NSC Norfolk Southern Corp

By Paul Ziobro | Photographs by Daniel Acker for The Wall Street Journal 

DECATUR, Ill. -- Norfolk Southern Corp. executives, employees and customers holed up for five days recently to work on a complex puzzle. How could they unclog a sprawling freight yard in central Illinois without triggering chaos?

They asked a multitude of small questions akin to word problems in a math class. Their answers point toward some of the most sweeping changes to the nation's railroad system in decades.

There are 19 railcars bound for Kansas City that reach Decatur around 7:10 a.m. most days, about two hours before their connecting train. That isn't enough time to unhook the cars, which are loaded with freight like coiled steel and corn syrup, move them along a grid of tracks, then attach them to the outbound train. So they sit in Decatur for an average of 26 hours -- well over Norfolk Southern's goal of 20.

Pushing back the Kansas City departure to 2:30 a.m. the following day would fix that problem but generate another: 21 cars from Conway, Pa., would miss the train to Kansas City. One fix would be to have the Conway train arrive later.

"It's a cascade," says Todd Reynolds, general manager of Norfolk Southern's western region.

Freight railroads generally have operated the same way for more than a century: They wait for cargo and leave when customers are ready. Now railroads want to run more like commercial airlines, where departure times are set. Factories, farms, mines or mills need to be ready or miss their trips.

Called "precision-scheduled railroading," or PSR, this new concept is cascading through the industry. Under pressure from Wall Street to improve performance, Norfolk Southern and other large U.S. freight carriers, including Union Pacific Corp. and Kansas City Southern, are trying to revamp their networks to use fewer trains and hold them to tighter schedules. The moves have sparked a stock rally that has added tens of billions of dollars to railroad values in the past six months as investors anticipate lower costs and higher profits.

The new approach was pioneered by the late railroad executive Hunter Harrison, who engineered turnarounds at two major Canadian railroads and Jacksonville, Fla.-based CSX Corp. by radically revamping their logistics.

His template won over Wall Street by boosting profits and stock prices, but it generated chaos on the tracks. The 2017 revamp at CSX caused crippling congestion east of the Mississippi River, jeopardizing operations at plants that made Pringles potato snacks, threatening deliveries of McDonald's french fries and idling Cargill Inc. soybean-processing plants because of lack of railcars.

The challenge for Norfolk Southern, which operates in the Eastern U.S., and others is to make sure that doesn't happen again. Federal regulators, flooded with complaints about CSX, which also operates in the East, have pledged to scrutinize other companies adopting a similar strategy.

"The board does not want to see any carrier implement so-called PSR the way CSX did," said Ann Begeman, chairman of the Surface Transportation Board, the federal agency that oversees freight railroads. "It had unacceptable impacts on so many of its shippers and, frankly, other carriers."

CSX spokesman Bryan Tucker said the company could have done better communicating the changes to customers, but he defended the actions by pointing to its financial results. He said CSX trains are running faster and with less downtime, and the railroad is hauling more cargo with fewer locomotives, railcars and employees.

Norfolk Southern estimates that its own plan will similarly allow its system to operate faster and more efficiently, while cutting about 3,000 employees from its current workforce of about 26,000 and shedding 500 locomotives from its fleet of about 4,100.

Ideally, the end result would be a more fluid railroad network that operates much like a moving conveyor belt, with fewer jams. It would allow shippers and customers to ship finished goods on a just-in-time basis, reducing carrying costs across the board.

Norfolk Southern is starting its overhaul with a process it calls "clean sheeting," which involves dismantling and reassembling schedules and processes -- one yard at a time.

The Decatur rail yard, which contains 180 miles of track on a 550-acre plot, is the largest flat-switching yard in Norfolk Southern's system. The yard connects to two other railroads, and several large customers nearby have plants adjacent to the yard, including Archer Daniels Midland Co. corn and soybean processing plants.

During the recent five-day work session, Norfolk Southern Senior Vice President Michael Farrell outlined the railroad's objectives to a group Norfolk executives, union workers and customers gathered at the downtown Decatur Club.

"We're here to build it from the ground up," he said. "When we come out of here on Friday, we will have a plan. Then, it comes down to execution."

Later that day, in the basement of the railroad's Decatur office, about two dozen members of the team pored over data on timetables, track lengths and the makeup of the 15 trains that stop daily at the terminal. Operations executives who had performed similar exercises at other Norfolk Southern yards drilled workers about how long it took to perform tasks such as switching cars between trains and turning around a locomotive.

Executives pieced together new outbound schedules by working backward. Their goal was to reduce "dwell" -- downtime railcars spend in the yard -- to around 20 hours, on average, for the 1,200 to 1,500 cars handled daily. Figuring out how to get the largest blocks of arriving cars to leave sooner was the priority.

