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Operator
ladies and gentlemen thank you for standing by my name is brent and i will be your conference operator today at this time i would like to welcome everyone to the csx corporation third quarter 2022 earnings conference call all lines have been placed on mute to prevent any background noise after the speaker's remarks there will be a question and answer session If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. It is now my pleasure to turn today's call over to Mr. Matthew Korn, head of investor relations.
Matthew Korn
Thank you, operator. Good afternoon, everyone, and welcome to our third quarter call. Joining me on today's call are Joe Henrichs, President and Chief Executive Officer, Jim Foote, our outgoing President and Chief Executive Officer, Kevin Boone, Executive Vice President of Sales and Marketing, Jamie Boychuk, Executive Vice President of Operations, and Sean Pelkey, Executive Vice President and Chief Financial Officer. In our earnings presentation, you will find our forward-looking disclosure on slide two, followed by our non-GAAP disclosure on slide three. And with that, it's my pleasure to introduce our President and Chief Executive Officer, Joe Hendricks.
Joe Henrichs
All right. Thank you, Matthew. And hello, everyone. And thank you for joining our conference call. I'm excited to be here with you today on my first earnings call as President and CEO of CSX. The entire CSX leadership team is here with me this afternoon, and we appreciate the opportunity to discuss our strong third quarter results with you. Our whole team is very motivated to build on our current momentum, strengthen our key relationships, provide better service to our customers, and deliver profitable growth for years to come. We will achieve this through our one CXX culture, which at its core means one team working together to serve all our key stakeholders. As Matthew mentioned, also joining us for tonight's call is Jim Foote, who as you all know, led this company through its remarkable, remarkably successful transformation over these last five years. Jim cares deeply about this railroad and its employees. And he has already been a great resource during my first several weeks in this role. I'll be happy to have his invaluable advice in the months ahead. And I want to thank him for all the help he has given me personally as I get the privilege to follow him. Jim, on behalf of everyone here at CSX, thank you.
Matthew
Thanks, Joe. As I have said on every earnings call since I took over as CEO five years ago, I am incredibly proud of every CSX employee who has been by my side as we transformed this organization into the best run road in North America. A company that's safer, more efficient, more profitable, and far more successful than when we started. I have the utmost confidence that Joe and this team will take this organization to even higher levels of success. This transition process has been underway for a long time. It was critically important that the board and I ensure that a succession plan was in place when the right time came. Having seen CSX through the initial phases of our transformation, past some unusual, to say the least, challenges and now with our operating performance starting to get back to normal it's the right time for me to step away joe is a great guy he is very talented and he brings a tremendous amount of operations experience in running a large complicated industrial company his years working with a diverse unionized workforce will clearly serve him very well it's truly been an honor to serve as president and CEO of CSX. And I wish all of you and everyone connected to this railroad the best. And now back to Joe.
Joe Henrichs
Thanks, Jim. I promise you this team won't let you down. I am honored to be here on behalf of the entire CSX team. I've spent the last month traveling all across the network, visiting our facilities and meeting with our customers, our employees, union leaders, regulatory partners, and government officials. at this point i can tell you two things for certain first this is a fantastic railroad our people and our infrastructure are second to none and the principles of schedule railroading that drive our successful resilient operating model are deeply embedded throughout the company i knew that css was a very impressive place when i started I did not appreciate how impressive it really is until I saw for myself how this team of skilled, dedicated men and women worked together to move thousands of boxcars and containers for our customers each and every day. Second, for as much as this company has achieved over its transformation during the last several years, there is still so much more that CXX can do. Rail is a low-cost freight solution. Rail is a freight solution with low emissions. Manufacturing investment in the United States is accelerating. We have great advantages in this market, and our customers should have every reason to ship more by CSX rail. But we have to focus our efforts to make this happen. We have to make it easier for our customers to use our service. We have to provide better service to our customers. We have to engage with all of our employees, especially those out in the field serving our customers every day, to ensure that we deliver the reliability that we promise. We have to challenge ourselves to nurture the kind of culture that fosters a nimble, creative, and market-leading company while staying true to the operational discipline that makes this all possible. The concept of one CSX as one team working together to accomplish great things can be very powerful. We have to bring one CSX to life. We'll talk more about that in a few minutes, but now let's turn to our presentation to review the financial highlights for the third quarter of 2022. CSX moved nearly 1.6 million carloads in the third quarter and generated approximately $3.9 billion in revenue. Operating income increased 10% year-over-year to $1.6 billion, which included the effect of additional labor and fringe expense related to the tentative agreements reached with our unions last month. Results this quarter also reflected lower real estate gains compared to last year. Earnings per share increased 21% to 52 cents a share. Our operating ratio for the quarter was 59.5%. Now let me turn it over to Kevin, Jamie, and Sean for the details.
Jim
Thank you, Joe. Turning to slide five, third quarter revenue increased 18% year over year with revenue growth across all markets. Overall volumes were up 2% as modest volume growth in merchandise and intermodal more than offset a minor decline in coal. Merchandise revenue increased 14% on 1% higher volumes driven by pricing that reflects rising cost inflation and higher fuel surcharge revenue. We saw strength in the automotive market where revenues rose 31% on 13% higher volume. Semiconductor challenges continue to ease, and we see significant finished vehicle inventory that needs to move. Ag and food was also a bright spot, as improving cycle times as well as stronger demand for grain, wheat, and ethanol resulted in revenue growth of 25% on 10% higher volume in the quarter. Fertilizers and metals and equipment both saw modest revenue growth despite volume declines in the quarter, Fertilizer shipments continue to be impacted by reduced phosphate shipments and production facility turnarounds. Lower metals and equipment shipments reflect volatile commodity pricing and mill maintenance outages. Intermodal revenue increased 19% on 2% higher volume as yields remained strong and supported by high fuel prices. International shipments were partially offset by lower domestic volumes, which reflected tight equipment availability and softer truck market. Intermodal demand remains strong in the quarter with the team continuing to collaborate with customers and identify new opportunities, including a new international service lane that contributed to growth. Customers continue to recognize our industry-leading service product in a challenging market as they seek lower costs and lower emission alternatives to truck. Coal revenue increased 36% on 2% lower volume as pricing continues to benefit from strong export benchmarks. Volumes remain limited in the quarter due to production issues at the mine, infrastructure constraints at the export terminals, and general manpower shortages. Though our crew availability did show improvement into the end of the quarter. We were also able to reopen portions of our Curtis Bay terminal in September. which provides additional volume opportunities as operations normalize. Demand remains strong, and we see opportunities to move more volume as some of these constraints ease. Trucking revenue increased 26%, mainly due to strong core pricing and higher fuel recovery. Other revenue increased largely due to higher intermodal storage and equipment usage fees. The strong sequential increase was driven by continued limited warehouse capacity at customer sites. Looking forward, there is obvious macroeconomic uncertainty as the Fed remains committed to raising rates and addressing high inflation. Given this backdrop, the team is highly focused on its efforts to drive strategic growth opportunities that target truck and expand CSX's addressable market. As you've seen, Our select site program continues to facilitate new customer partnerships. Last month, a key emerging domestic lithium supplier for the EV and battery markets announced the construction of a $600 million refining and manufacturing facility on a CSXServe site in Tennessee. We also have several other potential projects in various stages of development and continue to see customers investing in new projects across our network. We're also moving forward with efforts to facilitate ESG solutions for our customers. Before year end, we will be releasing an updated version of our carbon calculator that is integrated within our ship CSX interface. This new calculator will enable customers to drive into much deeper detail and understand in real time the environmental benefits that CSX rail can provide. Finally, we are also encouraged that service performance is on an upward trend We expect to turn this positive momentum into additional opportunities with customers. I will now turn it over to Jamie to discuss operations.
