Norfolk Southern (NYSE:NSC), one of the leading railroad networks in the eastern U.S., has been increasing its focus on its intermodal business to make up for the lost volumes and revenue due to the headwinds faced in its coal business. In 2011, intermodal shipments accounted for 45% of the overall volumes for Norfolk Southern. By 2013, this figure reached 49%.  Across the same period, the contribution of coal shipments towards overall volumes declined from 23% to 18% and general merchandise shipments remained relatively stable. Coal shipments have been declining due to the competitive pressure of low cost and cleaner natural gas. As the demand for natural gas increased, coal inventory began to pile up leading to further declines in coal shipments.
From 2011 to 2013, Norfolk Southern’s intermodal shipment volume grew 11% and revenue increased 12% driven by a recovery in the global economy and supported by the expansion activities undertaken by Norfolk Southern. However, a key factor limiting growth in Norfolk Southern’s intermodal business has been its revenue per unit for the segment. The revenue per unit has been relatively stagnant over the period due to competition from the trucking industry.
Investments in Corridors And Terminals Support Growth Of Intermodal Business
Norfolk Southern’s investment in corridors such as Crescent and Heartland have helped in growth of its intermodal business. In 2013, intermodal volumes through the Crescent corridor grew 8% and through the Heartland corridor grew 16%.  Terminals across these corridors facilitate truck to rail conversions. Norfolk Southern’s investments in such terminals help boost intermodal shipment volumes and revenues. It recently opened two terminals, one in Charlotte and the other in Chesapeake. We believe that continued investment in these corridors and new terminals will help sustain growth in Norfolk Southern’s intermodal business.
Growth In Intermodal Revenue Per Unit Is Dependent on Competition And Contract Re-pricing
Norfolk Southern’s revenue per unit for its intermodal shipments has been relatively stagnant from 2011 to 2013.  In order to maintain a competitive advantage over trucks, Norfolk Southern has not been able to increase prices for its intermodal shipments. However it does expect that capacity constraints enforced by the new hours-of-service safety regulation on truck drivers will help increase competitive advantage of shipping by rail. 
Growth in revenue per unit has also been limited by the ability to re-price contracts since contracts are based on one whole year. Hence, Norfolk Southern has not been able to take advantage of the favorable conditions that developed in 2013 including the new hours-of-service safety regulation and improvement in the economy. Given that Norfolk Southern is currently in the phase of renegotiating contracts for the year 2014, we can expect to see some improvement in the revenue per unit this year.Notes: