The battle for control over Norfolk Southern Railroad (NS) brought fresh impetus to precision scheduled railroading (PSR), a concept that had lost traction over the past year owing to rising criticism over deteriorating rail safety and service levels.

 

PSR, which focuses primarily on a rail carrier’s operating ratio, largely dictated railroads’ strategy prior to last year as the most promising route to higher returns.

 

Among shippers and rail labour unions, on the other hand, opposition to PSR rose as it came to be increasingly associated with aggressive cost-cutting to the detriment of service levels.

 

The meltdown of carrier performance in the wake of the pandemic intensified criticism.

 

Customers and observers contended that cuts in labour and equipment had left the railroads unable to cope with the surge in traffic, precipitating congestion and a service meltdown across the US rail system.

 

In a series of hearings on rail performance before the Surface Transportation Board in 2022, shippers voiced frustration over delays and poor service and the impact on their business.

 

Opposition to PSR stiffened further after the fiery derailment of an NS train in February of last year, which led to the partial evacuation of the town of East Palestine, Ohio, as it involved some cars carrying hazardous materials.

 

Again, PSR was widely blamed for eroding safety levels. Ironically, NS at the time was widely seen as the Class I railroad that had moved the furthest away from PSR, having pledged to put more emphasis on other metrics.

 

This won NS plaudits from unions, shippers and regulators, but some shareholders were less impressed with the company’s financial results, as they lagged the other Class I railroads.

 

Activist investor Ancora Capital, which held a US$1 billion stake in NS, launched a bid to take over management in later January.

 

It proposed eight candidates for the board of directors, including nominees for the CEO and COO position.

 

The following months in the run-up to the annual shareholder meeting in May saw the two sides sniping at each other as they tried to sway investors.

 

Ancora argued that its strategy, which centered heavily on PSR, would deliver results in line with other carriers, while NS management stated that Ancora’s approach would compromise improvements in safety and performance. Other parties weighed in, some prompted by the contestants, some of their own volition.

 

Regulators expressed serious misgivings about Ancora and PSR. Martin Oberman, the outgoing chair of the Surface Transportation Board, commented that nothing in Ancora’s plans indicated better service and accused the activist shareholder of missing the boat not only on the importance of resiliency but also on the importance of intermodal traffic.

 

Its strategy would result in fewer, longer trains carrying higher-yielding bulk commodities to the detriment of containers, although the latter segment currently accounts for 50% of all rail traffic and represents the future of the industry, he argued.

 

He declared that the cost-cutting and labour reductions associated with precision railroading would be “a huge detriment” not only for NS but the entire rail industry.

 

Both he and Federal Railroad Administration administrator Amit Bose hinted that a return to fully fledged PSR could prompt a regulatory pushback, such as a possible introduction of rules for reciprocal switching to give shippers more routing options, which has been opposed by the carriers but is finding favour with shippers.

 

A shipper survey indicated that customers favored the incumbent management. Even Joe Hinrichs, CEO of rival railroad CSX, expressed reservations about an all-out PSR strategy and stressed the importance of intermodal and labour.

 

Nevertheless, NS management felt compelled to revert to a softer stance on PSR in order to secure backing from investors at the critical vote for the board of directors.

 

The strongest signal of its changed approach was the recruitment of industry veteran John Orr as COO. He managed PSR in his previous roles at Canadian National and Canadian Pacific Kansas City and is expected to drive operational changes based on the concept. Since his arrival in March he has removed 200 locomotives from service, reduced the number of crew starts and unnecessary car handlings, and improved terminal dwell and car velocity both by 8%.

 

He intends to restructure the train and terminal operating plan and reduce excess costs. Over the coming five months this calls for the storage of 300 more locomotives, improving car velocity by 17% and dwell by 20%, while merchandise carload handlings should go down 10%.

 

This should produce US$250 million in productivity savings and better profit margins. Management now promotes a revised version of PSR.

 

In a letter to investors, CEO Alan Shaw wrote: “Our strategy is designed to mirror the great success stories of the Canadian railroads, who have recognized that PSR is about more than tearing a railroad down to its studs and slashing costs regardless of the fall-out.”

 

Ancora, which lost its bid to take over (only three of its seven candidates were elected to the board and Shaw was confirmed as CEO) pledged to continue its push for a more PSR-driven approach.

 

“We will continue to hold Mr. Shaw to account and push for the appointment of a qualified operator who can actually drive shareholder value. The campaign for change at this great American railroad will continue,” its leadership declared.

 

By Ian Putzger

Correspondent | Toronto