Oct 26, 2011
Executives
Donald W. Seale - Chief Marketing Officer and Executive Vice President Michael Hostutler - James A.
Squires - Chief Financial Officer and Executive Vice President of Finance Mark D. Manion - Chief Operating Officer and Executive Vice President Charles W.
Moorman - Executive Chairman, Chief Executive Officer, President and Chairman of Executive Committee
Analysts
Scott H. Group - Wolfe Trahan & Co.
Ken Hoexter - BofA Merrill Lynch, Research Division William J. Greene - Morgan Stanley, Research Division Edward Neal Deaton - BB&T Capital Markets, Research Division Cherilyn Radbourne - TD Newcrest Capital Inc., Research Division Walter Spracklin - RBC Capital Markets, LLC, Research Division Garrett L.
Chase - Barclays Capital, Research Division Keith Schoonmaker - Morningstar Inc., Research Division Benjamin J. Hartford - Robert W.
Baird & Co. Incorporated, Research Division Matthew Troy - Susquehanna Financial Group, LLLP, Research Division Donald Broughton - Avondale Partners, LLC, Research Division David Vernon - Sanford C.
Bernstein & Co., LLC., Research Division Christian Wetherbee - Citigroup Inc, Research Division Christopher J. Ceraso - Crédit Suisse AG, Research Division Jason H.
Seidl - Dahlman Rose & Company, LLC, Research Division Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division Unknown Analyst - Robert H.
Salmon - Deutsche Bank AG, Research Division
Operator
Greetings, and welcome to the Norfolk Southern Third Quarter 2011 Analyst Call. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce Mr. Michael Hostutler, Norfolk Southern Director of Investor Relations.
Thank you. Mr.
Hostutler, you may begin.
Michael Hostutler
Thank you, and good afternoon. Before we begin today's call, I would like to mention a few items.
First, the slides of the presenters are available on our website at nscorp.com in the Investors section. Additionally, transcripts and mp3 downloads of today's call will be posted on our website for your convenience.
Please be advised that any forward-looking statements made during the course of the call represent our best good faith judgment as to what may occur in the future. Statements that are forward looking can be identified by the use of words such as believe, expect, anticipate and project.
Our actual results may differ materially from those projected and will be subject to a number of risks and uncertainties, some of which may be outside of our control. Please refer to our annual and quarterly reports filed with the SEC for discussions of those risks and uncertainties we view as most important.
Additionally, keep in mind that all references to reported results, excluding certain adjustments, that is non-GAAP numbers have been reconciled on our website at nscorp.com in the Investors Section. Now it is my pleasure to introduce Norfolk Southern Chairman, President and CEO, Wick Moorman.
Charles W. Moorman
Thank you, Michael, and good afternoon, everyone. It's my pleasure to welcome you to our third quarter 2011 earnings conference call.
With me today are several members of our senior team, including Don Seale, our Chief Marketing Officer; Mark Manion, our Chief Operating Officer; and Jim Squires, our Chief Financial Officer, all of whom you'll hear from this afternoon. Continuing to build on the first half's momentum, Norfolk Southern produced excellent results in the third quarter.
We achieved all-time highs for any quarter, in income from operations and earnings per share, and our third quarter operating ratio of 67.5% equaled our best ever performance. As you would expect, these third quarter results, coupled with the first 2 quarters which were also outstanding, led to across-the-board record results for the 9-month period, including all-time highs for revenues, income from operations, operating ratio, net income and earnings per share.
Much of this was driven by continuing improvement in our service product, which helped to produce significant growth in revenues. Don will provide you with all of the details in a few minutes, but let me give you a few highlights.
The trends of the first 2 quarters extended into the third as we continued to see highway conversions lead Intermodal unit growth of 8% for the quarter and 9% year-to-date. Similarly, export coal volume has sustained its strong pace, up 23% for the quarter and 24% for the year-to-date.
We foresee solid strength in these markets continuing into the fourth quarter and on into 2012. With respect to service, we achieved another quarterly sequential improvement with the third quarter composite service index of 78.2, representing a 160-basis point improvement over the second quarter.
Mark will give you all the operations details a little later. As you all know, we have consistently been investing in our service product in terms of both increased crew hiring, as well as investments in assets and technology.
While these investments have obviously impacted our expenses, they have also allowed us to efficiently bring on increasing volumes into our network, resulting in significant operating leverage and our record-tying OR of 67.5%. These strong operating results have led to record cash flows for the first 9 months, which we have used to reinvest in our business and to reward our shareholders.
I mentioned our investments in our company, and thus far in 2011, we spent $1.4 billion on capital projects, including items such as new locomotives, which provide both immediate and ongoing benefits, as well as longer-term projects such as terminals, which will add value beginning next year. On the shareholder front, we paid $432 million so far this year in dividends, an 18% per share increase versus 2010.
And in addition, we repurchased over $1.6 billion of our shares through the first 9 months. Both are clearly strong indicators in our belief in the continued future strength of our company.
I'll go ahead now and turn over the program to Don, Mark and Jim, and then I'll wrap up with some closing comments before we take your questions. Don?
Donald W. Seale
Thank you, Wick, and good afternoon to everyone. During the third quarter, we saw an economy that posted modest improvements and favorable global trade patterns.
When combined with our ongoing new business development, we produced a strong quarter, which was within $5 million of our all-time high set in third quarter 2008. In total, revenue for the quarter reached $2.89 billion, up $433 million or 18% over the third quarter of last year, with yield improvement across all business groups and volume growth in Intermodal, Metals & Construction, Automotive and Coal.
Approximately 82% or $353 million of the revenue gained in the quarter was driven by higher revenue per unit, including pricing gains and increased fuel surcharge revenue. The remaining $80 million was the result of increased volume, which was up 3% or 57,000 units.
With respect to yield, we achieved our second highest revenue per unit ever, reaching $1,596, up $195 or 14% compared to third quarter last year. This was just $8 per unit below our all-time RPU record, which we set in the second quarter of this year.
Improved pricing based on market demand and tighter transportation capacity across all modes, combined with higher fuel surcharge revenue, drove this performance. For the quarter, we achieved record RPU levels in Agriculture, Metals & Construction, Paper, Automotive and Coal, surpassing the records previously set in each of these groups during the second quarter.
Additionally, Intermodal RPU was up 10%, led by higher fuel surcharge revenue and improved pricing. The pricing environment for our business continues to be favorable as truck capacity tightens and driver turnover continues to be an issue.
According to the American Trucking Association, driver turnover at large carriers has reached its highest level since the second quarter of 2008, now standing at 79%. And barge capacity remains tight for coal, grains and other bulk commodities.