The yard has four receiving tracks where eastbound trains pull in to get rearranged based on destination. One Norfolk Southern executive suggested using two of those tracks to park strings of railcars heading out on the same train so the outbound train can be rebuilt more quickly. Two union workers pointed out that plan would cause problems if more than two trains arrived at nearly the same time, as can happen when trains arrive late.

Railroads like Norfolk Southern are essentially 20,000-mile outdoor assembly lines that have to contend with weather, broken tracks and derailments. Mr. Farrell, the Norfolk Southern senior vice president, reminded those attending the meeting that the goal would be to overcome problems and get back to the plan as quickly as possible. "You manage the exceptions," he said. "Become exception managers."

Norfolk Southern said it is bringing customers in during the planning and development process to head off the kinds of problems that have plagued other railroads. "They're all open to that approach," Chief Executive Officer James Squires said of the customers. "Many of them want to see results. They want to feel confident that there will be no network disruption."

Christopher Boerm, Archer Daniels Midland's president of transportation, declined to comment on the proposed changes at the Decatur yard, but said ADM wants to see rail service improve and appreciates "the opportunity to voice our concerns and help our rail partners understand our specific business challenges and needs."

Some Norfolk customers who have seen similar changes play out at other railroads say they are skeptical. They say that while railroad operators profess to be sensitive to customer needs, the changes proposed are still largely take-it-or-leave-it.

Many customers of railroads own their own freight cars. Norfolk Southern wants customers to prune their car fleets. It promises to cycle cars quicker from plant to customer and back.

Customers say they don't want to give up that buffer of railcar supply, especially in industries where the price of goods sold is tied to commodities markets, or where demand can shift quickly because of outside factors such as weather or tariffs. Some shippers don't see Norfolk Southern's approach as much different than CSX's. "It's still doing less with less, and not charging any less," said one rail shipper.

Mr. Squires said Norfolk Southern "will be pursuing pricing that is commensurate with the value of our services."

BNSF Railway Co., which operates alongside Union Pacific in the Western U.S., has resisted the industrywide push to cut capital spending and drastically change service plans. Executive Chairman Matthew Rose, who is scheduled to retire this month, said railroads that cut back on service risk pushback from regulators. Mr. Rose said BNSF, owned by Warren Buffett's Berkshire Hathaway Inc., is focused on carrying more loads. "More volume leads to more investment," he said.

Norfolk Southern, Kansas City Southern and Union Pacific all had service issues last year that they said exposed the perils of maintaining the status quo. When, in some cases, they responded by adding cars to handle the extra volume, congestion in some corridors got worse.

As Union Pacific tried to clear gridlock, it experimented with some strategies modeled after Mr. Harrison's, which it then decided to adopt more broadly.

"We came to the realization that experimenting with pieces of precision-scheduled railroading was less effective on our network than going the whole way," said Chief Executive Lance Fritz. The catalyst, he said, "was nothing more complex than our growing frustration and our customers' growing frustration with the service product at that time."

Norfolk's Mr. Farrell, a 53-year-old former All American wrestler at Oklahoma State University, previously worked at both Canadian railroads where Mr. Harrison's plan went into effect -- Canadian National Railway Co. and Canadian Pacific Railway Ltd. At Norfolk Southern, he spent more than a year crisscrossing the network as a consultant to identify problem spots, a process he jokingly called the longest-ever episode of "Undercover Boss."

After he formally joined the company in November, he ramped up clean-sheeting sessions. As of mid-February, the railroad says, trains were running 13% faster and dwelling 20% less in yards compared with last year.

Its operations executives are fanning out to more locations each week to rework operations. Once local operations are fine-tuned, Norfolk Southern plans to more broadly overhaul how trains move across its network.

Norfolk Southern's promise to shareholders is that it will lower its operating ratio -- the percentage of revenue consumed by operating costs -- to 60% by 2021, from 65.4% in 2018. CSX and Union Pacific are racing to get their operating ratios below 60% sooner, in part by cutting capital expenditures.

Norfolk Southern is holding its capital spending to between 16% and 18% of revenue, compared with less than 15% for Union Pacific and about 13% for CSX. It will be upgrading its locomotive fleet and adding equipment so that it can carry more trailers -- a business thriving, in part, from more e-commerce packages crossing the country.

Weeks after the clean-sheeting session in Decatur, the new plan is up and running at the yard. Mr. Reynolds, the regional manager, said most tracks are now used for the same purpose each day, simplifying operations. Railcars are making their connections more reliably and spending less time in the yard. And in a sign that customers are buying in, he said, fewer cars are sitting idle in the yard.

Write to Paul Ziobro at Paul.Ziobro@wsj.com

(END) Dow Jones Newswires

April 03, 2019 10:58 ET (14:58 GMT)

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