In the Spotlight: Norfolk Southern Corporation (NSC) and the Cost of Derailment

Train derailments have been in the spotlight ever since Norfolk Southern’s derailment near East Palestine, Ohio, on February 3, 2023, released toxic chemicals into the environment. The costs to industry will certainly increase.

A bipartisan bill to improve rail safety is making its way through Congress and would require new investments. In April, Norfolk Southern reported an initial $387 million charge for the East Palestine derailment—in addition to the initial $7 million down payment set aside for local clean up and assistance.

Derailment Trends

On average, there were about 1,400 derailments per year since over the past decade, according to data that US railroad companies reported to the Department of Transportation (Federal Railway Administration).[1] The majority (73%) of derailments were among the large companies, such as Norfolk Southern, BNSF, CSX, and Union Pacific.

A closer look at FactSet Truvalue Spotlights[2] over the past decade reveals that NSC has a unique “derailment footprint.” NSC (yellow line) is constantly in the news relative to UNP and CSX, and the main issue is critical incident risk management (derailments, blue bar). After 2017 there is a steep increase in Spotlights. Top-ranked issues include labor practices (job cuts), health and safety, greenhouse gas (GHG) emissions, and competitive behavior. Industry experts believe workforce reduction was a contributing factor in the East Palestine derailment.

Figure 1: Trend in Top Ranked SASB Categories (Bars) with Peer Comparisons (Lines)

Source: FactSet Truvalue

It’s easy to assume that derailments are a growing problem given all the news. However, train derailments declined 17% from 2013 - 2022, largely in line with a 27% drop in total miles traveled, according to DOT/FRA data. At NSC, the number of derailments increased 39% (to 206 in 2016), and then steadily decreased by 40% in the remainder of the decade.

So how can we explain the increased focus on derailments? The costs, which far outweigh any other accidents the FRA tracks, increased 10% starting in 2017. Not all derailments reported to FRA are captured by FactSet Truvalue Spotlights. However, those that are captured are four times more costly (average damage costs of $427,155) than derailments not captured (average $134,217).[3]

After 2016, derailment Spotlights increased both in number and cost. Figure 2 highlights critical incident risk management Spotlights for derailments exceeding $1 million in costs. At NSC, derailment costs increased 48% in the past six years (+220% over the past decade). Even when normalized by miles traveled, the costs of derailment at NSC increased 105% as of 2017. In contrast, CSX, its nearest peer by size, decreased derailment costs per mile traveled by 23%.

Figure 2: Number of Spotlights and Derailment Costs Associated with Critical Incident Risk Management Category

Source: FactSet Truvalue, FRA data

Amid NSC’s higher derailment costs, it’s notable that the company’s OPEX and CAPEX barely increased, per FactSet Fundamentals. Profit margins across the industry in 2017 doubled due to the Tax Cuts and Jobs Act. Margins remained elevated at 25% relative to 17% in the prior period (2013 - 2016). Both NSC and UNP increased their dividend per share (10% - 14% CAGR) at levels higher than revenue growth (~1.4% CAGR). However, the largest railroad company, UNP, recorded a mere 1.7% increase in derailment costs in the past decade, higher CAPEX and OPEX, and lower profit margin growth. NSC’s footprint reveals a different path.

The author wishes to thank Annie Brandstrader, Greg Bala, and Eliot Caroom for their help in data analysis.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.

[1] Derailments are more likely to occur in Texas, Illinois, California and Ohio. DOT/FRA data

[2] Spotlights are characterized by a significant volume and sentiment in articles analyzed by FactSet TruValue in a seven-day window around a defined event for a specific company. Each event is tagged to a SASB category, e.g. critical incident risk management.

[3] DOT FRA data on total damage costs do not include indirect costs related to community risks, ecological risks, litigation and remediation costs.