Now turning to our volume performance in the third quarter. Total shipments of $1.81 million were up 57,000 units or 3% over third quarter 2010.
This was our highest quarterly volumes since third quarter 2008, just prior to the recession. These favorable results were driven by both economic and project growth with overall gains in Intermodal, Metals & Construction, Automotive and Coal, more than offsetting declines in Chemicals, Agriculture and Paper.
Overall volume during the quarter reached a new 52-week high in late September, led by a 52-week high in Intermodal. Now transitioning to our major business sectors as shown on Slide 5.
Coal revenue of $899 million was up $190 million or 27% over third quarter 2010, and that was our highest revenue quarter ever. Volume of 405,000 units improved by 2,400 loads or 1%, driven by increased global demand, which led to higher export volume.
This more than offset lower volumes to utilities, which came as a result of some gas displacement and reduced demand for electricity on our service region, with eastern coal burn down 5% year-to-date through August. For the quarter, we also saw a slight improvement in domestic metallurgical coal as more coal became available from additional production to the domestic coke market, which continues to be below targeted stockpiles.
Increased met coal production came on stream during the quarter at 2 Norfolk Southern served mines, which is favorable for both domestic and export met coal going forward. As we continue our discussion on Coal, you will note on the next slide that our export volume of nearly 62,000 loads was up 23% in car loadings and 25% in tonnage over the third quarter of 2010, reflecting more productive coal cars.
Tightened met coals supply around the world and an 11% increase in global steel production continues to support strong demand. At Lamberts Point, volume for the quarter reached 42,000 carloads, up 39%, while shipments over Baltimore were down 2% due to weaker demand in Japan and flood-related issues during August and September.
Concluding my discussion of Coal on Slide 7, our utility volume of 265,000 loads was down 4% compared to the same period in 2010. Competition from natural gas and reduced electrical demand impacted coal burn across our network, which was partially offset by new business.
Stockpiles at Norfolk Southern served power plants on average are below targeted levels, and we expect to see continued sequential utility volume increases ahead on the heels of the record heat experienced this summer across the NS service region. Now turning to our Intermodal network.
Intermodal revenue of $551 million was up $87 million or 19% over third quarter 2010. This gain was based on increased fuel-related revenue, volume growth and improved pricing.
Volumes surpassed 826,000 units, up 65,000 units or 8%, with strong gains led by our domestic business. Domestic volume growth of 13% in the quarter was driven primarily by highway conversions with tightening truck capacity in the marketplace, while the 7% volume growth in international included strong growth in local lanes, as well as some evidence of increased seasonal demand.
Premium volume, which was up 3%, benefited from truck -- tight truck capacity as well, and highway conversions in the less than truckload segment in addition to other new business, and Triple Crown volume was up 1% for the quarter. As you can see on the next slide, we made appreciable progress in growing our volumes across our major intermodal corridors during the quarter and for the first 9 months of the year.
Notably, the volumes for Crescent Corridor, which paralleled some of the nation's most congested highways, are up 30% for the quarter and 32% for the first 9 months of the year as compared to last year. The large increase over the Heartland Corridor is comprised of organic growth of 24% and 15% for the quarter and year-to-date, respectively, with the balance representing rerouted shipments that previously moved over longer routes via Harrisburg, Pennsylvania and Knoxville, Tennessee.
During the third quarter, our export container business was up 13%, while imports grew by 7%. This volume includes loaded units moving to and from all ports that we serve.
Now let's turn to Merchandise, as shown on Slide 10. At Merchandise, we generated revenue of $1.4 billion, up $156 million or 12% over third quarter 2010, with record revenue per unit in 4 of the 5 Merchandise segments: Agriculture, Metals & construction, Paper and Automotive.
Volume for the quarter was 578,000 carloads, down 2%, with softness in certain industrial products markets and negative comps in Chemicals and Agriculture, offsetting the growth in Metals & Construction and Automotive. During the quarter, we saw better-than-expected levels of manufacturing activities noted by the ISM Manufacturing Index, which reached 51.6 for September, up from 50.6 the prior month and the highest rating since June.
Now drilling down to specific market segments within our Merchandise business. Our Metals & Construction volume improved by 11,000 loads or 7% compared to third quarter last year, with increases in metals and miscellaneous construction materials.
Drivers of this growth range from increased steel for auto production to a strong demand for sand and other materials flowing through the Marcellus Shale gas operations. In our Automotive market, volume grew 8% over third quarter of last year, driven by an increase in North American light vehicle production, which is up 8% for the quarter and projected to be up 11% for the year, and robust vehicle sales which were up 7% in the third quarter compared to last year.
New business gains, including Volkswagen shipments from the newly opened Chattanooga assembly plant, also contributed to our growth in Automotive in the quarter. In our other Merchandise business groups as shown on Slide 12, Chemicals volume was down due to difficult comparisons to third quarter 2010 that included over 8,700 carloads of TVA fly ash business.
As I've stated in previous quarters, we will not clear that negative comp until December 1 of this year. Agriculture volume declined 7% in the third quarter, with tough year-over-year comps that accounted for over 1/3 of the decline in this market.
We will clear this negative comp March 1, 2012. The remainder of the decline in Ag was related to a 17% reduction in shipments of corn, primarily to short-haul Midwest destinations where greater local crop availability reduce the need for inbound rail.
And finally, our Paper and forest products business was down 5% due to weaker pulpboard, clay and woodchip volumes in the quarter. Now looking ahead, we expect continued growth across most of our portfolio.
The economic outlook for most industrial sectors calls for slow but steady growth, including upward projections for steel and North American light vehicle production. We see positive signs for international trade, which continues to bode well for our export coal, manufactured products, grain and Intermodal business.
And domestic truckload capacity challenges and the advantages of intermodal service further support growth ahead in our expanding corridor network. We expect our volumes to continue to exceed the growth of GDP, and we plan to price the market demand at levels exceeding the cost of rail inflation.
Thereby, increasing return for our shareholders, while delivering value for our customers through better capacity, service and equipment. Thank you for your attention, and now mark will present our service update.
Mark?
Mark D. Manion
Thanks, Don. Starting with safety, we ended the third quarter with a safety ratio of 0.67 compared to 0.86, a 22% improvement over the same period last year.
For the first 9 months, our ratio is 0.76, a 20% improvement over the corresponding period last year. Turning to the service front, our third quarter composite service performance was 78.2, even with last year, but sequentially improved from the first and second quarters.
Good improvements in both train and connection performance have driven this sequential gain. While even with levels of the third quarter last year, train speed has increased sequentially from the first and second quarters.