Joe
Thanks, Kevin. Safety remains our top priority at CSX, and operating safely is the foundation to our service restoration efforts. In the third quarter, our personal injury rate and train action rate decreased sequentially. Though we are not satisfied with our performance, I'm encouraged by our success. especially given the number of new employees across the network. As we mentioned last quarter, it is critically important to instill a culture of safety in our new T&E employees from day one. That emphasis on safety does not end when new employees graduate from training. It requires continuous attention throughout every railroader's career. To reinforce this, we are actively engaging with new hires and all of our employees in the field to discuss recent injuries and accidents to ensure that we take each opportunity to learn from each other. In the fourth quarter, our efforts will continue to focus on making sure our employees are protected from incidents that commonly occur as weather changes. Increased education and awareness of seasonal safety risks will help our team become safer. Turning to slide seven, we're encouraged by the recent improvement in our operational performance. These strong results are a testament to the OneCSX team and their unrelenting devotion to serving our customers. If we only look at the third quarter averages, train velocity, dwell, and carload trip plan performance, all showed a deterioration versus the prior year. Though intermodal trip plan compliance continued to improve 240 basis points. However, the right side of each chart of this slide shows a substantial improvements we have made throughout the quarter and continuing into recent weeks. As shown here, in the most recent four-week performance, all of these four key operational measures are above the averages for the third quarter 2022, but they're also ahead of third quarter 2021 performance. We are confident that these metrics show that our efforts to hire, train, and retain new employees are starting to take hold and make a difference for our customers. Though we are encouraged by the operational momentum, we will not let up. We will continue to push forward and take actions necessary until service is fully restored to a level that our customers expect. We are promoting new conductors, allocating the appropriate number of assets, and improving the overall reliability and operational resilience of our network. Turning to slide eight. In the third quarter, active T&E headcount reached the highest level since March 2020. Though the quarterly average shows a sequential increase of less than 100 employees, we exited the quarter with over 6,800 total. The hiring pipeline remains robust, and we averaged over 500 trainees again in the third quarter. We are determined to keep the pipeline full allowing us to continue filling classes as we work towards our goal of 7,000 active T&E employees by year end. Currently, we have over 700 employees in training and have additionally started locomotive engineer training. The number of conductors that finished training and marked up was down slightly in the third quarter as we cycled lower class sizes from earlier in the year. We anticipate this number to increase in the fourth quarter as the class sizes have remained elevated through the late spring and summer months. Conductor promotions will continue to increase the active T&E headcount. Our efforts to minimize attrition that we highlighted in the last quarter are bearing fruit. New hire attrition in the preceding months have trended lower, and we believe our hiring initiatives and recent pay agreements for new conductors are a contributing factor. I will now hand it over to Sean to review the financial results.
Kevin
Thank you, Jamie, and good afternoon. The favorable operating momentum Jamie discussed was accompanied by strong revenue growth of 18% for $600 million, including gains across all markets. Operating income was up 10% to $1.6 billion as top line gains outpaced expense headwinds from higher fuel costs, inflation, and tentative union agreement impacts that I will discuss in more detail on the next slide. The operating ratio was 59.5%, which, as a reminder, includes roughly a 250 basis point ongoing impact from quality carriers. Interest and other expense was roughly flat, as was income tax expense. The effective tax rate in the quarter was 21.9%, lower than our statutory rate as a result of a favorable state legislative change. As such, net earnings of $1.1 billion was up 15%, with EPS up 21%. Now let's take a closer look at expense on the next slide. Total third quarter expense increased $460 million versus the prior year. Fuel was up nearly $200 million, primarily due to higher prices. Inflation remains above historical levels with $82 million of inflation across labor, PS&O, and rents. Labor inflation alone was around $50 million, which reflects the proposed wage rate increase from the tentative union agreements. In addition, we recorded $42 million of out-of-period expenses related to adjusting union labor accruals for the tentative agreements. The most significant piece of this is the impact of the proposed union bonuses. When you think about labor expense going forward, the $42 million is a net catch-up and will not recur. The base labor per employee excluding this impact is expected to be the new run rate for Q4 and into the first half of next year. Of course, comp per employee will also be impacted by seasonality mix and other factors, but the full impact of the tentative union agreements is now in our base labor costs. Next, quality in Pan Am combined for $46 million of higher expense with the increase split about evenly between the two. Quality expenses correlate with higher revenues, while Pan Am reflects the first full quarter of CSX ownership. The Pan Am integration process is well underway, and we continue to receive positive customer indications around strong growth opportunities as we invest to increase the speed and reliability of the former Pan Am network. Real estate gains were 33 million less than prior year, with volume and all other expenses increasing 66 million. While operating fluidity improved through the quarter, Our hiring focus remained, and we incurred approximately $40 million of incremental costs related to T&E training, higher locomotive count, additional intermodal terminal activity, and other congestion-related items. Volume-related costs and higher depreciation represented the balance of the expense increase. We do expect some of the congestion-related expenses to continue into the fourth quarter, but view these costs as the first efficiency opportunities to be realized as we achieve sustained improvements in network performance. Now turning to cash flow on slide 11, year-to-date free cash flow before dividends is down nearly $30 million, but up approximately $120 million when adjusting for after-tax cash proceeds from the Virginia transaction. This is despite close to $225 million of additional capital spend as we continue investing for the health of our network to support the quality and Pan Am acquisitions and position for future growth. After funding all the capital needs of the business, shareholder distributions have exceeded $4.3 billion this year, including over $3.7 billion of share repurchases and nearly $650 million of dividends. Additionally, we ended the quarter with a strong balance sheet, including $2.4 billion of cash and short-term investments. Looking forward, we expect to maintain our balanced, opportunistic approach to returning excess cash to shareholders. And with that, let me turn it back to Joe for his closing remarks.
