Norfolk Southern NYSE: NSC said higher fuel prices are expected to pressure its operating ratio in the second half of the year, reversing the tailwind management had anticipated just two months earlier, while the railroad sees opportunities to gain freight share from trucking and continue investing in service and capacity.
During a Morgan Stanley conference discussion, Norfolk Southern executives said fuel prices have continued to rise following the company’s second-quarter call in late July. Based on the fuel curve available the prior week, management said elevated prices are expected to persist for the remainder of the year.
The company now estimates the change in fuel conditions represents roughly a 250-basis-point headwind to its operating ratio compared with expectations two months earlier. Norfolk Southern had expected sequential improvement from the second to third quarter that could be better than seasonal trends, but now expects third-quarter performance to be somewhat worse than seasonal patterns because of fuel.
Truck Costs Create Potential Share Opportunity
Despite the fuel-related cost pressure, executives said high diesel prices are helping attract freight from highways to rail. The company said it is seeing freight conversion not only in intermodal, but also across merchandise markets where shipments can move by either truck or rail.
Examples cited included coiled steel, paper products, consumer goods and lumber. Ed Elkins, Norfolk Southern’s executive vice president and chief commercial officer, said high truck fuel costs are “pulling freight off the road,” noting that diesel prices in the area of the conference had reached approximately $8 per gallon.
Elkins said management is monitoring whether elevated fuel prices could eventually weaken consumer demand. While fuel expenses and fuel surcharges tend to work through over time, he said the more significant question is whether fuel costs begin to affect overall freight demand.
On demand trends, the company said it continues to see industrial growth, supported by manufacturing expansion and progress in its industrial-development project pipeline. Norfolk Southern also reported growth in domestic premium and non-premium intermodal demand. However, management said international intermodal volumes on the East Coast could face a temporary headwind due to an unusually large price differential between East Coast and West Coast port landings.
Elkins said domestic business accounts for about 65% to 70% of Norfolk Southern’s overall intermodal activity, with international traffic representing a minority and West Coast traffic a smaller portion of that international segment.
Service, Pricing and Productivity Remain Central
The company said service quality is central to its ability to win freight and support pricing. Elkins said a reliable service product allows Norfolk Southern to demonstrate value to customers considering rail alternatives, while poor service makes those discussions difficult regardless of fuel prices.
Management said operating performance improved by mid- to late July after service issues during the second quarter. Elkins said on-time originations had risen 20% from second-quarter levels, while speed and train depth had improved despite sustained weekly volumes of roughly 140,000 to 145,000.
Norfolk Southern said it believes its network is positioned to handle additional freight, while it maintains staffing and locomotive resources in locations where demand is expected. The company said train-and-engine hiring requires a long lead time, prompting it to maintain a consistent hiring pipeline across 85 locations.
On productivity, management said it has generated more than $500 million in productivity-related cost reductions over the past two years and remains on track for an additional $150 million this year. Executives characterized the savings as structural rather than volume-dependent, citing locomotive modernization, fuel efficiency and terminal productivity as continuing opportunities.
Merger Review Moves Into Merits Phase
Norfolk Southern said the Surface Transportation Board has accepted the pending merger application and moved the proceeding into its merits phase. Management said the next major milestones include stakeholder, Department of Justice and Department of Transportation comments from mid-November through early December; company responses in February; and a public hearing sometime after March. Final timing remains subject to the STB.
Elkins said the company has added customer protections in response to stakeholder feedback, including expanded Committed Gateway Pricing eligibility, unit-train additions, service alternatives and pricing measures. He said these provisions were designed to address customer concerns while preserving the transaction’s value proposition.
The company also cited an agreement with Canadian National providing additional access related to certain shipper facilities and interests transferred to CN. Elkins said Norfolk Southern would continue to consider agreements that help solve customer and rail-network issues.
Management said standalone execution remains its mandate while the regulatory process continues. Norfolk Southern expects to spend about $2 billion in capital expenditures this year on safety, resilience, growth and technology investments.
Looking further ahead, Elkins said autonomous trucking could reach some scale within the next 18 months, though he framed that as his personal view. He said the prospect reinforces the need for railroads to use technology and develop more compelling customer offerings. Norfolk Southern also highlighted its deployment of 11 digital train inspection portals, which capture approximately 1,000 images per railcar as trains pass through at track speed, as well as more than 1,000 locomotive modernizations.
About Norfolk Southern (NYSE:NSC)
Norfolk Southern Corporation is a major freight railroad company serving the eastern United States. Through its railway network, the company transports raw materials, intermediate goods and finished products for industrial, agricultural, manufacturing and consumer markets. Its operations connect customers with domestic markets, major ports and other rail carriers.
The company transports a diverse range of commodities, including intermodal containers, coal, automotive products, agriculture and consumer goods, chemicals, metals, forest products and construction materials.
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