Terminal dwell, the average time cars dwell at a switching yard, stood at levels consistent with last year, but again like train speed, improved over the first and second quarters. Turning to the next slide, as you can see, our crew base is much improved over we've been in 2010 and earlier this year.
By September this year,we had crews we needed throughout most of the system with a few locations that will continue to fill out through the rest of this year. In January 2012, our total T&E employment will stabilize, with trainee hiring slowing in order to maintain a steady-state workforce.
As our total T&E employment levels out, our qualified T&E employment count continues to climb for several more months as conductors finish training. We're at the point where we are handling existing business and we're prepared for volumes ahead.
And finally, turning to our productivity scorecard, as previously indicated, volume's up 3% with crew starts up 3%. And additionally, gross ton miles are up 4%.
Railroad employees are up 7% as we continue to hire trainees in order to return us to employment levels commensurate with our current traffic levels and the 2012 forecast. Gross ton miles per employee is down 2% compared to last year, which, of course, is influenced by the 7% increase in employees.
However, this is a 1% point improvement from the second quarter as the sequential growth in gross ton miles is taking place at a faster rate than the growth in the employment population. Gross ton miles per gallon were down 2% year-over-year, primarily driven by a shift in traffic mix toward finished automobiles and intermodal and away from the more gross ton mile per gallon efficient bulk commodity unit trains.
This is also a sequential improvement from the second quarter when we posted a negative 5%. Gross ton miles per train hour improved 2% as our network has grown increasingly fluid.
I'll now turn it over to Jim. Jim?
James A. Squires
Thank you, Mark. I'll now review our financial results for the third quarter, which we're pleased to report reflect continued record performance.
Let's start with our operating results. As Don described, railway operating revenues for the quarter reached $2.9 billion, up $433 million or 18% compared to the third quarter of last year, including an increase in fuel surcharge revenue of $179 million.
West Texas intermediate crude oil prices have progressively declined since May, resulting in a favorable third quarter fuel lag effect of approximately $52 million. Year-to-date, the fuel lag is negligible.
Slide 3 shows our total operating expenses, which increased $241 million or 14% for the quarter. The combined operating results generated an all-time record $938 million of income from railway operations, a 26% increase compared to the prior year.
Our operating ratio set a new third quarter record at 67.5% and matched our overall record. Removing the $52 million favorable fuel revenue lag, our operating ratio would have been 68.8% or 130 basis points higher, also a third quarter record.
Assuming level or rising WTI for the remainder of the year, we would have a negative fuel revenue lag effect in the fourth quarter. Turning to expenses, this slide presents the components of the $241 million increase.
Similar to our experience last quarter, fuel and compensation and benefits accounted for 3/4 of the operating expense variance. As displayed on the following slide, nearly all of the $126 million increase in fuel expense was due to higher prices.
As shown next, our average price per gallon of diesel fuel was $3.10, a 42% increase compared with the third quarter of 2010. This year, our diesel fuel prices have correlated more closely with the Brandt index than WTI, our traditional benchmark.
Since the beginning of year, Brandt has traded at an increasing premium compared to WTI, and this has impacted our cost structure. Although we've seen some relief from this trend in just the last week, we do expect the Brandt premium to continue to pressure fuel expense on the operating ratio in the fourth quarter.
Compensation and benefits displayed next reflected a $56 million increase, up 8%. As detailed on the next slide, the components driving the change are generally consistent with second quarter 2011 run rates.
Volume-related payroll was up $19 million, including $8 million for trainees. Medical benefits for agreement employees increased $13 million.
Payroll taxes were up $8 million and wage rates were up $5 million. Pension costs were up $4 million.
Purchased services and rents increased $26 million or 7%, reflecting increased volume-related services, primarily associated with intermodal and other transportation services, as well as additional roadway and mechanical maintenance to support the higher volumes. Similarly, materials and other expenses presented next increased $20 million or 11%, primarily due to volume-related equipment maintenance activities, reliability initiatives for our locomotive fleet and travel costs.
Turning to our nonoperating items, the majority of the decrease is due to lower net corporate-owned life insurance returns coupled with the decreased coal royalties, which reflect the absence of the 2010 favorable settlement. As you may recall, last year's property sales benefited from a particularly large transaction in the City of Virginia Beach.
This year's results, while lower, include a $24 million gain from a property sale in Ohio. As illustrated on the next slide, income before -- income taxes increased $170 million or 24%, principally due to higher operating income.
Income taxes totaled $330 million and the effective tax rate was 37.3%. Income taxes last year were $269 million with an effective rate of 37.7%.
Our bottom line results presented on the following slide reflect third quarter net income of $554 million, an increase of $109 million or 24% compared to last year. Diluted earnings per share were a record $1.59, reflecting a $0.40 per share or 34% increase.
Turning to our year-to-date cash flows, cash provided by operations increased 30% year-over-year, driven by higher net income and increased deferred income tax expense that's largely related to the benefit of bonus depreciation. The additional cash generated from operations covered increased property additions through September.
We've utilized free cash flow along with cash and short-term investments to support share repurchases and dividends. In the third quarter, we've repurchased 12.2 million shares at a total cost of $819 million.
Our remaining share repurchase authority as of the end of the quarter is approximately 22 million shares. We ended September with $394 million in cash, cash equivalents and short-term investments.
Thank you for your attention. And now I will turn the program back to Wick.
Charles W. Moorman
Thanks, Jim. Well, as you've heard, this was an excellent quarter.
And as I said earlier, a great indicator of the strength of the Norfolk Southern franchise. As we look ahead over the short term, we continue to see signs pointing to overall modest economic growth.
Don discussed our projected growth in domestic intermodal and continued strength in export coal. And we anticipate that our overall volumes will continue to grow at a rate somewhat greater than that of the economy.
Looking further out, we have an abiding belief in the ultimate resiliency of the U.S. economy.
And we will continue to manage and invest for the long term to maintain the safety and quality of our franchise and to improve operating efficiency and service. In that regard, earlier, I mentioned our capital spending this year.
We're now in the process of working through our capital budget for 2012, and while the numbers haven't been finalized yet, we do anticipate another strong budget for the year, driven by our belief in our ability to grow volumes over the long term, along with increasing expenditures on positive train control. Clearly, the other issues of the day are the current labor round and the deliberations of the Presidential Emergency Board.
I don't really have anything to add that you probably don't already know. But I'm hopeful and optimistic that the board will recognize that the contract, which we have already signed with the UTU, which represents about 30% of our contract workforce, is a good deal for our employees and should represent the pattern for a settlement.
I'll conclude by saying that excellent financial performance like that we produced in the third quarter is the result of the hard work of a lot of people. We have a great team at Norfolk Southern, and we're committed to continuing to produce superior service for our customers and superior returns for our shareholders as the U.S.
economy continues to improve. Thanks for your attention.
