What Are Norfolk Southern’s Key Sources of Revenue?

by Trefis Team
Norfolk Southern
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Norfolk Southern (NYSE:NSC) generates its revenue from freight of various commodities, clubbed under three segments: Coal, Intermodal, and Merchandise. We estimate slower revenue growth for Norfolk Southern, when compared to the pace seen over the recent years. This can be attributed to an improved situation in the trucking industry, as well as the impact of the trade tensions, which have impacted the overall exports from the U.S. In this note we discuss Norfolk Southern’s revenue sources, its business model, past revenue growth, and expected trajectory. You can  view our interactive dashboard analysis ~ NSC Revenues: How Does Norfolk Southern Make Money? ~ for more details.

Norfolk Southern Generates Its Revenue From Freight of Various Commodities, Clubbed Under Three Segments: Merchandise, Intermodal and Coal.

  • Merchandise freight revenues are derived from the shipment of industrial commodities, including agriculture & consumer products, chemicals, metals & construction commodities, paper, clay, forest, and automotive products.
  • Intermodal segment refers to the shipment of containers that can be moved from one form of transport to another.
  • Coal freight consists of transportation of coal, coke (a by-product of the oil refining process), and iron ore, either on Norfolk Southern’s rail lines or in concert with connecting carriers.

Norfolk Southern’s Business Model

  • What Need Does Norfolk Southern Address?
    • Norfolk Southern is engaged primarily in freight transportation in the eastern United States.
    • Norfolk Southern’s rail network is over 19,000 route miles, and it offers the most extensive intermodal network in the eastern half of the United States.
  • Who Pays To Norfolk Southern?
    • Chemical producers, industrial manufacturers, agricultural companies, coal, oil & gas, and mining companies, steel processors, and automotive companies pay to Norfolk Southern to carry their goods.
  • What Are The Alternatives To Norfolk Southern?
    • Norfolk Southern’s competitors include trucking companies, along with other railroad companies, such as Union Pacific, BNSF Railway, and CSX Corporation.
  • What Are Norfolk Southern’s Competitive Advantages?
    • Most extensive intermodal network in the Eastern US.
    • Six Corridors Strategy: A key differentiator of NSC versus industry peers is the Crescent corridor which is the nation’s most direct intermodal rail route between the Northeast and the South.
    • Fast and fluid rail network.

Norfolk Southern’s Revenue Grew 16% Between 2016 And 2018, And They Could Grow 10% Between 2018-2021.

  • Norfolk Southern’s revenues have grown from about $9.9 billion in 2016 to about $11.5 billion in 2018.
  • This can be attributed to the full implementation of the ELD mandate, which resulted in capacity constraints in the trucking industry, and aided intermodal demand for the railroad companies.
  • The revenues could grow to $12.6 billion in 2021, reflecting a comparatively slower growth rate than witnessed over the recent years. This can be attributed to an improved situation in the trucking industry, as well as the impact of the ongoing trade tensions, which could result in lower exports from the U.S.

Norfolk Southern’s Revenue Growth Has Been Primarily Led By Better Pricing, And This Trend Will Likely Continue In The Near Term

  • Norfolk Southern’s revenues can be derived from no. of units (volume) times average revenue per unit (pricing).
  • The company’s total no. of units increased from 9.9 million in 2016 to 11.5 million in 2018.
  • It will likely see only a modest growth to 11.6 million in 2019, before moving higher to 12.6 million in 2021.
  • This can be attributed to the ongoing trade tensions, which could have an impact on exports, along with the improved capacity in the trucking industry, and favorable natural gas prices impacting the coal demand.
  • Average revenue per carload grew from $1,362 in 2016 to $1,495 in 2018, and this trend could continue with low single-digit growth by 2021, led by pricing gains.
  • However, the pricing could be impacted by lower fuel surcharge in the near term, as the oil prices have been declining, and the expected average WTI crude oil price of $56 for the year will be lower than that of $65 for 2018.


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