Joe Henrichs
All right, thank you, Sean. Now let's conclude with a review of our outlook as shown on slide 12. There's no change to our expectation for double-digit revenue and operating growth for the full year, excluding the effects of the Virginia real estate transaction. While there is uncertainty in the global economy, we feel confident in our ability to deliver on this guidance as we look over the remainder of this year. As we mentioned in our earlier remarks, We are pleased with the positive momentum in our service metrics, and we continue our hiring and training efforts to ensure that we have the resources needed to build on these trends and drive improved network fluidity. We remain committed to returning excess capital to shareholders, as you saw over this past quarter. And finally, we reiterate our priority to building a unified, cohesive culture of one CSX that will strengthen the relationships we have with our employees, customers, and all other stakeholders. This is a great company and working together, there is so much more that we can accomplish. And that's why I'm so excited to be here. Thank you all. I'll now turn it back to Matthew for Q&A.
Matthew Korn
Thank you, Joe. Now, in the interest of time, I'd ask that everyone please limit yourselves to only one question. And with that, operator, please open up the line.
Operator
Again, if you would like to ask a question, press star followed by the number one on your telephone keypad.
spk08
your first question comes from line of ken hexter with bank of america your line is open um can you talk a little bit about your your learning curve you know why why the your right background for the role what you hope to accomplish and and i mean it's a general question um and then i mean my more specific one would be on trucking right you know like a You talked about the rate ramp, and is that something that gets impacted by loose capacity, or is the chemical business just different from the trucking side? But I'll stick with the big one for you, Joe, to start with.
Joe Henrichs
Okay. Thanks, Ken. Well, I think Jim highlighted a couple of things, but certainly the labor side of the business experience in the automotive industry is certainly very applicable to our situation that we're in now. When you look at working through with our labor union partners, tentative agreements and ratification and working through those issues. But more importantly, I had the opportunity to be a customer for 20 years of the rail industry and have shared a lot of those experiences with with our team and have challenged us to continue to look at things from the customer perspective to make sure that we are holding ourselves to a higher standard of service and accountability for our side of this relationship and i'm really proud of the work that jamie and the operations team are doing to really show improvement in that area um jim mentioned that you know obviously the auto industry is a complexity complex business and so is the rail industry there's different times types of complexities But from my background experience, I think a lot of that's applicable. But I would step back for a second and say at the end of the day, you know, it's the workforce, it's the people here that serve our customers. And when we bring everybody together and align around our core objectives and around our opportunity to serve our customers better and work together better, we can create an even better CSX. And that's an opportunity for us to bring home and to bring to life. And I'm really excited to be a part of that. I'll let Kevin handle the second part.
Jim
So, Kevin, I think if I got your question right on the chemical, you're asking about the chemical trucking quality?
spk08
Yeah, Kevin, I guess just, you know, obviously what we're seeing in the market is just how pricing collapsing right on the spot basis. And I just want to understand, is the chemical business different, you know, in terms of the revenues we can expect from the trucking and other business, or is that something that's maybe more sustainable?
Jim
Yeah. I mean, what you have to remember when we were looking at this business, it's, it's a high touch customers really care about product quality and the brand awareness that they have for quality is very, very high. This is not business that typically moves around. And so what you've seen is, Actually, they've done a great job of attracting some drivers this year. I think they've done an excellent job versus the market there. Pricing has been very, very good and continues to remain that way. That's what we continue to see. It's a very, very different market. People have to be highly trained, highly skilled to do that business. They have a great workforce doing it. Great. Thanks, Joe. Thanks, Jim.
Operator
Your next question comes from the line of Scott Group with Wolf Research. Your line is open.
spk18
Hey, thanks. Afternoon, guys. Sean, maybe just any near-term color guidance on the other revenue, the labor, comp per employee, anything on operating ratio and Q4. And then Joe, just sounds like more of a focus on service, culture, so maybe I guess more of a growth focus. I guess, how are you thinking about the ability to grow and improve operating ratio over time, or is it more just about growth, or is it both?
Joe
Just your big picture strategy going forward.
Kevin
Scott, I'll start with the sort of modeling questions. In terms of other revenue, what we've said for a while here is that we do expect it to normalize as supply chains, you know, get back to normal. Clearly that didn't happen here in the third quarter with the increase that we saw in the other revenue line. uh but the expectation remains the same that we should see it come down you know in the fourth quarter and again into next year uh to your other point around copper employee um i think you know the best way to think about that is to take the 42 million dollars we talked about which was the out of period expenses related to the tentative union agreement strip that out of labor And that's the Comfort Employee Run Rate that you're probably going to want to use going into Q4 as well as into the first half of next year before the next increase takes place in July of 2023. I'll let Joe take the second part of the question.
Joe Henrichs
Thanks, Sean. Thanks, Scott. I think the way I'd like to describe it really is just how we're looking at this is just to step back for a second. I had the opportunity throughout the summer with all my conversations with Jim and the board to really take a, you know, to get educated on scalar railroading and to get educated on CSX. So the way I like to describe it, how we're looking at things is, you know, the five guiding principles of the scalar railroading are really around improved safety, improved customer service, control costs, improve your asset utilization and engage and then ultimately value and evolve your employees. And so if you take a look at all five of those things, they're all very important. And so operating ratio is a big part of looking at controlling costs and your asset utilization and frankly, a number of other pieces that go in there. So clearly that's a very important number for us and very important part of our objectives. Improving safety, as Jamie talked about earlier, is really important and we'll never, ever get away from that in this industry. The other two areas around our customers and employees are opportunities for us. So how do we leverage our strong operating model that we have here and that Jim and the team have built over the number of years to continue to improve the service we provide our customers and the experience and the engagement our employees feel as part of one CSX team? Now, how does that lead to growth? I'll tell you a couple ways. One, with the increased service performance and the manpower that we're putting on, that increases our capacity, which we now can leverage to quickly provide for our customers. I've had the opportunity to reach out and have video calls with about eight of our largest customers over the last couple weeks, and almost every single one of them has told me directly to a CEO or a COO of all those customers, they've all told me that When we deliver better service and more reliable, predictable service, we want to do more business with you. So we don't have to chase growth by trying to do unnatural things. We need to continue to do the things we're doing, leverage our operating model to continue to deliver better service and increase the headcount. And with that comes the opportunity to serve our customers better. And because we're lower cost, because we're better for the environment, because of all kinds of other reasons, there's opportunities for us to grow the business that way. And that's the way we look at the opportunity. Through better customer service, through increased capacity through Manning, we have the opportunity to serve our customers and there's more opportunity for us there.