And we'll now open it up to take your questions.
Operator
[Operator Instructions] Our first question is from the line of Tom Wadewitz with JPMorgan Chase.
Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division
Okay, I wanted to ask for a little bit more perspective on your coal view. I'm not sure if I caught all of your comments Don, so I apologize if I missed something.
But how do you think utility coal may play out in 2012 assuming you have a continuing low natural gas price? Is there further switching risk on your franchise?
And then what would your view on export coal be in terms of demand and just kind of how you get your arms around visibility to that?
Donald W. Seale
Well, let's take the first one, Tom. With respect to gas and the impact on utility coal going forward, we believe that the effect of gas displacement is pretty much already baked into the volumes we're seeing.
As you know, most of that gas displacement are at the smaller, older marginal plants, heat ray plants. So we've already seen that impact and we don't anticipate an increasing impact going forward.
With respect to the export market, as you know, we're pretty much 100% metallurgical coal in our export portfolio. We expect demand for that product to continue to be strong.
You might have seen that coming out of the recent conference in Madrid, Spain that coal trends -- that the projection for Chinese imports for coal by 2015 is projected to go as high as 200 million tons, up from 91 million tons at the current run rate. And we think China will continue to be a major factor with respect to our export demand, as well as South America and Europe and the rest of Asia.
Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division
Okay, that's helpful. I appreciate it.
And then, I guess, quick one on yield. You had this tremendous momentum on your yield performance this year and pretty sharp contrast to last year.
I guess, maybe mix is a headwind last year and a tailwind this year. But how do we think about yield growth next year given that there's been such a large difference in performance in this year versus last year.
It's kind of hard to figure out what the right ballpark is to be in on your overall yield growth for 2012.
Donald W. Seale
Tom, I would remind you that export coal is longer haul and when we have utility coal going to our southern network, it's longer haul as well. So those dynamics are at play.
We certainly expect our export market to continue to be strong, as I've mentioned previously. So that portion of the dynamic will be there, and we see opportunities for growth in the utility market going forward.
That includes our southern utilities. So those long-haul dynamics should continue.
Now ultimately, our domestic met U.S. receivers will take more coal.
That is shorter haul and it's very profitable business for us though, and that will come in to the mix when it starts to move and replenish stockpiles.
Operator
Our next question is from the line of Bill Greene with Morgan Stanley Smith Barney.
William J. Greene - Morgan Stanley, Research Division
Don, obviously, you've sort of outlined here what's happened with the volumes. And they've actually done a bit better than some of the peers.
And I'm wondering if there's a way for you to parse out how much of the growth in your volume is from sort of new business initiatives, organic growth or maybe even share gains?
Donald W. Seale
We track that, obviously, and I will tell you that year-to-date that over 2/3 of our business gain is organic growth.
William J. Greene - Morgan Stanley, Research Division
So just growth in market on the same-store sales, is that the right way to think of it?
Donald W. Seale
It is new business that's coming from the highway or new projects that we have launched in the marketplace that's generating new rail fleet for us.
William J. Greene - Morgan Stanley, Research Division
Okay. And then the other 1/3 is from?
Donald W. Seale
It's basically partially truck conversion. And I would say that is the largest category.
If you look at our Intermodal business and our domestic growth, that's exactly where it's coming from, is the highway.
William J. Greene - Morgan Stanley, Research Division
Okay. And then, Wick, I'm curious, in your experience, have we seen examples in a labor negotiation where pattern bargaining really didn't hold?
I mean, aside from maybe a nuance in a contract here or there, but is there any reason to expect that there could be a materially different economic outcome from this Presidential Emergency Board?
Charles W. Moorman
As I've said, we're optimistic. I'm certainly optimistic that the board will look at the UTU agreement, which was ratified by a 60-40 margin and is the single largest rail union and also look at the economics of that deal, which are very good for UTU members.
And it should represent a pattern. It's been a long time since we've had a board in the rail industry, Bill.
So I don't really have any experience of it being anything other than a process in which the concept of a pattern is recognized. We certainly have some experienced arbitrators on the board, so that's what leads to our optimism that they'll view this at least in its overall outline as a rational pattern to settle with the rest of the organization.
Operator
Our next question is from the line of Justin Yagerman with Deutsche Bank.
Robert H. Salmon - Deutsche Bank AG, Research Division
It's Rob Salmon on for Justin. As we think about your export coal exposure, could you give us a sense of kind of the ultimate customers as a percentage of the overall business?
Like, for example, China, Europe, South America.
Donald W. Seale
Rob, generally, if you break it out, about 55% of our export is Western Europe, about 20% is Asia and then the balance is South America. And when I say Asia, we're including Japan, Korea, India, China et cetera.
Robert H. Salmon - Deutsche Bank AG, Research Division
All right. And certainly, you guys gave an upbeat outlook regarding the remainder of the year.
In Q3, we did see a little bit of an impact, I guess, from the port of Baltimore being down. Could we actually see volume growth accelerate in Q4 given the headwind that you face there?
Donald W. Seale
Yes, Baltimore was impacted, as I mentioned, in the prepared remarks by the Japanese earthquake and tsunami and steel production there. We anticipate demand coming back, and it is coming back.
So we -- looking ahead, we do see Baltimore doing better as we move ahead.
Charles W. Moorman
One of the constraints in terms of the fourth quarter, although it's very minor, is we've been doing a good bit of work on one of the loaders at Lamberts Point. That's about to conclude and it shouldn't have an impact, but it won't lead to any acceleration.
Robert H. Salmon - Deutsche Bank AG, Research Division
And as my follow-up, I guess, on the comp and benefit, on a per carload basis, we saw the productivity improved sequentially from Q2 to Q3. Could you talk a little bit about how we should be thinking about that line item looking forward into Q4?
Can we see continued momentum on the productivity gains given the, I guess, moderation in overall trainees that you guys have?
Donald W. Seale
Well, I think your point is a valid one. As Mark showed you, we will see some moderation in hiring in the fourth quarter.
But at the same time, we are doing some hiring on the mechanical and engineering side. Next year, we expect our overall T&E headcount to be flat.
We may see some modest increases next year in engineering and mechanical, particularly as we work through our comp and -- through our capital programs. You will also have to look at things like incentive compensation and some issues there in terms of where we were in the fourth quarter.
Operator
Our next question is from the line of Ken Hoexter with Bank of America Merrill Lynch.
Ken Hoexter - BofA Merrill Lynch, Research Division
Don, if we can dig into Intermodal just for a second, you talked about seeing increased retail activity. I just want to understand, is that aided by the Heartland Corridor?
