It was nearly a year ago when a Norfolk Southern train derailed in East Palestine, Ohio, upending lives in the rural town. Twelve months later, the Atlanta-based railroad is still grappling with fallout from the incident.
Norfolk Southern said Friday its 2023 net income was down 44% compared to 2022, as the railroad has accumulated $1.1 billion in charges so far from the Feb. 3, 2023, derailment of a train carrying hazardous materials.
“Last year was historically challenging,” said Norfolk Southern CEO Alan Shaw during an investor conference call Friday. “The eastern Ohio incident tested our resolve.”
Shaw also disclosed Friday plans to cut management staff to reduce costs. The company aims to cut more than 300 people in the next several months.
Revenue was down 5% in 2023 amid network disruptions — including technology outages — and a “stubbornly weak freight market,” Shaw said.
Its operating expenses were driven up by massive costs for the cleanup of the East Palestine derailment site that continues today, legal expenses and liability, payments to residents who relocated and donations to the community in the surrounding areas in Ohio and Pennsylvania.
But the Ohio derailment wasn’t the only factor driving up the company’s costs. Expenses also increased due to inflation, network congestion and higher labor expenses after a series of union agreements.
Norfolk Southern reported $1.8 billion in net income for last year, down from $3.3 billion in 2022.
The $1.1 billion in charges in 2023 related to the Ohio derailment are estimates that could change in the future, and include $836 million in costs for environmental response, remediation and monitoring, and $381 million for legal and other costs, offset by $101 million in insurance payments. Of the total, the company paid $652 million last year.
“We have strengthened our safety and service. We have kept and will continue to keep our promises to make things right in Ohio, to improve our service to our customers, and to make a safe railroad even safer,” Shaw said. “A crisis allows you to accelerate change, and we acted.”
Shaw cited changes to the railroad’s network and composition of trains to reduce its accident rate and improve service.
The railroad completed the bulk of the cleanup at the derailment site last fall, and has been backfilling areas where contaminated soil was removed. There is also other work to be done to clean up any remaining contamination from creeks in East Palestine, along with ongoing testing.
The company’s fourth quarter results included another $150 million in charges associated with the East Palestine derailment, after collecting $76 million in insurance payments. Fourth quarter net income was $527 million, down 33% from $790 million a year ago.
Railway operating revenues for the quarter ended Dec. 31, 2023, dipped 5% from a year ago to $3.1 billion. Quarterly railway operating expenses, meanwhile, were $2.3 billion, up 10% from a year earlier.
Credit: Matt Freed
Credit: Matt Freed
“While we’re pleased with our remediation accomplishments, we currently expect ongoing monitoring efforts and cleanup efforts will continue through 2024,” said Norfolk Southern Chief Financial Officer Mark George. “There will be additional costs in the future related to legal settlements and fees, although the amounts and timing cannot currently be estimated.”
Shaw said the management staff cuts will “help offset increases in critical operating areas.” The company plans to keep its overall headcount flat compared with the end of 2023 as it adds mechanical craft jobs, according to George.
Norfolk Southern is first offering buyouts, and will proceed to layoffs if it does not reach its target of cutting management staff by 7%.
“It’s clear that our cost structure is too high for our revenue base,” Shaw said. “We’re looking at every cost out there.”
He added that executives “are intently focused on driving out cost inefficiencies and driving productivity.”
In a statement, Norfolk Southern said it instituted a “voluntary separation program” among its non-union management “to lessen the impact as much as possible.”
“Decisions like these are never easy,” the statement said.
Norfolk Southern went into last year with a strategy outlined by Shaw to invest in growth the future, after he took over as CEO in 2022. But 2023 brought a number of setbacks.
“Candidly, no, we didn’t expect some of the incidents that occurred in 2023 — the network disruptions, the eastern Ohio incident and a continuation of a very difficult truck market,” Shaw said. “We invested throughout 2023 for the long term. ... Now, we can really narrow our focus.”
“We are optimistic that recovery is on the horizon and our investments will yield return,” Shaw said.
