe there's an opportunity to actually if the fluidity gets better, there's actually an opportunity to see net inflation lower than that.

Speaker 13

Is that would you say that's a fair characterization?

Speaker 9

Well, I mean, we're going

Speaker 6

to see how much cost we can take out based on how well the network But I think the general premise that you're thinking about is the right construct. We got $40,000,000 to $50,000,000 a quarter this year that as we cycle better should go away. Is there more opportunity beyond that? Sure.

Speaker 13

Thanks guys. Appreciate it. Thank you.

Operator

Your next question is from the line of Jon Chappell with Evercore ISI. Your line is open.

Speaker 14

Thank you. Good afternoon. Jamie, I think last quarter I asked you about capacity as you were still trying to ramp up the labor force. Now it feels like you're pretty close to rightsizing the network from a labor perspective. We've talked a little bit about some of those excess equipment you have on the network today.

Speaker 14

What would you estimate the spare capacity is today on the network to take on new business, meet this demand that you've been leaving on the table for much of the last 12 months? And I guess the other way to phrase it too is, if we do go into a pretty deep downturn, is that capacity that you'd be willing to kind of back off the network for a short period of time or it's something you want to keep to make sure you're never short, again, because of some of the labor issues?

Speaker 4

Thanks for the question, John. When we take a look at the capacity that we currently have out there right now, It's all about people, people, people. And we've been saying this quarter after quarter after quarter. And you're right, we are getting closer to our targets, but we're still a few 100 people off. So we have pinch points out there, that isn't as fluke as we want.

Speaker 4

You can see in our numbers that we're starting to The velocity is picking up, the dwells coming down, even our tripline performance is creeping up, but definitely not where we want it to be. So over the next couple of quarters, really, you're going to start to see that momentum continue to pick up. And As Sean mentioned, yes, we still have too many locomotives out there, and the velocity will help us on that end. And even our cars online who are higher than where they should be. So as we continue to move forward, there is a lot of cost opportunity there for us to pull out.

Speaker 4

But And as we do that and as we move quicker, easily, I mean, we've said this years ago, but there's easily to the capacity that's out there with the right manpower. We've always said 10%, 15%, 20% capacity with the way that this plant is set up isn't really that big of an issue as long as we have the people to move it. We've got all the assets we need, and we are blessed with a fantastic network here at CSX with double track, long sidings and some good yards that can handle a lot and an operating team out there that's just doing fantastic. So they've proven to us time and time again that we have that capacity to continue to grow. So this is still a people story for us as we move forward.

Speaker 4

Now when we talk about that and as you mentioned, I mean that pent up demand that has been discussed a number of times from Kevin and other folks. What is that pent up demand that's out there? Is that 4%? Is that 5%? Is that 10%?

Speaker 4

I mean, I've heard a number a different number of what that really can be out there. So if we see a dip in the economy, we expect to be able to start picking up some of that freight that we can't pick up today. And for us, we just need to have a stay with the forward looking view on what's going to happen in not just next month or 2 months from now, but and we want to look at 9 months from now, 10 months from now and really protect that teeny headcount that we have. And if we get into any type of situation where we needed to do something different, there's natural attrition. Our natural attrition is 8% to 10% each year, and if we needed to pause classes, we're able to do that.

Speaker 4

But ultimately, we want to protect that teaming workforce that's there. As we just mentioned, Sean mentioned and I did, I guess, at the start of the question, there's a lot of other levers we can pull throughout the organization. So as a team, I think we would all sit down and have that discussion and we would make sure that we right size our assets and railroads are always heavy on assets. So we've got a lot of great cost savings we can do on that end. But all in all, we want to protect that T and E workforce and forward looking.

Speaker 4

And If some type of a softening in the market comes, we're going to be prepared come out of it strong. We're going to be prepared to get all the traffic that's out there, and we're going to come out of this stronger than we ever have if we get into that situation.

Speaker 14

That's great detail. Thanks so much, Jamie.

Operator

Your next question is from the line of Tom Wadewitz with UBS. Your line is open.

