Norfolk Southern reported record third-quarter revenue Thursday, with higher freight volumes and increased fuel surcharges fueling double-digit growth. The financial performance was better but the railroad was experiencing increasing cost pressures as evidenced by a declining operating ratio.
The company, based in the US and listed on the New York Stock Exchange under the symbol NSC, reported revenue of $3.5 billion, a 14% year-over-year increase. Freight volumes were up 3%, with higher fuel surcharges adding eight percentage points to overall revenue growth.
Operating income for the railroads grew 5% to approximately $1.2 billion. Diluted earnings per share increased 7% to $3.37.
Adjusted earnings per share increased 10% to $3.62. This excludes merger related expenses, costs and effects related to the East Palestine derailment and restructuring and other charges in the year-ago comparison. Adjusted operating income rose 7% to approximately $1.2 billion.
More sales don’t equal operating efficiency
Stronger earnings and record quarterly revenue pointed to pressure on Norfolk Southern’s operating performance. Its operating ratio, an important gage of how much a railroad spends to earn its income, increased 2.8 points to 67.4%.
The adjusted operating ratio also weakened, with the measure increasing 2.1 percentage points to 65.4%. The numbers indicate the company is allocating more of its revenue to operating activities, muting the benefits of stronger freight demand.
“Productivity gains were part of the improvement in earnings,” said Chief Executive Mark George. He also said tighter trucking capacity was helping rail’s competitive position among freight shippers.
“Demand for rail services improved over the quarter with constraints in the trucking market highlighting the advantages of rail transport,” George said. He said the situation also highlighted the opportunity to develop a more efficient freight network with more capacity.
George said the company was looking at ongoing investment in its rail infrastructure to improve the durability of the network and cater for expected growth.
Freight market is stronger, but margins are under pressure
Norfolk Southern’s latest figures show how different the freight transportation industry is being impacted by improved demand and higher operating costs. The trucking market is tighter, which makes rail more attractive to shippers, and higher volumes and fuel surcharges are driving revenue growth.
However, the decline in both reported and adjusted operating ratios indicates that these gains have not yet translated into improved operating efficiency. “The company’s ability to manage costs and fund additional network capacity will continue to be a key driver of its financial performance.”
The challenge for the railroad isn’t just to capture the growing demand, but to convert that demand into stronger margins and more efficient operations.