Scott
Thanks. Your next question is from the line of Ben Nolan with Stiefel.
Operator
Your line is open.
Coal
Yeah, thanks. I appreciate the time, guys. I wanted to get back to the coal side of it a little bit. Those outages have kind of continued both at the mines and the ports and appreciating that we're sort of now getting back to normal. Given the demand that you're seeing from your customers, is it possible to give any color as to how much incremental volume is achievable, let's say, in the next six months or however long it takes for some of these bottlenecks to normalize? How much better is it than it used to be or than it currently is, do you think?
Jim
Yeah, I think probably the gating factor as we get into next year, and we obviously are confident in resolving our labor issues, is what can the producers actually do? produce. Coal mines have been undercapitalized, quite frankly, and now have a lot of money, and they're looking for equipment, reinvesting, and so I anticipate it will get better. We also do have a mine coming online middle of next year that will help us, and we have a number of them that are still ramping up. So production looks like it could be up next year, knock on wood. We probably would have said that last year at this time, too. So There's a lot of things that can happen as you, you know, we mentioned previously on the call, we've had some mines that have struggled but are coming out of that, you know, here recently into the fourth quarter. So optimistic on the production side, there's clearly a need when you look at the utility coal mines or the utilities that we serve, particularly in the south. They have a lot of inventories they need to replenish. And so we anticipate a lot more consistent deliveries over the next year to really replenish those levels. And we continue to see the export market very, very strong and a lot of geopolitical risk out there in Europe and other areas where, you know, you probably didn't see as much demand a year ago continue to have a lot of demand. So the mines want to serve that. It's profitable for them. And, you know, we anticipate to have the resources to be able to deliver going into next year.
Coal
Okay, I appreciate it. Is that sort of if you're just categorizing areas of the business, that probably the one area that we're looking into next year that's the best growth potential? Maybe to think of it that way.
Jim
I think on the volume side, you know, we remember, you know, we kind of move with the, you know, the commodity price on the international market. So depending on what that does, they're at very, very healthy levels. today. A little bit down from the highs that we saw previously in the year, but I think that will be the biggest factor as we look at overall coal revenue for next year. All right. I appreciate it. Thank you.
Operator
Your next question is from the line of Amit Mavrotra. Your line is open.
Joe
Thanks, Operator. Hi, everyone. Joe, hearty congratulations to you. Wish you the best. And Jim, we'll miss you. I'm sure you'll miss all the 50 conferences and all the questions that we ask you, but hopefully you'll find something else to do. So congratulations to both of you all. Sean, I wanted to ask you about the cost structure, ex-fuel, obviously the fourth quarter, but I'm really kind of interested in how you think about it for 2023. because we're obviously still in a pretty high inflationary environment. And just related to that, Kevin, once Sean talks about that, can you just talk about your confidence in being able to grow the franchise enough to actually see earnings growth and EBIT growth next year relative to 2022? Just what your level of confidence is in given some of these idiosyncratic volume factors netted out against, obviously, some uncertainty on the macro side.
Kevin
Thanks, Amit. I'll get started on the cost question. So, I mean, think about the fact that the labor cost has now been reset, so we know what our base is kind of going into next year. Inflation doesn't show any signs of abating here more broadly outside of labor. and recognize that some of our costs are based on lagging indicators, meaning they'll get set based on where the inflationary rates are in 2022 for next year. So there's no doubt we'll be in a sustained inflationary environment going into next year between labor and some of those outside party contracts that we have. That being said, we've been carrying extra costs here throughout the year as the network has not operated the way we would have wanted it to based on not having enough crews in the right places. That problem is rapidly getting fixed here. You can see it in the numbers over the last couple of weeks. And so some of those costs are probably going to be a bit sticky going into the fourth quarter. But as we get into next year, I think there's plenty of opportunity for us to drive some efficiencies and take some of the cost out to help offset the inflationary headwinds that we're going to see.
Jim
Yeah, you know, my confidence level, I'll tell you where my confidence level is. I'm confident in what the team's doing, what we're going to be able to control going into next year. And, you know, there's a number of factors, obviously, that are out of our control. But we have a tremendous amount of initiatives that are really taking hold and are really going to capitalize on the service product that we expect to deliver next year. As Joe mentioned, there's a lot of customers that want to give us more share. of what they're uh you know producing and what they're making out there and so we have a lot of those initiatives in place uh that will reap benefits as we move in the next year and that's where my confidence uh lies um we started the process very very early in terms of looking at those realizing that there could be different markets that could move around on us next year but we know we know uh through the you know what's happened during the pandemic is The railroad, you know, in particular, all of us really haven't participated in the growth that existed out there. And so that's our objective to position ourselves, no matter what the economy holds, that we're taking our fair share and then more of it. And so that's where the confidence is very, very high across the whole team. And we were just with our shoreline partners. And I think there's a lot of confidence there that they have opportunities to go out in the market and take share from trucks.
Joe
Yeah, that makes sense. And Sean, I just wanted to follow up just one quick point what you said. So if I look at your cost-based ex-fuel this year, it's kind of like $7.3 billion. It seems like 4% or 5% inflation off that number is kind of the right structural costs that go up. But I guess what you're saying is, listen, there's a lot of inefficiencies, $40 million a quarter in 2022. So maybe there's an opportunity to actually, if the fluidity gets better, there's actually an opportunity to see net inflation lower than that. Would you say that's a fair characterization?
Kevin
Well, I mean, we're going to see how much cost we can take out based on how well the network spins. But I think the general premise that you're thinking about is the right construct. We got $40 to $50 million a quarter this year that, as we cycle better, should go away. Is there more opportunity beyond that? Sure.
Scott
Thanks, guys. Appreciate it. Thank you.
Operator
Your next question is from the line of John Chappelle with Evercore ISI. Your line is open.
John Chappelle
Thank you. Good afternoon. Jamie, I think last quarter I asked you about capacity as you were still trying to ramp up the labor force. Now it feels like you're pretty close to right-sizing the network from a labor perspective. We've talked a little bit about some of those excess equipment you have on the network today. What would you estimate the spare capacity is today on the network to take on new business, meet this demand that you've been leaving on the table for much of the last 12 months? And I guess the other way to phrase it, too, is if we do go into a pretty deep downturn, is that capacity that you'd be willing to kind of flex off the network for a short period of time, or is it something you want to keep to make sure you're never short, again, because of some of the labor issues?
Joe
Thanks for the question, John.