Speaker 9

Great. Good afternoon. Wanted to see if you could offer maybe a quick thought on operating ratio in 4th quarter versus 3rd quarter. Another railroad reported earlier today, Union Pacific, and they, I think, surprised people a bit with talking about worse than normal seasonal OR in 4Q versus 3Q. So I wanted to see if you could offer a quick thought on that.

Speaker 9

And then for Kevin, I think in a higher inflation environment, you'd like to get more price, but The kind of point to that is that the truck market is weaker and you do compete with truck. So how do you think about those factors? Can you get More price because you have more inflation or should we be mindful of lower truck price, truckload pricing and that's kind of a barrier to getting more price. Thank you.

Speaker 6

Tommy, I'll start on the Q4 OR question. So I think typical seasonality, it's not always this way, but usually, It's a little bit worse from Q3 to Q4 and that's primarily because we start to wrap up some of our capital projects and we've got some winter related expenses that hit. So all reason to believe that that same dynamic would occur this year. Some of the other things that will impact the operating ratio going Q3 to Q4. Fuel was a benefit here in the Q3 because of the positive lag that we had.

Speaker 6

If fuel prices stay relatively constant or follow the forward curve, we would expect that fuel is going to be a bit of a sequential headwind to the OR. It could be 100 basis points or more based on where the forward curve is right now. So that's just a little bit of noise. Beyond that, hopefully, we're able to pick up some volume as the network starts spinning, take some costs out. So those are good things.

Speaker 6

And then I think it's a matter of what do we see on the intermodal storage side because that can be a bit of a swing factor for us as we sit right now.

Speaker 5

Hey, Tom. On the trucking environment and other things, I think what you have to remember is we don't really operate in the spot market when Truckers are getting 30%, 40% rate increases. That's not what was occurring on our end. And we have a lot of long term agreements with customers that They understand. And the good news right now, we're seeing our customers get price, and they understand some of the cost pressures we're facing.

Speaker 5

And so we're having constructive conversations with them. And, I think, the spreads maybe versus truck aren't as great as they were but you have fuel surcharge which is very high right now and we know that flows through the truck rates. And so there's still a very, very compelling value proposition for customers to shift from truck to rail. And so we're still leaning into that and there's a lot of appetite that we continue to hear of companies wanting to do that and for the environmental reasons as well.

Speaker 9

Okay. So it sounds like you're not overly concerned about the kind of maybe falling truckload contract rates, you're still pretty optimistic on price?

Speaker 5

Yes, if I was participating in the 30%, 40% rate increases, maybe that would be more of a risk, but that wasn't the reality of our business model.

Speaker 9

Makes sense. Okay. Thanks for the perspective.

Operator

Your next question is from the line of Brian Ossenbeck with JPMorgan. Your line is open.

Speaker 10

Hey, good afternoon. Thanks for taking the question. So maybe a quick labor follow-up first for Sean, looking at taking out that $42,000,000 as you mentioned, getting around $33,000 per Employee, I don't know, so it's not a huge step up really from a year over year perspective from what you reported. So I don't know if you can help decipher that a little bit something I'm missing, maybe there's some incentive comp or maybe mix with PNM now in the 1st full quarter. So any thoughts on that would be helpful as we take that and run forward with it.

Speaker 10

And then just maybe a quick one for Jamie as well. When you think about to service recovery and you're performing, I think, best against some of the STB targets that we see in track.

Speaker 15

How long does it you mentioned that

Speaker 10

pent up demand, like are you seeing that come back? Are shippers still worried about a potential second slowdown or potential shutdown with the union agreements still not completely in hand? So what do you think about the near term and how long does it really take for you to benefit from some of those service gains? Thank you.

Speaker 6

So on your comp employee question, yes, the math is right. It really is just the inflationary impact over and above the settlement. So, I guess, they're right around $2,000 per employee for that for the $50,000,000 a little bit more than that. There are small mix impact from having more drivers at quality, which is a little bit lower comp per employee than a railroad worker, but that's really the only offset.