Is that overall? And you mentioned you expect it to grow greater than the economy.
Is that despite the loss of the Maersk business in 2012 or is -- I just want to understand what that comment entails.
Donald W. Seale
Ken, well, as I mentioned, our domestic Intermodal business was up 13% in the quarter. And as was also mentioned, that's being driven from highway conversions, predominantly in our eastern network, and the corridors that I mentioned entail a lot of that growth.
With respect to the international market, that was up 7% in the quarter. And that's based on some seasonal demand increases that we've seen.
We've described the fall peak in terms of being a fall mount as opposed to a fall peak. And I think that pretty much still falls into that category.
But we anticipate Intermodal growth certainly exceeding GDP and economic growth going ahead as we get into 2012 and beyond.
Ken Hoexter - BofA Merrill Lynch, Research Division
Okay. Great.
For a follow-up, just on the -- digging into the export coal for a second. Can you kind of divide up what is contract spot?
Is this all spot on the met side? I just want to understand -- or is it part of that April to March contract here?
Because I just want to understand at Baltimore, can you see a bounce back in terms of those lost volumes because of the tsunami, hurricane, other impacts or is that just lost volumes? In other words, I guess, to the prior question, should we expect kind of makeup volumes?
Donald W. Seale
Well, I don't think you will see makeup volumes for the balance of this year. I think as we get into 2012, stockpiles will be such that as Japanese auto production, steel demand continues to ramp back up, we will see demand commensurate for coking coal.
So I think there are 2 things that work going forward, we had a flood impact. That was about 2,000 cars coming into Baltimore during the third quarter.
We may make a little of that up in the fourth quarter, but I would say that the market side of this, with respect to Japanese demand, we'll see some improvement. But it will take some time to get that replaced.
Operator
The next question is from the line of Jason Seidl with Dahlman Rose.
Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division
A couple of quick questions here. One, on the productivity side.
I'm trying to parse out sort of the drivers. Obviously, you're pricing above cost inflation here.
But also you've seemed to push a lot more freight on new areas like the Heartland Corridor, which a lot is double stacking and you're getting benefit there, plus a lot of your trainees are coming online working. If you were to bucket them, could you split it out for us sort of what's been driving the main productivity here in Norfolk Southern?
Charles W. Moorman
Well, I think the productivity gains that we've been seeing are, to some extent, influenced by the fluidity of the network, which is much improved, and that's largely a result of the crews that we've got coming online, as well as some new locomotives that we put into service. Clearly, we feel very comfortable with our intermodal network, with our stack capability.
We're, I think, what, 98% cleared right now.
Donald W. Seale
We're 93%. When we finish Columbus and Cincinnati, it will be 98%.
Charles W. Moorman
We'll be 98% here soon. That's a big productivity driver on the Intermodal side.
But if I kind of look at where we are in terms of our productivity going forward, going back to the last question, we've done a lot of catch-up hiring over the past 18 months as we've shown you. We've done a lot of investment in assets and some in -- a good bit in infrastructure.
And I think that's the long-term key to driving productivity.
Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division
Okay. Now you said Columbus and Cincinnati is going to drive you to 98%, is that going to be in 4Q?
Donald W. Seale
Be complete by the end of the year.
Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division
So it's probably more of a 2012 end time for you?
Donald W. Seale
Right..
Operator
The next question comes from the line of Ben Hartford with Robert W. Baird.
Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division
I was hoping to get some perspective on the reason Conway Yard dispute to the extent that a disruption of the yard is likely to take place and whether you have any sort of visibility or idea as to the timing of a resolution to the dispute?
Charles W. Moorman
Actually, the dispute has been elongated somewhat as far as resolution with the retarders and employees involved in what we call skate operations. And that looks like it's going to be pushed off for a couple of months or so.
But as far as anything that is disruptive, we don't see anything in terms of disruption coming from it. If anything, it just -- it prolongs the efficiencies that we hope to gain down the road as a result of getting rid of these things that have way outlasted their usefulness back in history.
So we're just continuing to -- we'll continue to do what we are required to do in terms of using individuals in the operation that don't add as much value as we would like. And at some point down the road, we'll just have a more efficient operation, but it just gets pushed out a little bit further.
Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division
Okay. Can you just provide some context to this dispute?
I mean, are these types of yard disputes or disputes maybe by a local and a given -- any given location? Are they common?
Are these disputes that can take place and take place with some frequency, but have little disruption in the end? Or is this something that you have seen more recently, whether union might try to claw back some of the previous agreed-upon arrangements of the agreement?
Charles W. Moorman
No. This is very much a localized issue.
And in terms of its magnitude, it's small. It's important that we resolve it from a productivity standpoint.
We want to be as productive at that particular yard as we can. That's the only yard in all of our system where we are required by law to employ additional employees in order to handle this particular function.
It's the only yard we have. So it's just, from the systemwide standpoint, it's not real material.
Operator
The next question is from the line of Chris Wetherbee with Citigroup.
Christian Wetherbee - Citigroup Inc, Research Division
Don, you mentioned the coal stockpiles on the utility network. I was just kind of getting a -- curious about the order of magnitude if some of those kind of below targeted levels.
And then maybe if you could comment a bit about the difference between the north and the south. It looks like more northern utilities are below target than southern utilities, but it sounded like that favorable benefit of going south is going to continue on until fourth quarter.
Just curious, a little bit of color there, please.
Donald W. Seale
Yes. The stronger demand for southern utility will continue.
They have taken more coal this year than the north with respect to a percentage increase. So we're going to continue to see the dynamic of southern utility to northern utility be there, and the stockpiles in the north are lower than the stockpiles in the South.
And I will tell you that that's in terms of days, that's 28 days, which is below the target.
Christian Wetherbee - Citigroup Inc, Research Division
20 days is the south or on average?
Donald W. Seale
On a combined average.
Christian Wetherbee - Citigroup Inc, Research Division
Okay. That's helpful.
And just quickly as far as the duration of this mix shift for you, does this stick around to the first quarter or is it a little bit difficult to tell based on kind of how volumes are trending so far?
Donald W. Seale
I didn't catch that question. Could you repeat it?
Christian Wetherbee - Citigroup Inc, Research Division
Sure. Just curious if this benefit of longer length of haul to the southern utilities sticks around from more than just the fourth quarter.
Is it a comp issue as you look at last year or is it something that's a little bit more difficult to tell based on the level of volumes we're seeing right now?
Donald W. Seale
Well, the length of haul is going to be constant. Our utilities will have a longer haul to the south just as they did this year.
So the year-over-year benefit in terms of RPU will be comparable.