Joe
When we take a look at the capacity that we currently have out there right now, it's all about people, people, people. And we've been saying this quarter after quarter after quarter. And you're right. We are getting closer to our targets, but we're still a few hundred people off. So we have pinch points out there that isn't as fluid as we want. You can see in our numbers that we're starting to have velocities picking up or dwells coming down. Even our trip plan performance is creeping up, but definitely not where we want it to be. So over the next couple of quarters, really, you're going to start to see that momentum continue to pick up. And as Sean mentioned, yeah, we still have too many locomotives out there. And the velocity will help us on that end. And even our cars online are higher than where they should be. So as we continue to move forward, there is a lot of cost opportunity there for us to pull out. And as we do that and as we move quicker, you know, easily, I mean, we've said this years ago, but there's easily, you know, the capacity that's out there with the right manpower. You know, we've always said 10, 15, 20% capacity with the way that this plant is set up isn't really that big of an issue as long as we have the people to move it. We've got all the assets we need, and we are blessed with a fantastic network here at CSX with double track, long sidings. and some good yards that can handle a lot. And an operating team out there that's just doing fantastic. So they've proven to us time and time again that we have that capacity to continue to grow. So this is still a people's story for us as we move forward. Now, when we talk about that, and as you mentioned, I mean, that pent-up demand that has been discussed a number of times from Kevin and other folks, you know, what is that pent-up demand that's out there? Is that 4%? Is that 5%? Is that 10%? I mean, I've heard a number, a different number of what that really can be out there. So if we see a dip in the economy, you know, we expect to be able to start picking up some of that freight that we can't pick up today. And for us, we just need to have a, stay with a forward-looking view on what's going to happen, you know, in not just next month or two months from now, but We want to look at nine months from now, 10 months from now, and really protect that teeny head count that we have. And if we get into any type of situation where we needed to do something different, there's natural attrition. Our natural attrition is 8% to 10% each year. And if we needed to pause classes, we're able to do that. But ultimately, we want to protect that teeny workforce that's there. As we just mentioned, Sean mentioned, and I did, I guess, at the start of the question, there's a lot of other levers we can pull throughout the organization. So as a team, I think we would all sit down and have that discussion, and we would make sure that we right-size our assets, and railroads are always heavy on assets, so we've got a lot of great cost savings we can do on that end. But all in all, we want to protect that T&E workforce and forward-looking, and if some type of a softening in the market comes, we're going to be prepared to come out of it strong. We're going to be prepared to get all the traffic that's out there, and we're going to come out of this stronger than we ever have if we get into that situation.
Scott
That's great detail. Thanks so much, Jamie.
Operator
Your next question is from the line of Tom Wadowitz with UBS. Your line is open.
Tom Wadowitz
Uh, great. Yeah. Uh, good afternoon. Wanted to see if you could offer maybe a quick thought on, uh, operating ratio in fourth quarter versus third quarter. Uh, uh, you know, another railroad reported earlier today, Union Pacific, and they, you know, I think surprised people a bit with talking about worse than normal seasonal, uh, OR and 4Q versus 3Q. I wanted to see if you could offer a quick thought on that. And then for Kevin, um, You know, I think in a higher inflation environment, you'd like to get more price. But the kind of point to that is that the truck market's weaker and you do compete with truck. So how do you think about those factors? Can you get more price because you have more inflation? Or should we be mindful of a lower truck price, truck load pricing? And that's kind of a barrier to getting more price.
Scott
Thank you.
Kevin
Tommy, I'll start on the Q4 question. So, you know, I think typical seasonality, it's not always this way, but usually it's a little bit worse from Q3 to Q4. And that's primarily because we start to wrap up some of our capital projects and we've got some winter related expenses that hit. So, you know, all reason to believe that that same dynamic would occur this year. Some of the other things that will impact the operating ratio going from Q3 to Q4, you know, fuel was a benefit here in the third quarter because of the positive lag that we had. If fuel prices stay relatively constant or follow the forward curve, we would expect that fuel is going to be a bit of a sequential headwind to the OR. It could be 100 basis points or more based on where the forward curve is right now. So that's just a little bit of noise. Beyond that, you know, hopefully we're able to pick up some volume as the network starts spinning, take some costs out. So those are good things. And then, you know, I think it's a matter of what do we see on the intermodal storage side, because that can be a bit of a swing factor for us as we sit right now.
Jim
Hey, Tom, on the trucking environment and other things, I think what you have to remember is, you know, we don't really operate in the spot market. When the truckers are getting 30%, 40% rate increases, that's not what was occurring before. on our um on our end and you know we have a lot of long-term agreements with customers that you know they understand and you know the good news right now we're seeing our customers get priced um and they understand you know some of the cost pressures we're facing and so we're having those constructive conversations with them and um i think uh you know the spreads maybe versus truck aren't as great as they uh were before but you have fuel surcharge which is very high right now and we know that flows through the truck rates and so there's still a very very compelling value proposition for customers to shift from truck to rail. And so we're still leaning into that, and there's a lot of appetite that we continue to hear of, you know, companies wanting to do that, and for the environmental reasons as well.
Tom Wadowitz
Okay, so it sounds like you're not overly concerned about the kind of, you know, maybe falling truckload contract rates. You're still pretty optimistic on price.
Jim
Yeah, if I was participating in the 30%, 40% rate increases, maybe that would be more of a risk, but that wasn't the reality of our business model. Makes sense. Okay. Thanks for the perspective.
Operator
Your next question is from the line of Brian Ossenbeck with J.P. Morgan. Your line is open.
Brian Ossenbeck
Hey, good afternoon. Thanks for taking the question. So maybe a quick labor follow-up first for Sean, looking at taking out that $42 million, as you mentioned, getting around $33,000 per employee. I don't know. So that's not a huge step up, really, from a year-over-year perspective from what you reported. So I don't know if you can help decipher that a little bit, something I'm missing. Maybe there's some incentive comp or maybe mixed with P&M now in the first full quarter. So any thoughts on that would be helpful as we take that and run forward with it. And then just maybe a quick one for Jamie as well. When you think about the service recovery and you're performing, I think, best against some of the STB targets that we see in track, how long does it, you mentioned the pent-up demand, like are you seeing that come back? Are shippers still worried about a potential, you know, second slowdown or potential shutdown with the union agreements still not completely in hand? So what do you think about the near term and how long does it really take for you to benefit from some of those service gains?
Scott
Thank you.
Kevin
Hey, so on your, uh, comp employee question, yeah, the math, the math is right. Um, and it really is just the inflationary impact over and above the settlement. So, um, you know, I get to write around 2000 bucks, uh, per employee for that, uh, for the 50 million, a little bit more than that. Um, you know, they're small mix mix impact from, you know, having more drivers at quality, uh, which is a little bit lower copper employee than a railroad worker, but that's really the only offset.
