Atlanta-based Norfolk Southern's earnings offer railroad chance to defend its strategy ahead of board vote

The railroad and Ancora Holdings disagree over whether Shaw ’s strategy of keeping more workers on hand during a downturn to be ready to handle the eventual rebound is the best way to run Norfolk Southern and whether he is the best man to lead the railroad.

The way Ancora wants to run the railroad reminds the investors’ CEO candidate, Jim Barber, of what he used to do when he was UPS’ chief operating officer. He said keeping more workers on hand during slower times is just wasteful and would be like UPS keeping its seasonal workers on the payroll year-round.

“This concept of Precision Scheduled Railroading is the exact same way that UPS has run its network for 60 or 70 years, which is you run it very efficiently, very effectively, and very balanced with as few assets as you can and leverage the efficiency of your employee base and the assets,” Barber said in an interview with The Associated Press.

All the railroad unions, which have been complaining for years about the deep job cuts all the rails have made since PSR became the industry’s standard operating model, came out in support of Shaw. And key regulators at the Surface Transportation Board and Federal Railroad Administration warned that Ancora’s strategy could jeopardize the advancements in safety and service Norfolk Southern has made since the East Palestine derailment.

But control of the railroad will ultimately be decided by investors — not the unions or regulators — who will vote on Ancora’s seven board nominees, and investors have reason to be disappointed in Norfolk Southern’s results given that the railroad’s profit margins, as defined by the industry metric known as the operating ratio, have lagged behind peers. Several big investors, including EdgePoint Investment Group that holds more than $800 million in stock and ranks in the top 10 of the railroad’s shareholders, have said they will back Ancora’s slate, and a Deutsche Bank analyst said in a research note that the activists seem to have strong support among institutional investors.

Barber and Ancora’s pick to be chief operating officer argue that Norfolk Southern needs to aggressively implement the lean Precision Scheduled Railroading model to make the best use of its locomotives and crews and bring its profits in line with the other major freight railroads. That model calls for running fewer, longer trains on a tighter schedule and switching cars less often, so the railroad won’t need as many workers, locomotives and railcars.

Ancora says Shaw’s strategy doesn’t fit with PSR that calls for using only the minimum amount of workers and equipment needed to deliver all the commodities, cars and containers of goods customers want to ship.

And if keeping more workers on hand was really the answer to the railroad’s service problems, Barber and Boychuk questioned why Norfolk Southern can’t deliver more than of its shipments on time now while business remains slower. The railroad said Wednesday that during the first quarter, it delivered 86% of the shipping containers it handled and about 76% of all the other goods on time. Norfolk Southern predicted that would improve in the second quarter, but its nearest competitor in the East, CSX railroad, was significantly better on those measures.

Ancora doesn’t plan to lay off workers, but the investors acknowledge they want to shrink Norfolk Southern’s workforce by about 1,750 jobs through attrition over the next three years while working to cut more than $800 million in expenses in the first year.

Norfolk Southern says there’s no way to save that much in a year without laying off about 2,900 workers. The railroad said it believes the steps Ancora has outlined would only save about $400 million in the first year. Norfolk Southern has predicted that its own plan will generate about $550 million in cost savings over the next three years.

In one example of the dueling letters and presentations that shareholders have been receiving, Ancora replied to that criticism and said most of its initial $800 million in projected savings come from things like parking hundreds of unneeded locomotives and thousands of railcars and improving fuel efficiency — not from layoffs.

The man Ancora wants to oversee Norfolk Southern’s operations, Jamie Boychuk, helped CSX implement Precision Scheduled Railroading after a different investor group pressured that railroad to hire industry legend Hunter Harrison in 2017. That led to all kinds of service problems that year when CSX overhauled its operations quickly in the last few months of Harrison’s life, but since those initial problems CSX has come to be regarded as the industry leader in most respects and routinely outperforms Norfolk Southern in the eastern U.S.

Boychuk and Barber have promised to implement the model more gradually at Norfolk Southern, but they say major changes are needed — not the incremental adjustments the railroad is making under new Chief Operating Officer John Orr that it paid CPKC railroad $25 million to get the right to hire this spring.

Orr touted his background at other railroads and the efforts he has made in the first month on the job to streamline the way Norfolk Southern’s railyards are working.

“I’ve made a career out of going across Canada, the United States and Mexico, unclogging drains and creating a lot of momentum and then leveraging that momentum,” Orr said.

But Boychuk said improving the way an individual railyard operates without reworking the entire network will just push the problems out somewhere else along the railroad.

“It’s not about a point here, a point there. Or because I massaged a yard,” Boychuk said.

Norfolk Southern shares fell 3.5% Wednesday morning after the report.