Activist investor group would put Norfolk Southern back on PSR path, reduce operating ratio to 57%
CLEVELAND — An activist investor group says its proposed Norfolk Southern management team would improve the railroad’s operations, service, and profitability by jettisoning CEO Alan Shaw’s resilience strategy and adopting the low-cost Precision Scheduled Railroading operating model.
In a letter to shareholders today, Ancora Holdings says its plan for NS would cut costs, focus on the most profitable merchandise traffic, and produce a 57% operating ratio within three years. That would be a 10.4-point improvement over Norfolk Southern’s 2023 operating ratio.
Ancora aims to get a majority slate on the NS board at the railroad’s May 9 annual shareholder meeting. That group would then oust Shaw and new Chief Operating Officer John Orr. Ancora has touted former UPS executive Jim Barber Jr. for the CEO job and former CSX operations chief Jamie Boychuk as chief operating officer.
“This is our collective opportunity to reestablish Norfolk Southern as a great American railroad — with the right leaders in place, the Company can deliver significantly enhanced value for shareholders and stakeholders,” Ancora Holdings CEO Frederick DiSanto and Ancora Alternatives President James Chadwick wrote.
Ancora’s 14-page letter sketches out Barber and Boychuk’s plan for NS:
In the first 100 days on the job, they would embark on a listening tour with employees and customers. They’d redesign the NS operating plan in September 2024 and implement PSR in October and November.
Balancing the network, improving fluidity, and reducing excess assets — including an unspecified number of hump yards — would reduce the operating ratio to 62% to 63% within 12 months. NS would rely on attrition to whittle down the size of its workforce.
In months 13 and 14, Barber and Boychuk would eliminate excess costs, reach service metric targets, and begin to recapture merchandise traffic. NS also would introduce a new costing and profit management system for the merchandise network. The operating ratio would improve to 60%.
In year three, NS will gain business from existing customers, handle the most profitable traffic, become an employer of choice, and hit a 57% operating ratio.
Ancora believes that NS ultimately can reach a 55% operating ratio by developing “a different way of selling rail service across global supply chains, including with trusted shippers and partners … that creates new rail customers.”
Elements of Ancora’s operating plan include running fewer but longer trains that operate on time, maintaining dependable service, and improving safety — partly through reduced switching. Ancora also would reduce what it calls NS’s overdependence on low-margin intermodal traffic.
Ancora was critical of Shaw’s resilience strategy, which it says is responsible for the railroad’s lagging operational and financial performance. The strategy, announced in December 2022, reduces the emphasis on the short-term operating ratio in favor of keeping a buffer of train crews during freight downturns so the railroad can avoid service problems and capture more volume when business rebounds.
“This strategy, which is the antithesis of the true PSR approaches utilized by other Class I railroads, has increased congestion, led to difficulty handling trough volumes and resulted in a mediocre 72% merchandise on-time arrival record,” DiSanto and Chadwick wrote. “Furthermore, we understand that the strategy also hinges much of its upside potential on the unsupported hope that the freight economy will improve and high-margin volume will fall into management’s lap.”
Ancora also took aim at last week’s hiring of former Canadian National and Canadian Pacific Kansas City executive John Orr as chief operating officer. Orr brings PSR operating experience to NS.
“Norfolk Southern’s share price is down approximately 3.5% in the days since John Orr’s appointment. We attribute this to Norfolk Southern’s uninspiring operating ratio outlook, investors’ low confidence about his ability to execute on those targets, Mr. Orr’s inexperience as a railroad COO, and the governance failures associated with the hiring of Mr. Orr. The perceived benefits of hiring an outside PSR COO are actually a fallacy because PSR is incompatible with Mr. Shaw’s resiliency strategy,” DiSanto and Chadwick wrote.
NS adopted a Precision Scheduled Railroading operating plan in 2019 under then-CEO Jim Squires. But Ancora contends NS does not run a true PSR model.
“If Norfolk Southern’s claims of having a PSR operating model right now were true, the Company’s operating and financial metrics would not materially lag those of CSX and Class I peers (before and after the East Palestine, Ohio, disaster),” DiSanto and Chadwick wrote.
The NS board has unanimously backed Shaw, his “better way” strategy, and response to the Feb. 3, 2023 hazardous materials derailment in East Palestine, Ohio.
Rail labor leaders, the Federal Railroad Administration, and Surface Transportation Board have all expressed concerns over Ancora’s calls for change at NS.