WASHINGTON, D.C. — Norfolk Southern Corp. wants to be the engine that could, according to the Wall Street Journal.
After a period of service woes and disappointing profits, Norfolk Southern is undertaking a makeover of its rail freight network. The company is implementing new train schedules, operating trains over shortened, more direct routes and bypassing as many freight yards as possible to reduce delays.
The revamping, which started last summer and has been extended to Norfolk Southern’s entire railroad, represents a major effort to jumpstart the Norfolk, Va., company. Although it had the best railroad profit margins in the U.S. a few years ago, Norfolk Southern has since suffered financial setbacks following its integration of parts of the former Conrail system.
Norfolk Southern’s revamping is also part of a broader effort to tackle one of the railroad industry’s biggest problems: unpredictable service. “The big knock on rail service has been that it is perceived as unreliable and slow,” said Anthony Hatch, an independent analyst in New York. “That puts railroads at a competitive disadvantage to the highway.”
Trucks, which provide faster and more reliable service than railroads, command more than 80% of the nation’s freight revenue. Rail service, while generally 15% to 20% cheaper than trucks, doesn’t go nearly as many places.
Railroads have been attacking their service problems through a combination of capacity improvements, technology and cultural change as seen in a spate of new alliances with each other. Their efforts are starting to pay off. Canadian National Railway Co., Montreal, which a few years ago began to operate its freight trains on more precise schedules than it had in the past, has achieved the best profit margins among major North American railroads.
Norfolk Southern’s makeover began out of frustration. The company’s integration of Conrail in 1999 became mired in freight congestion and delays. The company gradually stabilized service but failed to produce the sizable freight and profit gains that the merger promised. James McClellan, Norfolk Southern’s senior vice president for planning, said the company decided it needed to take a “bolder approach” to fix the railroad.
The result, called the “Thoroughbred Operating Plan,” substantially transforms the railroad’s merchandise freight network — the individual freight cars loaded with such goods as paper, lumber, chemicals, road salt, steel and French fries that are assembled into freight trains at terminals. Such shipments account for about 60% of Norfolk Southern’s 2001 revenue of $6.17 billion. The rest of its revenue is generated by unit trains that carry a single commodity long distances with little intermediate handling.
The undertaking also shows just how complicated modern freight networks have become after railroad-industry consolidation left the U.S. with four major systems. Norfolk Southern relied on computer-modeling software to get a handle on its new enlarged system, which after its acquisition of Conrail includes more than 10,000 origin-destination pairs. It also spent more than $130 million to remove bottlenecks from its railroad.
With help from MultiModal Applied Systems Inc., a Princeton, N.J., computer-software consulting firm, and a team of Norfolk Southern executives, the railroad went about identifying inefficiencies, including circuitous routings and excess handling at terminals. Norfolk Southern cut out 300 miles for freight moving from Charlotte, N.C., to Chicago by routing certain freight trains through West Virginia instead of Pennsylvania. It eliminated more than a day of transit time between Birmingham, Ala., and Allentown, Pa., by avoiding stops in Chattanooga and Knoxville, Tenn.
About 60% of the transit time of a typical freight car on Norfolk Southern is spent in terminals, said Don Seale, Norfolk Southern’s senior vice president for merchandise marketing.
“The good news is we have a lot of terminals,” he said. “The bad news is we use
them.”
The new operating plan reduces the number of terminals used by a typical freight car to about three, compared with four terminals under the old system. Avoiding a terminal saves nearly a day. On the other hand, Norfolk Southern realized efficiency gains by expanding a freight yard near Harrisburg, Pa. The move eliminated the need to haul certain freight an extra 200 miles to a terminal in Allentown and then back to Harrisburg.
Norfolk Southern officials said the new operating plan will shave transit times by 10% to 30%, saving locomotives, freight cars, train crews and fuel. Mr. Seale said the plan will substantially boost efficiency but declined to provide details. Mr. Hatch, the independent analyst, believes the plan will eventually add tens of millions of dollars a year to Norfolk Southern profits.
Martha Yates, customer-service manager of Thiele Kaolin Co. in Sandersville, Ga., initially was skeptical of Norfolk Southern’s new operating plan after the disappointing results of the Conrail merger. But she said the company’s shipments of kaolin clay, which is used to give magazine paper its gloss, now take an average 31 days to reach the destination and return, instead of 34 days.
“We’ve seen enough improvement in rail service to know their plan is working,” she said.
But some Norfolk Southern customers still complain of problems. Richard Robey, president of the North Shore Railroad and other short-line railroads in north central Pennsylvania, said some shipments sit in Norfolk Southern terminals for several extra days because the railroad has failed to supply enough locomotives and crews to move the freight in a timely manner. “It’s still not a smooth operation,” he said. A Norfolk Southern official said the company is “systematically correcting” deviations from the plan.