Speaker 4

You can already see our gains in service with the headcount that we've seen rise. So as we continue to qualify, 20, 30, sometime some of the weeks coming up here 40 employees a week. You should continue to see that trend move forward. Now we've got winter coming. So winter always throws a few challenges at us when we look at our service metrics, but our customers are feeling better now, I can tell you that, far from where we need to be.

Speaker 4

And we're feeling it out in the field, the discussions that we have, Joe and I have spent a lot of time out in the field over the last few weeks and the discussion points. Our men and women who are making this happen each and every day, whether it's on the ground or in the towers on the service side delivering, everyone's feeling it. We're starting to feel the railroad run better. We're starting to feel The numbers of the cars moving faster, so that's the big highlight that we're excited about and confident that we're going to continue to move forward on these metrics. And look, I don't like to comment on anything that's out for ratification.

Speaker 4

I think it's important that we allow our union leaders to have those discussions with the employees that are out there and then any other ongoing discussions and negotiations. We prefer to really not make any comments on that and allow the folks who are working on that to just continue doing what they're doing.

Speaker 10

Understood. Sean, was there any incentive comp impact in this quarter like there was last quarter?

Speaker 16

No.

Speaker 10

Okay, great. Thanks for the time. Appreciate it.

Operator

Your next question is from the line of Chris Wetherbee with Citi. Your line is open.

Speaker 16

Hey, thanks. Good afternoon. I guess, I think there's been a perception that the demand level that's out there is decently been above what the service has allowed you guys to carry. And I guess as you think about some of the macro crosscurrents that are out there, for headwinds. Is that still the case?

Speaker 16

Do you think that demand is still maybe meaningfully above what you're able to provide from a service perspective. And I guess as you think out maybe shorter term 4Q in particular, should we start to see the weekly carloads begin to ramp up as the service improvement becomes sort of more realized in the numbers. Just want to get a sense of how you guys are thinking about that. And then maybe a second point, but related is, if we do see things get a little bit worse, How quickly do you think you can respond in terms of heads, whether it be your willingness to furlough or just using attrition? Jamie, I think as you talked about a pretty heavy attrition number, is that that you guys would be able to use relatively quickly in response to slowing demand.

Speaker 5

Why don't I touch on the first one and maybe I'll hand it off to Jamie on the second part of that. Look, I I think you're well aware our network, more than well over half of our business, such as another network out there, another railroad. And so it's important for the industry to work together to capture some of these opportunities we continue to talk about. Clearly, there's markets like housing that are seeing slower signals, but there's other areas like coal and some of the ag products that we're seeing great signs there. And even if in some markets where there could be some slowdown, I think the magnitude of slowdown is what would be the question for us because there's demand that we haven't been able to meet.

Speaker 5

And quite frankly, a lot of our customers haven't been able to meet because of some of their labor issues, the demand that they see out there. So This is not all CSX. It's the whole supply chain catching up and we're one part of that. So where Demand ultimately settles out, I think is somewhat of a question, but we do see from a share perspective, and that's an important thing, a lot of opportunity to win wallet share with existing customers and we see a lot of new customers willing for maybe the first time coming to us and saying, well, how does rail work and how could we provide a service for us? And those are the things that we have to lean into as we go in and we have some uncertainty in the market.

Speaker 5

And I'll hand it over to Jamie.

Speaker 4

Well, when I Looking at the question, kind of as I answered it earlier, we got to stay forward looking. Can we pull costs out quick? We can. I mean our locomotives, when you think about that, that's a daily cost. You put it down tomorrow, you stop paying for it tomorrow.

Speaker 4

I mean these are assets that have been around a long time. And we haven't bought a new locomotive in many years even though we have a rebuild program other than depreciation, the heaviest cost of a locomotive is what you use every day on them. So I mean, that is one example of costs that we can handle. And on our T and E side, it's important that we continue to build our T and E workforce where we need it to be. And if we get into a position where things get deeper or things look differently, That attrition, as you mentioned, Chris, it is a heavy attrition rate, and we're able to use that as just a natural way to control our numbers.

