Ed Elkins: And Ken, just to put a fine point on the resiliency expense, about a third of that cost in the third quarter is related to the quality of life benefits, which are essentially paid sick leave. That has a cost to it. And the rest is really around the headcount additions for primarily T&E, but also some mechanical staff and then the rest is locomotive investments as well to be able to accommodate and accelerate the network. Thanks for the question.
Operator: Our next question is in the line of Scott Group with Wolfe Research.
Scott Group: Hey, thanks. Good morning. Mark, I wasn’t sure what you were trying to say on overall cost, ex fuel in Q4 versus Q3, so if you have any color there. And then, Al, I just want to go back to that big picture question. You’ve been clear and consistent with your message. We’re not going to chase short-term OR, but long-term we want to have industry competitive margin. I guess my question is, what does 2024 look like in that short-term versus long-term view? Like, are we committed to margin improvement next year? Are we committed to starting to narrow this margin gap next year, because it is getting pretty wide right now. So I just want to know, when do we start to see it get to industry competitive again?
Alan Shaw: Mark, you want to address the first one?
Mark George: Oh, yeah. Sorry. Scott, look, I think the way you look at cost, ex fuel, to answer your specific question, it should be largely sideways and then, you sprinkle in the nice uptick we’ve seen in volumes. I think we’ve definitely probably troughed here in Q3, and we should see sequential margin improvement. Model out what you think that volume is going to be as we navigate through the quarter, and we report our volumes and you can pretty much assign traditional incremental margin rate to that. So I think we’ve troughed here in Q3, and it should improve from there.
Alan Shaw: And Scott, with respect to industry competitive margins, we are committed to it. We’re committed to it over the long term. Now, what we’ll see is that as service continues to improve, we’ll have greater opportunity to eliminate the service recovery cost. We’ll have greater opportunity to drive productivity throughout our organization as we standardize our operating practices. We’ll have greater opportunity to generate more volume. We’ll have greater opportunity to generate more price, reflecting the value of the product that we sell and all of those things will contribute to improvements in our margins and industry competitive margins and I think we’re going to see improvement in that next year.
Scott Group: Okay, thank you.
Operator: Our next question is from the line of Tom Wadewitz with UBS. Please proceed with your question.
Tom Wadewitz: Yeah, good morning. So I think it seems fairly clear that it’s not so much a cost story, but it’s much more volume and a revenue story that you need to drive that margin improvement and correct me if you think I’m wrong on that, but the question is really, what do you think is necessary to really get that revenue story improving? I think we look at the intermodal revenue per car was pretty weak in the quarter. I know there’s some mix, but how do you think about that intermodal revenue strengthening? Is that mix going to improve over a couple quarters? Do we really need to see some tightening in the truckload market? I know a lot of your business is truck competitive, so is that something that truck rates are key. Just maybe if you could offer some thoughts, I guess intermodal on that revenue per car, but broader thoughts on ’24, what should we be looking for to really potentially drive that revenue story stronger?
Alan Shaw: Yeah, Tom, to be clear, this is a balanced approach. It’s not just about revenue growth. We will continue to drive productivity into our organization. I’m committed to that. Our improved service product is going to help us with productivity. Our improved service product is going to help us attract more volume. Our improved service product is going to help us price to the value of our product. So there’s a lot of value in there as we continue to invest in network resiliency long term. Ed, why don’t you talk about what you’re seeing in the market itself?
Ed Elkins: Sure. It’s a really important question that I appreciate you asking and we want to unpeel the onion here and make sure that everybody understands. First of all, let me say, year to date, we are positive in our core pricing in every single market we serve, okay. Now, let’s dig into intermodal. The largest impact once we stripped fuel out was a decline in our intermodal storage revenue. We knew that that was going to happen. And as I think I said in the prepared remarks, that storage figure accounts for over two-thirds of the RPU decline that we saw in the quarter and then we had a couple other things that were very important for folks to understand. We had substantial negative mix in the quarter, and that comes in two forms.
The first is international shipments grew while domestic shipments were very anemic given the amount of pressure that’s out there in the truckload market. Our domestic shipments have a higher yield than international, so this was a substantial headwind. We also saw negative mix in two different ways within our international business. First of all, we’re seeing much higher growth in short haul lanes, and those are lanes that really shifted to the highway during the pandemic and then are now rolling back to us. 85% of the growth in the third quarter in international came from those short haul lanes, and those are intrastate lanes, so it’s very important to understand that. Lastly, the amount of empties that we moved is, frankly, much faster-paced growth than the lows that we saw.
That is another decrimental pressure on RPUs. So a lot going on there. The truck market continues to be loose. I think the cash rate index has been down for 21 straight months. Contract rates on the highway peaked in March of last year. There’s a lot of downward pressure, but here’s what I’m confident of. Number one, I’m confident that the market in general will rotate back to growth. It always does. The excess capacity that’s on the highway will evacuate. It always does and Norfolk Southern is going to be really well positioned, exceptionally well positioned to take advantage of not only the volume increases, but also the opportunity to reprice.
Operator: Our next question is in the line of Brian Ossenbeck with JPMorgan. Please proceed with your question.
Brian Ossenbeck: Hey, good morning. Thanks for taking the question. It may be a two-parter for Ed. Can you just give us an update? I think last time you mentioned that the $650 million headwind in the back half of the year for coal and accessorials or intermodal storage fees. Is that sort of still tracking in line with expectations? And then secondly to your point about core pricing, can you just give a little more color on where that is relative to inflation? I think we have seen a decent disconnect in terms of just the core pricing realization for Norfolk and for some of the industry in terms of how that trended versus inflation, which is higher than expected. So when do you expect to really sort of catch up with that? Is there something structural that’s been keeping it lower than what we would have anticipated? Or is this more a matter of timing with contracts, repricing and service? How do you expect that rolling forward?
Alan Shaw: Well, let me try to answer both of those. First one, I think you were asking about some of the known headwinds that we had coming in the second half and if they’re intact. And I would say yes. We’ve seen the storage revenue really normalized to pre-pandemic levels and that’s persisted and it’s been very consistent throughout most of the year. We all know what fuel’s doing. On that storage piece, we expect to lap that probably second quarter of next year and so that’s going to be a headwind until then. Coal pricing is a surprise to the upside and we’ll see where it goes from here. So that’s sort of the known pieces of this. On the core pricing side, I think it’s probably worth reviewing, what our strategy is and that’s, number one, we’re always compelled to deliver a competitive price in the marketplace that our customers can recognize value in, but we define that by long-term contract pricing, not by what’s going on in the spot markets.
