Amid debate over rail safety concerns, another Norfolk Southern train derails

Before weekend incident in Pennsylvania, missives were flying over NS and Union Pacific efforts

John Kingston·Sunday, March 03, 2024

With a Norfolk Southern derailment in Pennsylvania on Saturday that sent diesel fuel into a Lehigh Valley River, the already heated battle over control of the railroad with safety issues as a backdrop got even hotter. 

The derailment came after two days of charges, countercharges and missives flying back and forth over the safety records of both Norfolk Southern and Union Pacific, with leading government officials that regulate the rails leveling separate heavy criticism at the two companies. 

And while it hasn’t yet provoked any government response, the issue of safety and levels of employment could also be triggered by Friday’s news that BNSF had implemented a significant number of furloughs. 

In the proxy battle roiling Norfolk Southern, the activist investor group Ancora is recommending the replacement of eight new directors to the Norfolk Southern board. It also wants to replace CEO Alan Shaw with former UPS executive Jim Barber and name Jamie Boychuk, a former executive at CSX, to replace current COO Paul Duncan.

That fight now has the Pennsylvania derailment as part of the battle, and Ancora wasted no time Saturday coming out with a statement over the incident.

“Our proposed slate and management team are unanimous in their view that Norfolk Southern must become a safer and more reliable railroad before it can ever reach its full potential,” Ancora said in the statement. “Following this latest derailment, we call for the immediate termination of CEO Alan Shaw and stand ready to engage with the Company about an orderly reconstitution of the Board and a transition to capable management with a track record of actually delivering on safety commitments.”

The statement went on to say that “an incident like this, which is drawing national news coverage and resulting in more embarrassment for the railroad, should put an end to the Board’s unsustainable efforts to save a tainted CEO with no long-term future.3 How can anyone defend this?”

What happened?

According to news reports, the derailment took place in Lower Saucon Township, which is near the Allentown-Bethlehem area. There were no reports of injuries, although diesel fuel being carried in a tank car did spill, there were no reports of contamination or evacuations. Plastic pellets also spilled, according to the news reports. 

In a statement provided to FreightWaves on Sunday, a spokesperson said: “Norfolk Southern crews and contractors remain at the derailment site. Members of the NTSB have arrived and are investigating. Once they have completed their investigation of the scene, we will continue with site cleanup and begin work to restore the track. The area where the locomotives were in the water will remain contained with booms until any residual sheen has been removed.”

Saturday’s derailment comes after two days of back-and-forth over two of the U.S.-based Class 1 railroads that left heads spinning. The scorecard for the criticism and the responses went like this:

— Martin Oberman, chairman of the Surface Transportation Board, ripped into Ancora Associates for its proxy battle over Norfolk Southern (NYSE: NSC) railroad. Oberman spoke to the Southeast Association of Rail Shippers 2024 Spring Meeting in Atlanta on Thursday, where he said Ancora “has nothing to say about what it could do better” than current management in running Norfolk Southern, adding, “I think we can assume that if Ancora succeeds in its bid to control NS, its next move will be to put the Brooklyn Bridge on the market.”

— Ancora didn’t have any public response to Oberman’s comments, but on Friday, it sent a letter to the Norfolk Southern board, just a few days after the railroad released its 2024 proxy statement. The proxy revealed that in 2023 — the year when Norfolk Southern labored under the fallout from the derailment in East Palestine, Ohio — NS CEO Alan Shaw had total compensation of $13.41 million, compared to $9.78 million a year before.

— The second blast from a government official aimed at a railroad came from Amit Bose, the administrator of the Federal Railroad Administration. In a letter addressed to UP CEO Jim Vena,

Bose criticized recent furloughs implemented at Union Pacific (NYSE: UNP). “It is imperative that UP prioritizes safety above all else and takes immediate steps to address this issue, an issue disproportionately affecting UP workers since your railroad continues to furlough employees at a rate, based on available data, far outpacing that of any of your Class I peers.” Bose wrote.