Speaker 4

And by pausing classes if we get to that, those numbers will take care of themselves. But we on the T and E side, and I'm going to keep emphasizing that, We it's a very important position like any other in the company, but it takes us 4 to 6 months to make a train conductor. And if we get softening market and we come out of this, we are going to be prepared to handle all the traffic that comes back at us. And that's a commitment that we're making and we're going to continue to follow through on that. So all those other levers, there's a lot we can pull on this industry.

Speaker 4

We want to make sure that we're prepared to come out of any softening if we get to that point.

Speaker 16

Okay. That's very helpful. Appreciate it. Thank you.

Operator

Your next question comes from the line of Justin Long with Stephens. Your line is open.

Speaker 8

Thanks. Good afternoon. Sean, are there any thoughts that you can share on your expectation for total volumes and coal RPU to you moving into the Q4. And then Joe, congrats on the new role. Congrats to Jim as well.

Speaker 8

Going back to the question on growth versus margins. I think it's clear you're focused on improving service, improving the customer experience. Do you think that requires additional costs and a need for margins to take a step back in 2023 to set the stage for future growth or do you think there's enough cost opportunity from running a more fluid network so that margins can improve next year.

Speaker 5

I guess I'll take the coal I think you could expect we're hopeful that some volume step up given the network starting to get more fluidity and some of our producers starting to a little bit better. So at the margin, maybe a little bit of better volume there. You have access to the benchmark prices. So those have come down. They're still very, very healthy, but that would also impact what we would see in the Q4 from an export coal ARPU perspective.

Speaker 5

So a little bit down probably sequentially there, given that we're already a little bit into the quarter and those numbers are down from Q3.

Speaker 2

Yes, thanks. So this is Joe again from my perspective. First of all, to be very clear, our goal is to leverage our strong operating model and our operating ratios to give ourselves some more capacity to give that incremental volume opportunity that should be very complementary to to our margin performance. So we should not have to chase share by degrading our margin. In fact, that would not be wise.

Speaker 2

It takes a lot of volume to make up for a point of margin. So to be clear, we're really focused, as you've heard over and over tonight, about the opportunity that should keep this momentum going and leverage our great operating model the team has put in place here to free up that capacity with the manpower to then allow for us to naturally provide more volume to our customers that they're asking for. And that's really what our focus is for the growth side.

Speaker 8

Got it. Thank you.

Operator

Your next question is from the line of Ari Rosa with Credit Suisse. Your line is open.

Speaker 16

Hey, good afternoon. So Joe, I wanted to stick on this question of your background and your experience. Maybe you could

Speaker 17

talk about what are the

Speaker 16

learnings that you take from dealing with labor unions in the auto industry that you think carry over to railroads? And then from a customer standpoint, maybe you could give a little more color on what you've shared with your new teammates at CSX about what the customer experience is like from a customer standpoint and maybe what was being missed internally or if there was anything that was being kind of misunderstood internally about what that experience is like. Thanks.

Speaker 2

Yes, thanks. So on the labor front, I really applaud Jim over the last couple of quarters. He has spoken very openly about the need and the desire of this industry to have a better relationship with its union partners. It's a complex relationship. There are 12 different unions and there's industry bargaining.

Speaker 2

So those things are a little bit different than the auto industry. But at the core, I believe that if you can develop relationships and spend the time listening to each other, you can get into interest based bargaining, which this team has some success doing here at CSX to find solutions that are in the best interest on both parties and can find win win solutions. So We were able to do that. It took time, maybe decades to get there in the auto industry, but certainly I was fortunate to be a part of that. And it won't take us that long here because we're already we've already experienced what we experienced lately.

Speaker 2

And I think We all recognize if we keep doing the same thing, we're going to end up in the same place in a couple of years, and I don't think any of us want that to happen. So big opportunity there and really leaning into that. I've already met with some of our key union leaders. And Jamie mentioned we've been out in the field talking to employees. We've been talking to union leaders here and out in the field and really just want to start building that relationship so we can form opportunity to work together to find solutions that are in the best interest of our employees.

