Norfolk CEO Sees Achieving Efficiency Target Despite `Headwinds'

  • Railroad plans to reduce $650 million of costs by 2020
  • Carrier lags far behind hostile bidder Canadian Pacific

Norfolk Southern Corp., which is facing the pressure of a hostile bid from Canadian Pacific Railway Ltd., plans to cut costs to meet a five-year target aimed at improving efficiency from near the bottom of the industry.

“We can, if necessary, increase the cost-reduction element of the plan,” Norfolk Southern Chief Executive Officer Jim Squires said in an interview Wednesday. “We have the ability, we think, to achieve that result given headwinds, tailwinds or no winds.” Traffic fell 2.5 percent for large U.S. railroads last year, driven by plummeting coal carloads, according to the American Association of Railroads.

The railroad, which operates in the eastern U.S., intends to reduce expenses by $650 million by 2020 to improve its operating ratio, an efficiency gauge in which a lower number is better, to below 65 percent. Norfolk Southern’s ratio was 74.5 percent in the fourth quarter, compared with an average of 65 percent for the six major railroads that have reported results for the period. 

Canadian Pacific Chief Executive Officer Hunter Harrison, whose railroad had a 59.8 percent ratio, has promoted his takeover attempt in part by saying he would turn around Norfolk Southern’s lagging operations. 

Persuading Shareholders

The U.S. railroad’s plan for improving efficiency could help persuade shareholders to shun Canadian Pacific’s proposal. The Canadian carrier, with backing from activist investor William Ackman, has said it may wage a proxy fight after Norfolk Southern’s board rejected all three merger offers.

Politicians and rail customers, such as the Alliance of Automobile Manufacturers, have sent letters to U.S. regulators opposing a merger.

“These are very sophisticated companies,” Squires said. “They know what they want and don’t want, and they are writing in favor of what is in their best interests.” Norfolk Southern, which called the bids “grossly inadequate,” hasn’t received notice of a proxy proposal, he said.

The efficiency plan, which was announced without the cost-cutting detail in December, wasn’t rolled out in response to Canadian Pacific’s moves, Squires said. It was begun as an “intensive bottom-up review of our business model” when he became CEO on June 1, he said.

“We are very focused on executing on this strategic plan,” Squires said.

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