Joe
You can already see our gains in service with the headcount that we've seen rise. So as we continue to qualify, you know, 20, 30, some of the weeks coming up here, 40 employees a week, you should continue to see that trend move forward. Now we've got winter coming, so winter always throws a few challenges at us when we look at our service metrics. But our customers are feeling better now, I can tell you that, far from where we need to be. And we're feeling it out in the field, the discussions that, you know, we have, Joe and I have spent a lot of time out in the field over the last few weeks. And the discussion points, you know, our men and women who are making this happen each and every day, whether it's on the ground or in the towers, on the service side delivering, everyone's feeling it. We're starting to feel the railroad run better. We're starting to feel the numbers of the cars moving faster. So that's the big highlight that we're excited about and confident that we're going to continue to move forward on these metrics. And look, I don't like to comment on anything that's out for ratification. I think it's important that we allow our union leaders to have those discussions with the employees that are out there. And in any other ongoing discussions and negotiations, you know, we prefer to really not make any comments on that and allow people the folks who are working on that to just continue doing what they're doing.
Brian Ossenbeck
Understood. Sean, was there any incentive comp impact in this quarter like there was last quarter?
Scott
No. Okay, great. Thanks for the time. Appreciate it.
Operator
Your next question is from the line of Chris Weatherby with Citi. Your line is open.
Chris Weatherby
Hey, yeah, thanks. Good afternoon. I think there's been a perception that the demand level that's out there is decently been up above what the service has allowed you guys to carry. And I guess as you think about some of the macro cross currents that are out there, potential headwinds, is that still the case? Do you think that demand is still maybe meaningfully above what you're able to provide from a service perspective? And I guess As you think out maybe shorter term, 4Q in particular, should we start to see the weekly car loads begin to ramp up as the service improvement becomes more realized and the numbers? I just want to get a sense of how you guys are thinking about that. And then maybe a second point, but related, is if we do see things get a little bit worse, How quickly do you think you can respond in terms of, you know, heads, whether it be your willingness to furlough or just using attrition, Jamie? I think you talked about a pretty heavy attrition number.
Scott
Is that something that you guys would be able to use relatively quickly in response to slowing demand?
Jim
Why don't I touch on the first one, and maybe I'll hand it off to Jamie on the second part of that. Look, you know, I think you're well aware our network, more than, you know, well over half of our business, touches another network out there, another railroad. And so it's important for the industry to work together to capture some of these opportunities we continue to talk about. Clearly, there's markets like housing that are seeing slower signals, but there's other areas like coal and some of the ag products that we're seeing great signs there. And Even if in some markets where there could be some slowdown, I think the magnitude of slowdown is what would be the question for us because there's demand that we haven't been able to meet. And quite frankly, a lot of our customers haven't been able to meet because of some of their labor issues, the demand that they see out there. So it's just not all CSX. It's the whole supply chain catching up, and we're one part of that. So we're... demand ultimately settles out, I think, is somewhat of a question. But we do see, from a share perspective, and that's an important thing, a lot of opportunity to win wallet share with existing customers. And we see a lot of new customers willing for maybe the first time coming to us and saying, well, how does Whale work and how could we provide a service for us? And those are the things that we have to lean into as we go in and we have some uncertainty in the markets. And I'll hand it over to Jamie.
Joe
Well, when I, you know, looking at the question, you know, kind of as I answered it earlier, we got to stay forward looking. Can we pull costs out quick? Well, absolutely we can. I mean, our locomotives, when you think about that, that's a daily cost. You put it down tomorrow, you stop paying for it tomorrow. I mean, these are assets that have been around a long time. And we haven't bought a new locomotive in many years, even though we have a rebuild program other than depreciation. the heaviest cost of a locomotive is what you use every day on them. So, I mean, that is one example of costs that we can handle. And on our T&E side, it's important that we continue to build our T&E workforce where we need it to be. And if we get into a position where things get deeper or things look differently, that attrition, as you mentioned, Chris, it is a heavy attrition rate. And we're able to use that as just a natural way to control our numbers. And, you know, by pausing classes, if we get to that, those numbers will take care of themselves. But we, you know, on the T&E side, and I'm going to keep emphasizing that, it's a very important position like any other in the company, but it takes us four to six months to make a train conductor. And if we get softening market and we come out of this, we are going to be prepared to handle all the traffic that comes back at us. And that's a commitment that we're making, and we're going to continue to follow through on that. All those other levers, there's a lot we can pull on this industry. We want to make sure that we're prepared to come out of any softening if we get to that point.
Scott
That's very helpful. I appreciate it. Thank you.
Operator
Your next question comes from the line of Justin Long with Stevens. Your line is open. Thanks. Good afternoon.
Justin Long
Sean, are there any thoughts that you can share on your expectation for total volumes and coal RPU moving into the fourth quarter? And then, Joe, congrats on the new role. Congrats to Jim as well. Going back to the question on growth versus margins, I think it's clear you're focused on improving service, improving the customer experience. Do you think that requires additional costs and a need for margins to take a step back in 2023 to set the stage for future growth? Or do you think there's enough cost opportunity from running a more fluid network so that margins can improve next year?
Jim
I guess I'll take the coal one. You know, I think you could expect, you know, we're hopeful that some volume stuff up given, you know, the network starting to get more fluidity and some of our producers starting to form a little bit better. So, you know, at the margin, maybe a little bit of better volume there. You have access to, you know, the benchmark prices. So those have come down. They're still very, very healthy, but that would also impact what we would see in the fourth quarter from an export coal market. RPU perspective. So a little bit down, probably sequentially there, given that we're already a little bit into the quarter and those numbers are down from third quarter.
Joe Henrichs
Yeah, thanks. So this is Joe again. From my perspective, first of all, be very clear. Our goal is to leverage our strong operating model and our operating ratios to give ourselves some more capacity to give that incremental volume opportunity that should be very complementary to our our margin performance. So we should not have to chase share by degrading our margin. In fact, that would not be wise. It takes a lot of volume to make up for a point of margin. So to be clear, We're really focused, as you've heard over and over tonight, about the opportunity to keep this momentum going and leverage our great operating model the team has put in place here to free up that capacity with the manpower to then allow for us to naturally provide more volume to our customers that they're asking for.
Scott
And that's really what our focus is for the growth side. Got it. Thank you.
Operator
Your next question is from the line of Ari Rosa with Credit Suisse. Your line is open.