Speaker 2

If we put our employees first because they're the ones serving our customers every day, I believe we can mutually find areas of opportunity to make progress together. And so on the customer side, challenging our team, especially Steve is coming on the technology side and all of us here to think about what would it take to be able to provide the type of service our customers should expect from us in 2022 and beyond in terms of not only living up to our commitment around the trip planning compliance or having cars ready or those kind of things, but also around visibility, around transparency and communication, to some of the frustrations that we experienced on the other side of this was really around transparency and visibility and there's lots of opportunity for us to get better as an industry and frankly as a company in that regard, and just really go back to core principles of why we're here. We're in business to serve customers And so they pay us to and they always pay us to honor our commitment and we need to do a better job of honoring that commitment. You heard Jamie talk about that a lot.

Speaker 2

You heard Kevin reference it. And this team is really committed to delivering to our customers in a better way. And CSX was able to show significant improvement really right before the pandemic. This place was showing dramatic improvement in those kind of metrics and then of course that little sidewall that are going to happen with COVID. We want to get back to there.

Speaker 2

As Jamie said, that's our base camp. We want to get back to there and then expect ourselves to go further from there. So it's really just keeping the employees and the customers at the forefront of everything we do because They're mutually exclusive in how they work together. If our employees are engaged and feeling good about the culture and about how they're working together, we can deliver We can deliver better service to our customers, obviously help with less attrition and attracting more people and all that stuff reinforces itself. Thanks.

Speaker 4

Okay, wonderful. Thanks for the thoughts.

Operator

Your next question comes from the line of Brandon Oglenski with Barclays. Your line is open.

Speaker 18

Hey, good evening, everyone, and thanks for the question. Jim, I don't know if you're still on, but congrats on retirement. And if you want to comment on what you found the most successful the last 5 years and what was left unturned, I think we'd all appreciate it. And Joe, welcome to railroading. And I guess to your answer on that last question, How do you see the 1 CSX culture fitting into that customer relationship and focusing on the right priorities?

Speaker 3

Well, sure. I'm just taking a little nap here. That's okay. The biggest success is what you're listening to today in this room. 5 years ago, There wasn't an executive team, it was me.

Speaker 3

These guys are all in new roles, all doing a phenomenal, phenomenal job. I say it and oftentimes everybody that our owners agree, to the best railroad team. This is the best management team in the railroad business. And it's the thing that puts a big smile on my face, especially today when I'm Getting out of here.

Speaker 2

Thanks, Jim. And I thank you from the bottom of my heart because I'm equally am Excited about the team we have here and I'm blessed to be able to work with everyone that you've put together and it is a great team. On your question on One to the initiative, the culture initiative was rolled out before I got here by the team, which I really appreciate the attention and the focus on that. At the end of the day, if we're going to make more progress as a rail industry and then here at CSX, we have to have a better relationship with our union partners and with our workforce out in the field doing the work that creates the value for our customers every day. To really focusing our energy on at CSX about being recognizing we're all part of one team, we're all valuable, We should all be appreciated and we should all be respected and really getting our team to recognize that if we're here to serve and make and help make our employees in the field more successful, that ultimately the company and our customers will be more successful and really channeling that energy in that way.

Speaker 2

We have a great operating model. We have a great process. We have great people. And if we can get people working better together, solving problems, helping us deliver better for our customers, I believe and I think our team I know our team believes that we can have a better railroad and better performance overall on all aspects of our business. So that's the real impetus around One CSX is bringing our team together after all we've been through with the transformation of the operating model and COVID and labor negotiations and all these things to build from where we are and say we're going to be one team working together, supporting each other, appreciating each other delivering for our customers and ultimately that will deliver better performance financially for our business and for our shareholders.

Speaker 2

And it really starts internally. If we're going to provide better service, we have to really engage with our employees to make that happen.

Speaker 18

Thanks for the response.

Operator

Your next question comes from the line of Fadi Chamoun with BMO. Your line is open.

Speaker 15

Thank you. Congratulations to both Jim and Joe on the role and the retirement. I want to ask a question about kind of theme that's going on kind of all night on this call. I think there is, I believe, agreement generally that rails can grow share across many markets because of cost, environmental benefits and so on. But I think the issue has been and what we hear always from shippers is not just to the level of service, but the consistency of service over seasons, over cycle.

