Norfolk Southern Corp. Wednesday predicted its planned joint purchase of Conrail Inc. with CSX Corp. would boost profit by nearly $400 million annually.
The announcement was Norfolk Southern's first specific statement on the financial impact of its $5.9 billion plan to buy 58 percent of Conrail. If the deal wins regulatory approval, NS would boost its rail revenue by more than 50 percent.Although NS is emphasizing the growth aspects of the Conrail purchase, about 75 percent of savings apparently will come from expense reductions and consolidations typical of previous rail mergers.
In 2000, NS estimates total merger benefits of $399 million, including $307 million from the expense line. Cost savings account for $180 million of the expected $236 million in benefits during 1999, while incremental profit from new business adds $56 million. For 1998, expense cuts should contribute $47 million of a total $71 million in benefits.
Among the expense targets are administrative costs, reducing Conrail's cost structure, boosting asset utilization, adding ''through'' trains that eliminate intermediate handling and more efficient purchasing plans.
''While this is an aggressive, growth-driven strategy, we will seize every opportunity to capture efficiency,'' NS Chairman David Goode said. ''The competitive benefit of this transaction is that it brings the kind of healthy competition to the Northeast that NS and CSX have engaged in in the Southeast and Midwest. I hope we can find ways to do this (transaction) without killing each other.''
Plans call for revenue growth of $132 million next year, building to $316 million in 1999 and $511 million in 2000.
Expected margins on new business are less than 20 percent, apparently reflecting more intense rate competition. Current NS rail profit margin is nearly 30 percent.
To accommodate growth, NS targeted capital spending on Conrail lines at more than $600 million over three years, beginning in 1998. Intermodal facilities and the little-used Conrail Southern Tier line between Buffalo and the New York area are two focal points for those capital programs.
NS officials apparently are not worried about line and terminal capacity problems as new business is added.
''The last thing you want to do is to go into a large transaction and be capacity-constrained,'' Mr. Goode said. ''We are for the most part convinced there is good capacity available to the extent we are smart enough to use it.''
Much of the growth focus is on truck traffic in the I-81 and I-95 corridors.
Senior Vice President James McClellan called those north-south routes along the East Coast a multibillion-dollar market. Even so, he believes less than 10 percent of current truck business will be diverted to rail.
Expectations are high for Triple Crown Services, a specialized intermodal service now owned 50-50 by NS and Conrail. NS is to assume full control of all Triple Crown operations after the purchase.
NS is eyeing Amtrak's Northeast Corridor as a Triple Crown route between New York and North Carolina.
NS Wednesday announced first-quarter 1997 net income of $128 million, or $1.02 a share, including a $49.7 million charge related to its Conrail purchase.
Excluding the charge, net income would have been $177.5 million, or $1.42 a share, an 8 percent improvement. Rail revenue rose 3 percent, to $1.05 billion.
Two-thirds of the revenue rise was concentrated in merchandise traffic, with a $7 million revenue boost from intermodal and $2 million from coal.