Ari Rosa
Hey, good afternoon. So, Joe, I wanted to stick on this question of your background and your experience. Maybe you could talk about what are the learnings that you take from dealing with labor unions in the auto industry that you think carry over to railroads? And then from a customer standpoint, maybe you could give a little more color on what you've shared with your new teammates at CSX about what the customer experience is like from a customer standpoint and maybe what was being missed internally or if there was anything that was being kind of misunderstood internally about what that experience is like. Thanks.
Scott
Yeah, thanks. So on the labor front,
Joe Henrichs
um you know i really applaud jim over the last couple quarters has spoken very openly about the need and the desire of this industry to have a better relationship with its with its union partners it's a complex relationship there are 12 different unions um and there's industry bargaining um so those those things are a little bit different than the auto industry but at the core um I believe that if you can develop relationships and spend the time listening to each other, you can get into interest-based bargaining, which this team has some success doing here at CSX, to find solutions that are in the best interest on both parties and can find win-win solutions. So we were able to do that. It took time, maybe decades, to get there in the auto industry, but certainly I was fortunate to be a part of that. Um, and it won't take us that long here because we're already, we've already experienced what we experienced lately. And I think we all recognize if we keep doing the same thing, we're going to end up in the same place in a couple of years. And I don't think any of us want that to happen. So big opportunity there and really leaning into that. I've already met with some of our key union leaders and Jamie mentioned, we've been out in the field talking to employees. We've been talking to union leaders here and out in the field. and really just want to start building that relationship so we can form an opportunity to work together to find solutions that are in the best interest of our employees. If we put our employees first, because they're the ones serving our customers every day, I believe we can mutually find areas of opportunity to make progress together. And so on the customer side, you know, challenging our team, especially customers, You know, Steve was coming on the technology side and all of us here to think about what would it take to be able to provide the type of service our customers should expect from us in 2022 and beyond in terms of not only living up to our commitment around, you know, the trip plan compliance or having cars ready or those kind of things, but also around visibility. around transparency and communication, because some of the frustrations that we experienced on the other side of this was really around transparency and visibility, and there's lots of opportunity for us to get better as an industry and, frankly, as a company in that regard, and just really go back to core principles of why we're here. We're in business to serve customers, and so they pay us, and they always pay us, to honor our commitment and we need to do a better job of honoring that commitment. And you heard Jamie talk about that a lot. You've heard Kevin reference it. And this team is really committed to delivering to our customers in a better way. And, you know, CSX was able to show significant improvement really right before the pandemic. This place was showing dramatic improvement in Those kind of metrics. And then, of course, that little sidewall of what's going to happen with COVID. We want to get back to there. As Jamie said, that's our base camp. We want to get back to there. And then we expect ourselves to go further from there. So it's really just keeping the employees and the customers at the forefront of everything we do because they're mutually exclusive in how they work together. If our employees are engaged and feeling good about the culture and about how they're working together, we can deliver success. We can deliver a better service to our customers, obviously help with less attrition and attracting more people, and all that stuff reinforces itself.
Scott
Thanks. Okay, wonderful. Thanks for the thoughts.
Operator
Your next question comes from the line of Brandon Oglinski with Barclays. Your line is open.
Brandon Oglinski
Hey, good evening, everyone, and thanks for the question. Jim, I don't know if you're still on, but congrats on retirement. And if you want to comment on, you know, what you found the most successful the last five years and what was left unturned, I think we'd all appreciate it. And Joe, you know, welcome to railroading. And I guess to your answer on that last question, how do you see the one CSX culture fitting into that, you know, customer relationship and focusing on the right priorities?
Matthew
Well, sure. I'm just taking a little nap here. That's okay. The biggest success is what you're listening to today in this room. Five years ago, there wasn't an executive team. It was me. These guys are all in new roles, all doing a phenomenal, phenomenal job. I say it, and oftentimes our owners agree that This is the best management team in the railroad business, and it's the thing that puts a big smile on my face, especially today when I'm getting out of here.
Joe Henrichs
Thanks, Jim, and I thank you from the bottom of my heart because I equally am excited about the team we have here, and I'm blessed to be able to work with everyone that you've put together, and it is a great team. On your question on OneCSX, the culture initiative was rolled out before I got here by the team, which I really appreciate the attention and the focus on that. At the end of the day, if we're going to make more progress as a rail industry and then here at CSX, we have to have a better relationship with our union partners and with our workforce out in the field doing the work that creates the value for our customers every day. So really focusing our energy at CSX about recognizing we're all part of one team, we're all valuable, we should all be appreciated, and we should all be respected. And really getting our team to recognize that if we're here to serve and help make our employees in the field more successful, that ultimately the company and our customers will be more successful. And really channeling that energy in that way. We have a great operating model. We have a great process. We have great people. And if we can get people working better together, solving problems, helping us deliver better for our customers, I believe, and I know our team believes, that we can have a better railroad and better performance overall on all aspects of our business. So that's the real impetus around 1CSX is bringing our team together after all we've been through with the transformation of the operating model and COVID and labor negotiations and all these things to build from where we are and say we're going to be one team working together, supporting each other, appreciating each other, and delivering for our customers. And ultimately that will deliver better performance financially for our business and for our shareholders. And it really starts internally. If we're going to provide better service, we have to really engage with our employees to make that happen.
Joe
Thanks for the response.
Scott
Your next question comes from the line of Fadi Shamone with BMO.
Operator
Your line is open.