Speaker 15

And I'm not sure coming out of this pandemic and some of these labor issues we've experienced in the last year, whether you approach that kind of different framework for the operation and kind of capacity going forward. Is there kind of framework where You look at surge capacity maybe differently than you have in the past or is there an opportunity maybe on labor agreement to change how availability of crews is managed through those kind of times to kind of remove some of that volatility that we see in service, which I think has been probably a big hindrance to the growth in the past.

Speaker 4

Well, I'll take this one on, Buddy. And I believe We're coming out of this stronger than we ever have, and we're coming out of this learning lessons, Okay. If we haven't learned lessons along the way as an industry, it's not just CSX, then we haven't been watching or listening to our customers and seeing what's going on out there. So, yes, is there opportunities with our union agreements? There absolutely is.

Speaker 4

Let's get past the ratification now before getting any comments. But As Joel mentioned, the relationships between our unions and as we continue to do things differently and improve those relationships, it's going to open up opportunity for us to retain employees like we haven't been able to before and provide possibly a schedule and Jim has talked about this a number to provide a better schedule for our employees. So when they come to work, they come to work with a smile on their face, they come to work rested, they come to work being that facing the face that delivers cars to our customers to the docs and they have a positive attitude and they're wanting to grow this company. And believe me, our employees want us to grow. There is no question about it.

Speaker 4

They want us to give them the tools to grow, They want us to give them the opportunity to do that. So that's a big opportunity as we move forward. We are staffing up. We are staffing up to make sure that we can handle the demand that Kevin and his team brings forward to the operating team. Kevin and I talk every single day.

Speaker 4

Weekly, we go through numbers together. Our teams are very close. We know where the opportunities are out there. A number of great announcements that have been made through Kevin and his team through some big wins on customers who are opening up facilities on us. So going forward over the next couple of years, those are great opportunities.

Speaker 4

And we're going to make sure we're staffed up for that. We've got locomotives in storage. I've said that a number of times. And I think when I took Joe into Waycross and he saw The number of locomotives we had in storage out there, it's a surprise. I like to call that the field of dreams.

Speaker 4

And one day maybe we'll have all those locomotives pulling freight and pulling tonnage out there. And if we get to that point, we know that we've really grown this company beyond where we think we can. So We are continuing to prep ourselves to move freight. I think I answered the question on what happens if there's a bit of a downturn in business. We're going to stay forward looking and we're going to try to drive this opportunity like it's never been done before.

Speaker 4

And if there is a softening, we're going to make sure that we are fully prepared no matter how it comes to provide that service to the customers like they've never seen before. And that's our goal. And you're right, that's the theme you've heard tonight. And I'm happy that you said that that is the theme you've heard because I believe all my colleagues and everyone around The table here, we all believe the same thing.

Speaker 15

Thank you.

Operator

Your next question comes from the line of Ravi Shanker with Morgan Stanley. Your line is open.

Speaker 17

Thank you. Good evening, everyone. A couple of quick ones. Joe, probably the last one, hopefully you'll have to do is still wearing your auto hat on, but can you just help share with us what you think the future of autos as an end market is for the railroads, I. E, near shoring production basis, when do you think the chip shortage eases, etcetera, etcetera, and kind of how that Industry kind of ramps up in the near term and long term.

Speaker 17

And as a follow-up, any commentary on, I think today the rails to BMW as kind of asks in the labor contract and then next summer speculating this increase is likely to have a strike, How did that eventually end up? Thank you.

Speaker 2

Okay, thanks. I'll take the second one first and then I'll talk about the autos. As Jamie mentioned, we're going to let the process play itself out. We have a lot of respect for our union leaders and we've reached tentative agreements and during the ratification process. I think Union Pacific talked a little bit about some of the issues with BMW ED this morning.