Christian Wetherbee - Citigroup Inc, Research Division
Sure. Okay.
All right, that's helpful. And then, I guess, you commented a little bit on the headcount kind of perspective for 2012.
I'm just kind of curious, assuming we have a modest GDP level and Don's outlook for GDP plus kind of holds the case, what are your thoughts about kind of staffing growth relative to your attrition that you should see in the workforce naturally in 2012?
Charles W. Moorman
I would tell you that, as Mark said, our projections are that in terms of total T&E headcount, we'll level out about January. We'll see qualified employees continue to tick up and the number of trainees to go down slightly.
But we would anticipate that on the T&E side that, that overall count that we're looking at in January is good to handle our projected 2012 volumes and probably beyond. I think I did mention that we're still reviewing our engineering and mechanical hiring.
That's, to some extent, a function of capital programs. And to some extent, a function of locomotive maintenance requirements.
So x attrition, we may see some modest increase in those numbers. But that's not determined completely yet.
Operator
Our next question is from the line of Matt Troy with Susquehanna Financial Group.
Matthew Troy - Susquehanna Financial Group, LLLP, Research Division
Had 2 questions on Intermodal. I guess, from a very simple or the kind of conceptual standpoint, could you just help me, I'm trying to think about profitability as this business continues to grow and gains critical mass and moves from arguably one of your less profitable businesses from an industry perspective to something that's a little bit more closer to corporate average, what are the economics of running a double-stack train?
What I mean by that is, if you have 100 flats, your revenue obviously is going to be what it be when you charge a certain rate. But what's the running cost or the unit cost, variable cost for actually going from full single stack to a double-stack configuration?
What's the step-up?
Charles W. Moorman
Well, that double stack is the most efficient mode in which to run Intermodal. I would not want to get into the delta in cost, but I will tell you that it's our objective to stack as much traffic as possible.
Matthew Troy - Susquehanna Financial Group, LLLP, Research Division
Right. That's certainly the objective.
But you seem to be here now in terms of the corridor buildout. Maybe If I were to take the question more broadly, what -- in terms of the articulated goals you had for traffic patterns in your corridors, where are you running relative to those goals and maybe what percentage of your business is currently a single stack that now could go double stack?
Donald W. Seale
Well, there are 2 things at work there. One is the 53-foot platform car supply and the other is making sure we get the right box on the right car.
We have initiatives in place to address both of those. And we do see an opportunity to improve stacking.
And that's within our internal goals. But Matt, you also have to keep in mind that our premium traffic, which is growing as well, is generally not stacked and it's trailer traffic which will not be stacked, not in the short run anyways.
Matthew Troy - Susquehanna Financial Group, LLLP, Research Division
Right. But is it fair to say then that given the investment with these corridors open 98% in the network double stack capable by year end, that we can almost think of this as an industry or Norfolk specific tipping point and that profitability should move perhaps better than volume growth on a one-for-one basis as you've got critical mass and the investments made?
Donald W. Seale
Certainly, density and maximizing stacks will help in that regard. And as I mentioned, those are both objectives that we're pursuing.
Operator
The next question comes from the line of Walter Spracklin with RBC Capital Markets.
Walter Spracklin - RBC Capital Markets, LLC, Research Division
Just 2 quick questions here. First, on -- Wick, you mentioned a healthy budget for your capital spend next year.
When you look forward, and perhaps Don you can chime in here, when you look forward to your markets going into the year, what areas are you getting most excited about, and you want to allocate capital perhaps in a region or more importantly on a segment basis? Where do you really want to put those healthy dollars to work going into next year?
Charles W. Moorman
Well, as we look at our capital requirements next year in terms of asset investment, in particular, I think we've talked for a number of years now about reinvestment in our coal fleet. We have a substantial portion of our fleet that is life expiring over the next few years.
We're going to be buying a significant number of coal cars next year. We've got investments that we're making or we're planning on making in our automotive fleet.
Our Automotive business is good and we think the automotive industry is going to continue to head up. We are talking a lot about investment in Intermodal.
One of the things I would point out is that while we have -- we'll end up with 98% of the network cleared in terms of our corridor strategy. We'd still have a significant amount of investment underway in intermodal terminals at Birmingham, Memphis, Greencastle, Pennsylvania.
We'll be investing there. We're looking at investments in some intermodal equipment as well.
What else from an equipment standpoint, Don?
Walter Spracklin - RBC Capital Markets, LLC, Research Division
More zeroing in on sort of your growth areas where your really focus -- what areas do you see the most growth in 2012 that you want to allocate capital to?
Charles W. Moorman
Well, we're going to continue to allocate a lot in just what I call core system investments, significant technology investments, more infrastructure investments, which will open up all of our business. We're clearly looking at the Marcellus Shale opportunity, which has been very good for us so far in terms of possibly additional terminals, additional equipment to make sure we can handle all of the growth we anticipate there.
It will be a wide range of investment opportunities. The other thing which I mentioned, of course, is that it will be one of the things that will -- and this is perhaps unfortunate drive the robustness of our budget next year.
It's a big investment in positive train control.
Walter Spracklin - RBC Capital Markets, LLC, Research Division
Right. Second question would be more to Jim.
I guess, looking at your share buyback, it was pretty good, pretty healthy there this quarter. To what extent now that you've got just a cash balance running around $250 million now.
What extent are you going to dip into leverage now to fund a continued kind of -- well, maybe you could tell me what is a good run rate for your share buyback in the year and to what extent will you be using the leverage to fund that buyback?
James A. Squires
Sure. Well, Walter, our financial strategy has been to utilize cash from operations first for reinvestment in the business, obviously, and that's to pay our dividend at a target payout ratio of about 1/3.
And then to use incremental free cash flow for buybacks along with cash on hand. And we use both incremental free cash flow and the cash on hand, but not incremental borrowing capacity in the third quarter to do the buybacks.
Now going forward, as EBITDA and EBIT and funds from operations grow, we'll have additional borrowing capacity that we can devote to share repurchases without altering our target capital structure. So we will have some flexibility there to do additional buybacks as well.
Walter Spracklin - RBC Capital Markets, LLC, Research Division
So you don't see increasing the debt component of your capital structure in a percentage basis?
James A. Squires
No. We're not -- debt-to-total capitalization, it's a little bit different.
That may tend to drift up even as other credit metrics stay stable. But our objective with respect to debt to EBITDA are FFO to debt, and the interest coverage would be to maintain fairly stable credit metrics.
Operator
Our next question is from the line of Chris Ceraso with Crédit Suisse Group.
Christopher J. Ceraso - Crédit Suisse AG, Research Division
Is there anything in the contract or the pending contracts with labor that addresses the healthcare cost inflation? This seems to consistently be one of the areas where your cost is growing the fastest.
