The Year 2016 In Review: Successful Cost Reduction Initiatives To Enable Norfolk Southern To Take Advantage Of Better Business Conditions In 2017

by Trefis Team
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Norfolk Southern
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The year 2016 was characterized by tough business conditions for Norfolk Southern, as a decline in shipment volumes and fuel surcharge revenue weighed on the company’s operations. With top line pressure negatively impacting operations, Norfolk Southern looked to manage costs in order to maintain profitability. While the company spent most of 2016 grappling with declining shipments, the coming year promises to offer much better business conditions for the company. In this article, we will take a look back at the year 2016 as well as look ahead to what 2017 has to offer for Norfolk Southern.

A Year Of Declining Shipments & Fuel Surcharge Revenue

Norfolk Southern’s shipment volumes fell roughly 5% year-over-year in the first nine months of the year, primarily driven by lower coal and crude oil related shipments, with lower declines or muted growth seen in other shipment categories. [1]

NSC Decline in shipments in the first nine months 2016

A decline in demand for coal from utilities in the backdrop of soft natural gas prices has impacted U.S. rail shipments of coal, translating into a decline in Norfolk Southern’s coal shipments as well. The company’s coal shipments fell around 20% year-over-year in the first nine months of the year. [1] In addition, oil and gas drilling activity declined in 2016 due to a fall in oil prices. This negatively impacted Norfolk Southern’s shipments of crude oil from the Bakken oil fields, which the company classifies under its chemicals shipments category. The Chemicals shipments category registered a 10% year-over-year decline in the first nine months of 2016. [1] The weak crude oil pricing environment also negatively impacted Norfolk Southern’s fuel surcharge revenue, as a result of lower fuel prices in 2016. The decline in fuel surcharge revenue is reflected in the lower revenue per carload realized by Norfolk Southern in the first nine months of the year.

NSC Declien In Revenue Per Carload 9M 2016

Offsetting Decline In Revenue With Cost Reduction

Lower volume related costs associated with shipping lower shipment volumes partially offset the impact of a decline in top line on the company’s profits. In addition, fuel expenses also declined as a result of lower prices. Norfolk Southern’s own cost rationalization efforts added to the impact of lower volume related costs on the company’s operations. The cumulative decline in Norfolk Southern’s operating costs was enough to offset the impact of lower revenue on the company’s operating ratio, which improved 330 basis points year-over-year. [1]

NSC Operating Ratio 9M 2016A Promising Year Ahead

In contrast to the current year of top line pressure, 2017 promises to be one characterized by rising shipments and fuel surcharge revenue. President-elect Trump’s economic policies are likely to provide a broad-based boost to growth in various sectors of the economy, which will boost shipment growth for railroad companies such as Norfolk Southern across shipment categories. Whereas proposed measures such as a reduction in corporate taxes should benefit all sectors, the President-elect’s proposed $1 trillion revamp of domestic infrastructure will boost metals shipments in the coming years. [2] The President-elect has also promised to revitalize the coal industry. [3] Though doing so will not be easy if gas prices do not increase substantially, any measures that boost coal production will also benefit rail companies, since these are involved in the transportation of the commodity. Thus, the more favorable business environment expected in the coming year should provide an opportunity for Norfolk Southern to report better results. Given the company’s success in cost rationalization this year, it is well placed to benefit from an improvement in business conditions.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Norfolk Southern

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Notes:
  1. Norfolk Southern’s Q3 2016 10-Q, SEC [] [] [] []
  2. Trump’s $1 Trillion Promise vs. Congress, Wall Street Journal []
  3. Trump’s big plan for the coal industry just got even harder, CNBC []
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