Speaker 2

And I think the opportunity here is for us to really just work together to let the process play out. We want to respect that process on the union labor side. On the auto side, I mean, there's a lot of things going on. I mean, there's been a number of significant investments, announcements in the especially the Southeast, many of which have been we've been the beneficiary of having a relationship with or having the rail access to, whether it's on EV batteries or whether it's on new manufacturing assembly plants. So I think you'll continue to see, obviously, with the government's help, to increase production for things that support electrification of the automotive industry and we were well positioned to take advantage of that frankly with how these are playing out.

Speaker 2

I'm not going to comment on the chip shortage, but you are hearing from the autos that production is picking up. We're seeing more opportunity to deliver more vehicles. So that's a good thing for us in the near term. And we're watching what's happening on the demand side, but certainly We're seeing increased opportunity to deliver more vehicles for our automotive customers here at CSX. And longer term, of course, there's significant investment going in electrification, and we're seeing again that opportunity to be a part of that as CSX has been a successful part of a number of these announcements.

Speaker 2

So that will continue and we're excited to be a part of it. Thanks.

Speaker 17

Thank you.

Operator

Your final question comes from the line of David Vernon with Bernstein. Your line is open.

Speaker 19

Hey, good afternoon guys for taking the question. Jim, congratulations and good luck. Hopefully, we can stay in touch down the road. Wanted to come back to you Jamie on the headcount. The guidance is we're going to continue to increase transportation headcount to restore service.

Speaker 19

Can you frame, what your expectations are for how large you need to get the headcount to get the service levels where you want it to be? And as you think about adding those resources into next year, should we be expecting the training rooms to be as full in terms of the productivity drag that where we're going to be trying to model out here.

Speaker 4

Well, thank you for that one. I would say our target as we said at the end of this year 7,000 active T and E. We are pushing up to 72 as we move forward and look, we're doing locomotive engineer training. We don't want to get ourselves caught behind on that. We're still good for a number of years, We want to take advantage of that.

Speaker 4

And the trickiest part of headcount on the railroad is getting the headcount on the right spot. And as market conditions change and as things move around out in the field, we're very fortunate that right now we have over 60 employees who have taken temporary transfers to areas where we're short right now and we're hiring, and we're taking advantage of some of those areas where we do have excess employees. So I'm quite happy with where our numbers are heading. And Let's see what that number looks like as we continue to move forward and see where our attrition rate to take us through. But yes, absolutely heading into next year, we will see our class sizes most likely start to decline to more normalized Attrition rate, we're going to make sure that we keep up with attrition.

Speaker 4

We don't want to fall behind on that. And we mentioned that that's an 8% to 10% depending on to which area of the network as we continue to right size and right size in the right places. So yes, you will see our class sizes start to drop when we start hitting those numbers, and we feel quite confident that we're heading in the right direction with those numbers. I wish I had the headcount today that we needed, but it will take a little bit of time and we'll get there. But you will see those to normalized class sizes as we move forward.

Speaker 4

Appreciate the question.

Speaker 19

And if I could just squeeze one little one in there at the end here. As you think about the attrition rates on the recent graduates, have you seen any or noticed any differences as a result of some of the changes that are Coming in the contract, are you seeing like maybe some of the labor stick around a little bit longer than maybe we saw earlier in the pandemic when you were trying to ramp up? Yes.

Speaker 4

We're definitely seeing a change lately, and I would not necessarily put that to the contract at this point in time since it's still out for for ratification. I think that is the hard work that our labor group has done and the great relationships that we're continuing to build with our union groups on changing pay scales. The pay scale where we went from a step scale of 80% it takes over 5 years before you get to 100%. As soon as we started offering to our new hires that they would make the same money as The person sitting next to them in the cab, we definitely saw a change in our retention rate in a positive way. So We are doing things differently.

Speaker 4

And I think as we continue to make some of those changes and build those relationships, that's only going to get better as we move forward.

Speaker 19

I appreciate you letting me squeeze that in there. Thanks again.

Operator

I would now like to turn the call back over to Mr. Matthew Korn.

Speaker 1

Thank you, operator, and thank you everyone for your interest in CSX. We look forward to speaking with you again on our next quarter. Thank you.

Operator

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
CSX Q3 2022
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