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Norfolk Southern not ready to abandon this controversial railroading strategy after derailments

Norfolk Southern (NSC) CEO Alan Shaw isn't ready to completely jettison the controversial Precision Scheduled Railroading (PSR) approach to doing business that has dominated the railroad industry in recent years.

But he is committed to adjusting the process after several high-profile train derailments have called the profit-focused operating model into question.

"There are some components of PSR that we're going to continue to endorse, and that's developing our people, working safely, investing in our assets," Shaw said on Yahoo Finance Live (video above), doubling down on a new "hybrid" PSR strategy that he started to implement in 2022.

Shaw declined to elaborate further.

A Norfolk Southern freight train, left, waits on a siding, as another train passes in Homestead, Pa, Wednesday, April 27, 2022. (AP Photo/Gene J. Puskar)
A Norfolk Southern freight train, left, waits on a siding, as another train passes in Homestead, Pa, Wednesday, April 27, 2022. (AP Photo/Gene J. Puskar) (ASSOCIATED PRESS)

Longtime railroad exec Hunter Harrison pioneered PSR as a means to cut costs and boost operating margins. The system has three key components: minimize railroad car downtime; run longer trains at higher speeds, and minimize power requirements.

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Critics of PSR contend the process has been an exercise in cutting employees and running less-safe railroads to maximize the bottom line.

A recent ProPublica analysis of Federal Railroad Administration (FRA) data found that 20 train derailments from 2005 to 2020 could be linked to trains being too long, for instance.

The PSR model has come into focus amid Norfolk Southern derailments this year.

On Feb. 3, a Norfolk Southern train with 150 cars carrying hazardous materials derailed in East Palestine, Ohio. The NTSB found the operators of the train tried to stop it after a wheel bearing overheated to a worrying level. An official cause of the derailment has not yet been shared by the NTSB.

Shaw said that Norfolk Southern will be in East Palestine for "as long as it takes" to make things right with residents.

FILE - This photo taken with a drone on Feb. 4, 2023, shows portions of a Norfolk Southern freight train still on fire that derailed on Feb. 3, in East Palestine, Ohio. Norfolk Southern has agreed to exclusively use Ohio-based businesses to clean up the site of the fiery train derailment in a small town near the Pennsylvania state line. Ohio Attorney General Dave Yost made the announcement Wednesday, March 29. (AP Photo/Gene J. Puskar, File)
This photo taken with a drone on Feb. 4, 2023, shows portions of a Norfolk Southern freight train still on fire that derailed on Feb. 3, in East Palestine, Ohio. (AP Photo/Gene J. Puskar, File) (ASSOCIATED PRESS)

The company incurred a $387 million charge in the first quarter related to potential clean-up efforts from the Feb. 3 derailment. Norfolk also committed to making up the difference in home value for residents who sold their homes for lower than their value before the accident.

Last week, nine cars from a Norfolk Southern freight train also derailed in Pennsylvania.

But Shaw maintained that his railroad is a safe operator.

"Last year at Norfolk Southern, our number of derailments was the lowest in two decades," he said. "We can do better. We're looking at this stuff. We're working very closely with the NTSB."

At some point, the end game for PSR may come down to regulators.

Transportation Secretary Pete Buttigieg has criticized the PSR operating model and has clamored for tighter industry regulations.

"We have a lot of concerns about the business models that the railroads have adopted," Buttigieg told Yahoo Finance Live. "They strip out the human factor. Employment at some of these major railroads is down 30%, 40%. They've become wildly profitable but have not been able to dramatically improve their efficiency or their fluidity in moving goods, and it's really come on the backs of workers who are now overworked, stressed out. And this is part of what led to so much concern last year as workers were insisting on sick leave, something that we still believe these railroads need to provide."

Buttigieg is pushing for improved braking standards on freight trains, among other aspects.

Norfolk Southern Chief Executive Alan Shaw testifies during a Senate Commerce, Science and Transportation Committee hearing titled
Norfolk Southern Chief Executive Alan Shaw testifies during a Senate Commerce, Science and Transportation Committee hearing in Washington, U.S., March 22, 2023. REUTERS/Evelyn Hockstein (Evelyn Hockstein / reuters)

Shaw says he "respects" Buttigieg's position, but he hasn't publicly endorsed Buttigieg's thoughts on better braking systems.

"There are a lot of things that Norfolk Southern does that are absolutely aligned with the administration's goals — high-paying union jobs, investments in the nation's infrastructure, pulling trucks off the highway, and the sustainability advantage of rail relative to truck," Shaw said. "Relative to our long-term focus and our pivot away from that traditional rail model and hiring, that's exactly what we're doing, as I talked about in the new strategy Norfolk Southern charted in the industry."

"And then relative to rail safety, I've been on the Hill a number of times," Shaw added. "I'm advocating with Republicans and Democrats for many of the provisions that are included in the rail safety bills."

Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations or anything else? Email brian.sozzi@yahoofinance.com

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