Since its introduction in 1993, precision scheduled railroading (PSR) has transformed railroad performance in North America.
Invented by E. Hunter Harrison, then CEO of Illinois Central Railroad, the PSR model focuses on switching freight trains to fixed schedules instead of allowing trains to be dispatched whenever needed or enough cars are available. Harrison successfully implemented PSR at Illinois Central Railroad before deploying it at Canadian National Railway, Canadian Pacific Railway and CSX Corp.
Implementing that efficiency measure is largely credited with turning the railroads around. PSR allowed the railroads to use fewer resources to do more; it reduced the number of trains the companies needed by making the trains longer and having them carry more cargo. Less trains meant less accidents. Longer trains carrying more cargo increased operating ratio and made the railroad more attractive to customers and increased its financial health. As Harrison’s railroads saw their stock prices grow, other railroad companies jumped on board to implement the same successful operating model.
At Norfolk Southern Corporation (NSC), PSR was implemented in 2019. Since then, the company under CEO Alan Shaw retreated from that strategy and utilizes a limited version of PSR. “Reducing OR [operating ratio] is not our singular focus,” Shaw said at the company’s investor day in 2022.
But discussions about the merits of utilizing PSR in the railroad industry have been renewed as a group of investors seeks to take control of NSC.
An investor group led by Ohio-based Ancora Holdings, which owns a large equity stake in Norfolk Southern, has asked NSC shareholders to approve a slate of eight independent directors. Ancora has proposed installing former UPS executive Jim Barber Jr. as CEO and former CSX executive Jamie Boychuck as COO. While at CSX, Boychuck played an important role in the implementation of scheduled railroading.
The investor group would emphasize PSR as part of its strategy to improve NSC’s growth profile, performance, sustainability, safety and service.
“Our slate’s Scheduled Network strategy would position the company to enhance safety and reduce risks by shrinking the number of trains on the track and reducing dangerous workloads that can lead to exhaustion-driven mistakes,” Ancora said.
Ancora has a plan to have new leadership at NSC implement its “Network of the Future” approach, which involves incorporating the following objectives:
- Safety-First Culture – The well-being of our people, business partners and community;
- Human Capital – People are your #1 asset, ensure you provide recognition and development;
- Service – Customer-focused, based on reliable service with excellent value;
- Cost Control – Manage costs targeted at creating network operating leverage;
- Asset Utilization – Focus on velocity and asset turnover thereby creating additional capacity;
- Growth – Collaboration of operations and commercial division. Includes incorporating a strategic product and pricing process aligned to customer value proposition, and the ability to adapt resources for unplanned volume growth;
- Strategic Product Mix – Optimizing product sets to drive shareholder value.
Michael Farrell, former senior vice president of operations and mechanical for Norfolk Southern, said PSR could work for NSC. He implemented PSR at NSC between 2018 and 2020, first as a consultant, then as senior vice president.
“We had great success with PSR during 2019 and first half of 2020, I believe these principles need to be reintroduced to the organization,” Farrell told Transportation Today. “The model will work at NSC but there are no short cuts. It will have to be rolled out from the foundational level and every resource will need to be justified.”
Farrell said PSR makes railroads safer because of its efficiencies.
“PSR is a systematic approach to rebuilding a safe, productive, and efficient operation. Safety will improve with predictable schedules, clear expectations, and less congestion,” he said. “PSR is about scheduling every aspect of the operation. When do you do it, why do you do it, and how long does it take you to do it? It focuses on resource balance, predictable schedules, and justifying costs. The benefits are to create a consistent, productive, cost-effective, and safe operation. This is a journey, not a destination; it’s all about the process.”
According to a December 2022 report on PSR by the U.S. Government Accountability Office (GAO), the industry has voted with its feet and adopted PSR. Per the report, six of the seven largest freight railroads in the United States reported using PSR between 2011 and 2021. While railroad industry experts say the strategy is a safe way to increase operational efficiencies, critics of the system, mostly unions, shippers and other railroad stakeholders, said the changes PSR creates cuts employees and makes for a less safe railroad all to benefit railroads’ bottom lines. However, the GAO’s report did not make that finding.
Ken Squire, founder and president of 13D Monitor, an institutional research service on shareholder activism, said in a Feb. 10 op-ed published by CNBC that moving back to PSR would be critical for NS, the only publicly traded Class I rail company that does not use PSR strategy, because it reduces switching costs and lowers safety risks. NS’s current model, he said, enables more short-haul and lower margin intermodal transportation.
“Norfolk Southern has materially underperformed the markets and its peers over the past one, three and five years,” Squire wrote. “When you see that in a railroad company, there is one key metric to look at which drives railroad profitability and shareholder return: It’s operating ratio. NSC’s operating ratio is almost 69 percent and the right management team with the right strategy should easily be able to get the operating ratio down close to 60 percent.”
Ancora has stated that NSC’s board has failed to oversee management and operational risks that has led to environmental damage and financial losses. The investor group says NSC bungled its response to the 2023 derailment of its train carrying hazardous chemicals in East Palestine, Ohio, creating national concern over railroad safety and sparking health concerns among local residents.
NSC opposes Ancora’s takeover attempt and says it is one of the safest railroads in the country, even as another train derailed in the same area this year. Since the East Palestine derailment, NSC said it has installed digital train inspection portals, implemented enhanced employee training, and joined the Federal Railroad Administration’s Confidential Close Call reporting system.