Charles W. Moorman
There's certainly some components of healthcare plan design changes in the UTU agreement, which, while they are, I would describe from a dollar standpoint as relatively modest, they are nonetheless meaningful in that they start to establish a plan in which people will start thinking more about the dollars they're spending and hopefully, make better decisions in terms of spending healthcare dollars. That's a significant change.
And as well, I'd say I think the economic impact will be modest, certainly on our employees, to the extent that we have plans as we do with our management plan that have people start to think about their own pocket as they think about healthcare. That's a meaningful change.
And over the longer term, we would hope that, that would moderate some of these trends.
Christopher J. Ceraso - Crédit Suisse AG, Research Division
Have you any given any thought, Wick, to maybe more meaningful changes, let's say, for as new employees come in to the business, having a different type of program for new employees that may be more resembles a 401(k) typestyle for healthcare?
Charles W. Moorman
Well, the issue, we have made and continued to make changes in the plan for our nonagreement workforce with significant wellness incentives and I think a lot of good things. The issue with the healthcare plan, the national plan, which covers all of our contract workers is that it's a negotiated plan.
And the rails cannot unilaterally make changes. They have to be part of our labor negotiations.
And in fact, healthcare plan changes are a big part of the current round. So there's -- if we could do things differently in terms of plan design, we would.
But we can't do that unilaterally.
Christopher J. Ceraso - Crédit Suisse AG, Research Division
Okay. And then just one housekeeping item.
Do you have the pre and post-tax dollar amounts for the gain on the property sale here in the quarter?
James A. Squires
Sure. The one we mentioned, the sale of land in Ohio was $24 million pretax.
Christopher J. Ceraso - Crédit Suisse AG, Research Division
And then is that just at your 38% rate?
James A. Squires
Yes.
Operator
Our next question is from the line of Keith Schoonmaker with MorningStar Inc.
Keith Schoonmaker - Morningstar Inc., Research Division
Could you comment on your Intermodal growth, 13% domestic and 7% international? Is this in particular lanes for domestic, in particular industry verticals?
Also is FedEx a material portion of this or is that too early in the stage of development?
Donald W. Seale
The growth on the Intermodal was pretty much across the network. The international was in all of our ports, to and from all ports.
We have heavier increase or percentage increase in our local lanes in the quarter. And then with respect to the domestic business, as depicted on the corridor slide, we're seeing growth across those corridors and across the network.
It's fairly balanced growth. And our premium business, which would include UPS and FedEx, continues to grow.
Keith Schoonmaker - Morningstar Inc., Research Division
Great. I guess, the second then.
We've asked a bit about double stacking, but I'd like to ask about the other plane. Can you comment on train lengths or weights, maybe year-over-year comparison and any actions that might extend this metric without compromising on-time delivery?
Charles W. Moorman
Yes. Let me give you a little bit of information on that.
We are -- if you look at our Merchandise business, we are running -- we're running train lengthwise just a little bit under what we did a year ago. And on the Intermodal side, just a little bit over.
So, not a great deal of difference there. And the best part of it is we got plenty of room.
If you look at it on the average, we're in the 4,500 range Merchandise and 5,500, 5,700 range Intermodal wise. And not to say there aren't some big trains out there because there are, but plenty of room to grow in both of those areas.
Keith Schoonmaker - Morningstar Inc., Research Division
And any actions that would extend those?
Charles W. Moorman
More business. And Don and his group are doing a darn good job of bringing it to us.
So that's what we're trying to do. And train length works in our favor.
But like we always say, it's all about velocity. So we put a network plan together that maximizes our efficiency and allows us to get asset turns as high as we can get them.
And to the extent we can do that and grow our train length at the same time, that's what we are working on doing.
Operator
Our next question is from the line of Gary Chase with Barclays Capital.
Garrett L. Chase - Barclays Capital, Research Division
Wanted to ask a couple quick ones. First, Jim, on the comp and ben line looked quite a bit lower than what we had been expecting.
Just wondering if there was a stock comp component in there that we should expect to reverse as we head into 4Q?
James A. Squires
Not stock comp, but incentive comp, yes. In the 4Q, we would be expecting higher incentive compensation.
That mostly reflects last year's lower incentive compensation. So that one stands out, but not in the third quarter.
Garrett L. Chase - Barclays Capital, Research Division
So when you say higher, were you referring to like year-on-year? I mean, your absolute levels shouldn't be materially changed from period-to-period, is that fair?
James A. Squires
Well, no. I think we may see a little bit higher comp and benefits expense sequentially as well in the fourth quarter.
Garrett L. Chase - Barclays Capital, Research Division
Okay. And then just switching gears, wondered, Don, if you could give us a sense of, is any material portion of the book now still trafficking on some of the older surcharges that were at much lower triggers or have you worked through the majority of that and you've got most of the book re-based at this stage?
Donald W. Seale
It really varies and it depends on the contract duration that was in place. So we have many variations of fuel surcharge applications.
Garrett L. Chase - Barclays Capital, Research Division
Is there a way to characterize how many of them are close to the current tariff program you've got and how much are still trafficking on, say, more than 3-year-old program designs?
Donald W. Seale
No, we don't have that data here handy.
Operator
Our next question is from the line of Scott Group with Wolfe Trahan & Co.
Scott H. Group - Wolfe Trahan & Co.
So Don, just wanted to follow up on one of the earlier questions on utility coal volumes. With stockpiles at northern utilities more below target, it makes sense or it seems logical that at some point you'll see volumes start to be better going to the north than to the south.
And I'm just wondering what's the visibility on when you think that inflection occurs. And then how should we think about that?
Is there a way to think about how much longer is it to the south versus the north or what's the difference in revenue per car to the south versus the north?
Donald W. Seale
It's about a 2/3 differential on an RPU basis, with the utility south being about a 1/3 higher than the north because of the length of haul. And the first question, certainly, it depends on the burn with respect to winter weather.
But we're already beginning to see weather turn that way in the north, and you're absolutely correct. We will see northern utilities start taking more coal because of their stockpiles where they are.
But with 36% of the southern utilities still below target as well, we still expect that coal to move as well even though we've seen a higher volume of that coal this year relative to northern utilities..
Scott H. Group - Wolfe Trahan & Co.
What's the split between northern and southern coal?
Donald W. Seale
In terms of the total book?
Scott H. Group - Wolfe Trahan & Co.
Yes.
Donald W. Seale
In terms of the overall volume, it is very close to being even in terms of the volumes.
Scott H. Group - Wolfe Trahan & Co.
Okay. And then just quick one on Intermodal.