— Union Pacific quickly responded to Bose’s comments with a letter from Vena, which said the FRA head was portraying an “inaccurate correlation between natural workforce fluctuations and safety.”

Oberman was harsh in his assessment of Ancora’s motives. “Several weeks ago, Ancora wrote me a letter,” Oberman said, according to a transcript released by the STB. “The essence of their message was that they had taken a $1 billion dollar stake in NS in order for it — quote — ‘to become a safer railroad.’ Really? What hedge fund raises $1 billion to promote safety anywhere?”

Oberman, as he has done before, criticized railroad focus on its operating ratio (OR), with the STB head expressing concern that a goal to reduce OR can come at the expense of both safety and performance. 

“Ancora principally and repeatedly focuses on a rapid lowering of the OR to drive cash payouts and raise its stock price, harshly criticizing present NS management for not making a lower OR the objective,” Oberman said. “We now know that this is wrong-headed thinking. Making OR the corporate objective is what led to elimination of thousands of workers which caused the service crisis.” 

The reference to the service crisis was from earlier in his speech when he recapped STB actions to force service improvements during the enormous system backups of 2022. 

Ancora’s Friday letter was addressed to Amy Miles, the non-executive chair of the NS board.  The letter said that Ancora — which as an activist investor has previously trained its sights on Forward Air (NASDAQ: FWRD) and C.H. Robinson (NASDAQ: CHRW) — said Shaw has “presided over industry-worst operating results, sustained share price underperformance and an ineffective and tone-deaf response to the preventable derailment in East Palestine.” It said Anchor had “offered viable solutions in the form of exceptional people with a strategic vision.”

Norfolk Southern’s stock price in the last 52 weeks is up about 14%. During that time, its fierce rival for business east of the Mississippi, CSX (NASDAQ: CSX), is up about 23.7% while Union Pacific is up 21.5%.

Focusing in on Shaw’s pay package from 2023

On the issue of Shaw’s pay, the Ancora letter said shareholders were “baffled” at the decision to give the CEO a raise in the same year as the East Palestine derailment and the fallout from it. 

“We challenge the Board’s determination that it had to adjust executive compensation in 2023 to

‘retain key talent,’” Ancora said, quoting a board statement. “We do not see how the Board could have actually viewed Mr. Shaw as a flight risk. In addition to being a more than 30-year insider at Norfolk Southern, he was a relatively new, unproven CEO off to an extremely rocky start. The fact that this decision was made suggests deference to management and a lack of respect for shareholders and stakeholders.”

UP furloughs at issue

In the back-and-forth surrounding Union Pacific, Bose said UP’s decision to furlough some worker is a sign that the railroad “has again chosen to prioritize cost-cutting measures over ensuring safe operations, jeopardizing the well-being of both UP’s workers and the public.”

“Furloughing maintenance of equipment workers puts a strain on workers across the railroad, leading to fatigue and potential errors that could have severe ramifications for both workers and the public,” Bose wrote. 

In a letter signed by Vena, UP responded to Bose’s criticism with several key rebuttals.

— It cited several statistical points about derailments, that “serious” derailments were down 26% in 2023 from 2019 levels, track-related derailments had declined 28% in the past 10 years, and that UP had recorded an 8.7% improvement in mainline derailments in 2023 versus 2021.

— The Vena letter said “fluctuations in workforce needs are a natural component of operating the railroad … normal, cyclical and vary from year to year based on business needs, capital projects and weather.”

To support its criticism that Bose was not making distinctions among types of workers and railroad needs, Vena’s response said the Bose letter “combines different types of workers (Mechanical employees and Engineering employees) and work done on the railroad (equipment maintenance and capital projects), and therefore paints an incorrect and incomplete picture of the natural role workforce fluctuations play in operating a railroad year-round.”

“We’ve already begun seeing an increase in demand and have more employees working in January and February of this year,” Vena wrote.

The letter also said workers impacted by furloughs and layoffs can apply for other positions at Union Pacific.