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Despite a lackluster economy and 2 percent drop in traffic volume, Norfolk Southern Corp. reported mostly dazzling financial results for the first quarter.

Operating revenue increased 11 percent to a record $2.5 billion, income from railway operations rose 9 percent to $578 million, net income inched up 2 percent to $291 million and diluted earnings per share increased 7 percent to 76 cents compared with first-quarter 2007 totals.

Coal revenue jumped 19 percent to a record $662 million, general merchandise revenue rose 10 percent to $1.35 billion — the Class I's second-highest total — and intermodal revenue increased 5 percent to $486 million.

The coal sector registered record performance because revenue per unit rose 17 percent and strong global demand drove up export coal volumes 64 percent to the highest total since second-quarter 1998, said NS Executive Vice President and Chief Marketing Officer Don Seale during the railroad's earnings conference this morning. Despite excess truck capacity and the loss of Schneider National Inc.'s business during the quarter, intermodal revenue increased because revenue per unit rose by $58 and international trade patterns shifted in NS' favor, he said.

"West Coast port volumes decreased 16 percent while East Coast port volumes increased 8 percent," said Seale.

However, railway operating expenses jumped 12 percent year over year to $1.9 billion primarily because fuel costs soared 63 percent to $404 million. NS paid an average price per gallon of $2.79, up 65 percent year over year, said EVP and Chief Financial Officer James Squires.

In addition, NS' operating ratio increased slightly vs. last year (by 0.4 points) to 76.9. NS' first-quarter results also were impacted by a lawsuit settlement relating to the 2005 Graniteville, S.C., train accident that played a major role in reducing earnings by 2 cents per diluted share.

"It was another strong performance for the railroad in the face of some headwinds, high fuel prices and unanticipated legal expenses," said Chairman, President and Chief Executive officer Wick Moorman.

NS benefited from solid operational performance, he said. On Jan. 1, the railroad began using a new service metric with three measurable components: adherence to the Thoroughbred Operating Plan, making the right connections and the on-time performance of all trains "held to tight standards," said Moorman. The metric showed the Class I registered a 7 percent improvement vs. first-quarter 2007, with the railroad posting better numbers in all three measures, he said.

"Our trains are running on time, not too early and not too late," said Moorman.

For the rest of 2008, NS anticipates continued weakness in the automotive and housing sectors, but growth in merchandise and intermodal business and a robust coal market. NS-served eastern mines will boost coal production by 6.5 million tons during the next three quarters, said Seale. In addition, the Class I projects continued strong pricing gains.

"A minimum 4 percent pure pricing improvement is expected," said Seale.

— Jeff Stagl