The corridor growth is, obviously, really impressive. Can you give us a sense, what percent of the Intermodal book is -- includes these corridors?
And then kind of what inning of this do you think wherein -- can you see a multiyear period of Heartland growing, doubling and Crescent growing at a 30% clip?
Donald W. Seale
When you look at the corridor map, it's a wide map that pretty much reflects the primary corridors over our railroad. So we're seeing growth in that corridor network which essentially covers most of our major network.
With respect to where we are in converting truckload business, I will tell you that, and as you probably already know, the truckload market is well over $600 million in the U.S. And we are just beginning the efforts to work with motor carriers to place that business in the most fuel-efficient environmentally friendly service, which is Intermodal.
Operator
Our next question is from the line of Cherilyn Radbourne with TD Securities.
Cherilyn Radbourne - TD Newcrest Capital Inc., Research Division
Wanted to just ask you a quick question on resourcing. I'm really just curious whether you've made any tweaks to your resource plan in the context of a slower economic growth outlook or whether you're basically seeing continued strength across your business and driving forward with the plans you would have established at the beginning of the year.
Charles W. Moorman
I think it's safe to say that with the volume growth that we have seen already this year and the outlook that we have for our volumes in 2012 that we're continuing to invest in a fairly steady and strong way in our resources. Certainly, you've seen that in our hiring and you've seen that in our equipment acquisitions and in our investments in technology.
And we have -- we don't see any reason right now to moderate our investment policy.
Operator
Our next question is from the line of Neal Deaton with BB&T Capital Markets.
Edward Neal Deaton - BB&T Capital Markets, Research Division
Just want to follow back up on -- someone mentioned earlier about the Maersk contract going away in early 2012. Just want to see what kind of an impact that's going to have on your international Intermodal volumes, and I don't know if you're comfortable sharing what percent of your total international business Maersk represents.
Charles W. Moorman
Well, Maersk is a good customer and will continue to be a customer of ours going forward. We will continue to have a good relationship with them.
And I would tell you that based on our projection for next year, the impact will be less than 100,000 units of Intermodal business for us.
Edward Neal Deaton - BB&T Capital Markets, Research Division
Okay, that's helpful. And what are you doing to prepare for that?
Are there other shipping lines that you don't already partner with that you're trying to forward your relationship with? And how's that going?
Charles W. Moorman
The marketplace is always dynamic.
Operator
Our next question is from the line of David Vernon with Alliance Bernstein.
David Vernon - Sanford C. Bernstein & Co., LLC., Research Division
It's actually with Sanford Bernstein, but the revenue per ton mile on the coal traffic, the quarter-to-quarter improvement there was around -- close to 2%. And if you think that fuel wasn't much of a change kind of quarter to quarter, that looks like an 8% a year annualized rate of increase.
Was there anything specific as far as contract renegotiations on the utility side that might have helped add to that quarter-to-quarter rate of improvement on the revenue per ton mile?
Charles W. Moorman
No. No significant contract changes.
David Vernon - Sanford C. Bernstein & Co., LLC., Research Division
Was there anything -- was there any material kind of difference in the rate of increase between the utility traffic and the export traffic as far as the rate at which -- the rates actually went up?
Donald W. Seale
Well, we had the 23% increase in volume, the 25% increase in tonnage on our export business. And our utility south, which has a longer haul also was up.
But as I mentioned too, we had a 1% increase in our domestic met coal for the quarter, which has a higher revenue per ton mile because of shorter haul.
David Vernon - Sanford C. Bernstein & Co., LLC., Research Division
And then could you maybe talk a little bit about the rate at which intermodal train starts increase kind of year-over-year to accommodate the high rate of carload growth?
Donald W. Seale
We had, as far as our Intermodal operations, we had a -- what's the percentage -- we've had about a 2.5% to 3% increase of crew starts on Intermodal against a much higher volume increase.
Operator
The next question is from the line of Donald Broughton from Avondale Partners.
Donald Broughton - Avondale Partners, LLC, Research Division
Most of all the good questions have been taken, so I'm going to ask something a little more esoteric. I noticed gross ton miles continue to grow very nicely, gross ton miles per train hour.
And revenue ton miles per train hour did as well, pretty much lockstep. So it wasn't really mix.
Exactly how high do you think you can take that number? I mean, you're damn near at 90.
Can you get to gross ton miles per train hour? And Can you get to 95?
Is 100 possible? Where are both GTMs and RTMs per train hour at?
Donald W. Seale
Well, we would hope, as I ponder your more esoteric question, that they're headed up. I don't know that we have a specific number in mind, Don, but I will tell you that while our network is still far more fluid, we still have a good ways to go in terms of taking the velocity of the network to where we want it to be.
And clearly, velocity plays directly into that train hour metric. And the other side is, as Mark mentioned, is that we have -- still have substantial capacity, particularly in our merchandise train network in terms of length.
Donald Broughton - Avondale Partners, LLC, Research Division
So it's somewhat dependent upon mix?
Donald W. Seale
It is. To some extent, it's dependent on mix, but even in Intermodal we can do more.
So I'm not going to try to give you a specific example or specific number rather, but I do think that we have the opportunity to take that number on up a good bit more.
Donald Broughton - Avondale Partners, LLC, Research Division
Because I know -- the conversation I had with Deb Butler at the Altoona Meeting, she was laying out how 10% velocity over the next 2 years was possible just through the technology initiatives. That would imply you could take gross ton miles per hour to 100 at some point the next 8 to 12 quarters.
Charles W. Moorman
That's the way the math would work, and I don't think it's out of reach to improve our velocity by 10%. Right now, we're looking at train speeds in the 21.5-mile-an-hour range.
A 10% increase there without even adding length to our trains -- tonnage to our trains would take us up above 23, and that's a number we've seen before. So I think that's a very rational analysis.
Operator
Our next question is from the line of Jeff Kauffman with Sterne Agee.
Unknown Analyst -
It's actually [indiscernible] in for Jeff. I just had one question for you.
Wanted to know if you could put some numbers around the size of the potential frac sand opportunity, maybe in terms of revenue of carload?
Donald W. Seale
The market in Marcellus Shale and in-course Utica Shale coming after that, which is just beginning to develop with some -- with a very few wells drilled. We see that continuing to ramp up.
And our volumes are up significantly in that area. And we feel that will continue as the gas operations expand in Marcellus and Utica.
I would rather not cite the specific volumes associated with that.
Operator
There are no further questions at this time. I would like to turn the call back over to management for any closing comments.
Charles W. Moorman
Well, thanks for all of your patience. We look forward to talking with you next quarter and talking with a lot of you in the interim.
Thanks.
Operator
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.