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Despite a volatile business environment and an 8 percent drop in traffic volume, Norfolk Southern Corp. set five financial records in the fourth quarter.

Railway operating revenue rose 2 percent to a fourth-quarter record $2.5 billion, income from railway operations jumped 19 percent to a 4Q-best $813 million, net income increased 13 percent to a fourth-quarter record $452 million, diluted earnings per share soared 19 percent to a 4Q-best $1.21 and NS’ operating ratio improved 4.5 points to an all-time-best 67.5 compared with fourth-quarter 2007 totals. Analysts had expected earnings of $1.18 per share and revenue totaling $2.6 billion, according to Thomson Reuters.

“In the fourth quarter, we faced even more significant challenges as volume declines accelerated,” said NS Chairman, President and Chief Executive Officer Wick Moorman during an earnings conference held this morning. “However, we still were able to generate improved financial results and set a number of fourth-quarter records. While economic headwinds continued to exert pressure on traffic volumes, we were able to offset reduced loadings through pricing gains and cost control.”

Coal revenue jumped 33 percent to a record $798 million as traffic increased 5 percent. However, general merchandise revenue declined 10 percent to $1.2 billion as traffic fell 19 percent.

“Weakness in the automotive and housing sectors plagued our merchandise groups throughout the year,” said Executive Vice President and Chief Marketing Officer Don Seale. “But, on the plus side, each of our merchandise groups was successful in improving yield.”

In addition, intermodal revenue dropped 3 percent to $480 million as traffic decreased 5 percent. Overall, revenue per unit rose 10 percent to $1,450 primarily because of continued pricing gains and favorable contract escalators.

Railway operating expenses declined 4 percent to $1.7 billion primarily because fuel costs dropped 24 percent and compensation/benefits expenses decreased 2 percent. NS’ fuel consumption fell 10 percent in the quarter — driven down by soft traffic volumes and fewer train hours, said EVP and Chief Financial Officer James Squires — and the average price per gallon of diesel dropped from $2.56 in fourth-quarter 2007 to $2.19 in fourth-quarter 2008.

For the full year, NS set the following five records: railway operating revenue at $10.7 billion (up 13 percent); income from railway operations at $3.1 billion (up 19 percent); net income at $1.7 billion (up 17 percent); diluted earnings per share at $4.52 (up 23 percent); and operating ratio at 71.1 (down 1.5 points). Railway operating expenses increased 11 percent to $7.6 billion.

During the conference, NS senior executives also announced that the Class I’s 2009 capital expenditures will total $1.4 billion, down 9 percent vs. 2008’s $1.56 billion budget.

“Approximately 72 percent of our 2009 capital expenditures will be spent on maintaining our railroad,” said EVP and Chief Information Officer Deb Butler. “The remaining 28 percent is related to the growth and productivity of our franchise. These projects include infrastructure and terminal expansion investments, strategic opportunities, and projects that improve our productivity and efficiency.”

Roadway spending will rise 13 percent to $698 million primarily because of higher unit costs. Freight-car spending will drop 78 percent to $45 million, but NS still plans to acquire 514 new super jumbo covered hoppers and buy out leases on 331 cars, said Butler. Locomotive spending will decline 49 percent to $79 million and NS will not acquire any new locomotives in 2009, she said.

Infrastructure spending will increase 36 percent to $170 million, facilities/terminals spending will fall 16 percent to $141 million and technology spending will drop 4 percent to $67 million.

— Jeff Stagl