spk17
Thank you. Congratulations to both Jim and Joe on the role and the retirement. I want to ask a question about kind of theme that was going on kind of all night on this call. You know, I think that there is, I believe, agreement generally that rails can grow share across many markets because of cost, environmental benefits and so on. But I think the issue has been and what we hear always from shipper is not just the level of service, but the consistency, the consistency of service over seasons, over cycles. And I'm not sure, coming out of this pandemic and some of these labor issues we've experienced in the last year, whether you approach that kind of different framework for the operation and kind of capacity going forward. Is there kind of framework where, you know, you look at surge capacity maybe differently than you have in the past, or is there an opportunity maybe on labor agreement to to change how uh availability of crews is managed through through those kind of times to kind of remove some of that volatility that we see in service which i think has been probably a big hindrance to the growth uh in the past well i'll take this one on buddy and i i believe um
Joe
No, we're coming out of this stronger than we ever have, and we're coming out of this learning lessons, okay? If we haven't learned lessons along the way as an industry, it's not just CSX, then we haven't been watching or listening to our customers and seeing what's going on out there. So, yes, there are opportunities with our union agreements. There absolutely is. Let's get past the ratification now before we get any comments, but As Joel mentioned, the relationships between our unions and as we continue to do things differently and improve those relationships, it's going to open up opportunity for us to retain employees like we haven't been able to before and provide possibly a schedule, and Jim has talked about this a number of times, provide a better schedule for our employees so when they come to work, they come to work with a smile on their face, they come to work rested, they come to work being that facing you know, the face that delivers cars to our customers, to the docs, and they have a positive attitude and they're wanting to grow this company. And believe me, our employees want us to grow. There is no question about it. They want us to give them the tools to grow and they want us to give them the opportunity to do that. So, you know, that's a big opportunity as we move forward. We are staffing up. We are staffing up to make sure that we can handle the demand that Kevin and his team brings forward to the operating team. Kevin and I talk every single day. You know, weekly we go through numbers together. Our teams are very close. We know where the opportunities are out there. A number of great announcements that have been made through Kevin and his team through some big wins on customers who are opening up facilities on us. So, you know, going forward over the next couple of years, those are great opportunities. And we're going to make sure we're staffed up for that. We've got locomotives in storage. I've said that a number of times. I think when I took Joe into Waycross and he saw the number of locomotives we had in storage out there, it's a surprise. I like to call that the field of dreams. And, you know, one day maybe we'll have all those locomotives pulling freight and pulling tonnage out there. And if we get to that point, we know that we've really grown this company beyond what we think we can. So we are continuing to prep ourselves to move Great. I think I answered the question on what happens if there's a bit of a downturn in business. We're going to stay forward looking and we're going to try to drive this opportunity like it's never been done before. And if there is a softening, we're going to make sure that we are fully prepared no matter how it comes to provide that service to the customers like they've never seen before. And that's our goal. And you're right. That's the theme you've heard tonight. And I'm happy that you said that that is the theme you've heard because I believe All my colleagues and everyone around the table here, we all believe the same thing.
Joe
Thank you.
Operator
Your next question comes from the line of Ravi Shankar with Morgan Stanley. Your line is open.
Ravi Shankar
Thank you. Good evening, everyone. A couple of quick ones. Joe, probably the last one, hopefully you'll have to do, is still wearing your auto hat on, but can you just help share with us what you think the future of autos as an end market is for the railroads, i.e., near-shoring production bases, when do you think the chip shortage eases, et cetera, et cetera, and kind of how that industry kind of ramps up in the near term and long term. And as a follow-up, any commentary on, I think today the rails rejected BMW as kind of a asks in the labor contract, and then like some are speculating this increases the likelihood of a strike.
Scott
How does that eventually end up? Thank you.
Joe Henrichs
Okay, thanks. I'll take the second one first, and then I'll talk about the autos. As Jamie mentioned, we're going to let the process play itself out. We have a lot of respect for our union leaders, and we've reached tentative agreements, and they're in the ratification process. um i think union pacific talked a little bit about some of the issues with bmw ed this morning um and you know i think the opportunity here is for us to really just work together to let those let the process play out we want to respect that process on the union labor side on the auto side i mean there's a lot of things going on i mean there's been a number of significant investments announcements in the especially the southeast um many of which we've been a beneficiary of having a relationship with or having the rail access to, whether it's on EV batteries or whether it's on new manufacturing assembly plants. So I think you'll continue to see, obviously, with the government's help, increased production for things that support electrification of the automotive industry. And we were well positioned to take advantage of that, frankly, with how these are playing out. I'm not going to comment on the chip shortage, but you are hearing from the autos that, you know, production is picking up. We're seeing more opportunity to deliver more vehicles, so that's a good thing for us in the near term. And, you know, we're watching what's happening on the demand side, but certainly we're seeing increased opportunity to deliver more vehicles for our automotive customers here at CSX. And longer term, of course, there's significant investment going in electrification, And we're seeing, you know, again, that opportunity to be a part of that as CSX has been a successful part of a number of these announcements. So that will continue and we're excited to be a part of it. Thank you. Thank you.
Operator
Your final question comes from the line of David Vernon with Bernstein. Your line is open.
David Vernon
Hey, good afternoon, guys. Thanks for taking the question. Jim, congratulations and good luck. Hopefully we can stay in touch down the road. Wanted to come back to you, Jamie, on the headcount. The guidance says we're going to continue to increase transportation headcount to restore service. Can you frame what your expectations are for how large you need to get the headcount to get the service levels where you want it to be? And as you think about adding those resources into next year, should we be expecting the training rooms to be as full in terms of the productivity drag that we're going to be trying to model out here?
Joe
Well, thank you for that one. I would say our target, as we said at the end of this year, is 7,000 active T&E. We are pushing up to 72 as we move forward. We're doing locomotive engineer training. We don't want to get ourselves caught behind on that. We're still good for a number of years, but we want to take advantage of that. The trickiest part of headcount on the railroad is getting the headcount in the right spot. And, you know, as market conditions change and as things move around out in the field, we're very fortunate that right now we have over 60 employees who have taken temporary transfers to areas where we're short right now and we're hiring. And we're taking advantage of some of those areas where we do have excess employees. So I'm quite happy with where our numbers are heading. And, you know, let's see what that number looks like as we continue to move forward and see where our attrition rate continues to take us to. But yeah, absolutely. Heading into next year, we will see our class sizes most likely start to decline to more normalized attrition rate. We're going to make sure that we keep up with attrition. We don't want to fall behind on that. And we mentioned that that's an 8% to 10% depending on which area of the network as we continue to right-size and right-size in the right places. Yes, you will see our class sizes start to drop when we start hitting those numbers. And we feel quite confident that we're heading in the right direction with those numbers. I wish I had the head count today that we needed, but it'll take a little bit of time and we'll get there. But you will see those class sizes drop to normalize class sizes as we move forward. Appreciate the question.
David Vernon
And if I could just squeeze one little one in there at the end here. As you think about the attrition rates on the recent graduates, Have you seen or noticed any differences as a result of some of the changes that are coming in the contract? Are you seeing maybe some of the labor stick around a little bit longer than maybe we saw earlier in the pandemic when you were trying to ramp up?
Joe
Yeah, we're definitely seeing a change lately, and I would not necessarily put that to the contract at this point in time since it's still out for ratification. I think that is a hard work. that our labor group has done and the great relationships that we're continuing to build with our union groups on changing pay scales. The pay scale where we went from a step scale of 80% takes over five years before you get to 100%. As soon as we started offering to our new hires that they would make the same money as the person sitting next to them in the cab, we definitely saw a change in our retention rate in a positive way. So we are doing things differently, and I think as we continue to make some of those changes and build those relationships, that's only going to get better as we move forward.
David Vernon
I appreciate you letting me squeeze that in there. Thanks again.
Operator
I would now like to turn the call back over to Mr. Matthew Korn.
Matthew Korn
Thank you, operator, and thank you, everyone, for your interest in CSX. We look forward to speaking with you again on our next quarter. Thank you.
Operator
Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.
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