Union Pacific posts record quarterly results despite volume declines, flooding

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OMAHA, Neb. — Cost-cutting, efficiency gains, and higher revenue per carload helped Union Pacific post record second quarter financial results despite declines in traffic and revenue and the impact of flooding that shut down key routes in the Midwest.

The railroad’s operating income rose 8%, to $2.2 billion, even as revenue declined 1%, to $5.5 billion, UP reported today. Earnings per share increased 12%, to a record $2.22 that beat Wall Street expectations.

UP’s 59.6% operating ratio improved by 3.4 points and was the first time its key measure of efficiency dropped below 60% for a quarter.

The railroad maintained its outlook for the year, including a sub-61% operating ratio, despite economic uncertainty, increased competition from trucks, and a 4% decline in traffic volume in the second quarter.

UP expects a traffic decline of 2% for the second half of the year.

Kenny Rocker, executive vice president of marketing and sales, says UP has a positive outlook for biofuels, food and beverage, plastics, construction, petroleum products, and finished vehicle traffic.

Grain and international intermodal volumes are uncertain amid the ongoing trade dispute between the U.S. and China.

UP has a negative forecast for frac sand due to increased use of local sand in the Permian Basin of west Texas; expects continued weakness in coal amid low natural gas prices, business lost to rival BNSF Railway, and the retirement of coal-fired power plants; lower lumber shipments due to lower housing starts; and weak domestic intermodal volume due to truck competition.

Long-term, however, UP remains bullish on converting over-the-road truck traffic to intermodal, Rocker says.

UP’s key operating metrics were mixed in the quarter, partly due to the impact of flooding that forced the railroad to reroute traffic around lines that were shut down by washouts and high water.

Trip plan compliance, which measures on-time performance, declined by 1 point, to 61%, amid the flooding on UP’s Mid-America Corridor. With all routes open again, trip plan compliance is now running above 70%, Chief Operating Officer Jim Vena says.

Average dwell declined 14% and freight car velocity, measured by miles per day, improved 4%. But average train speed dipped 6%, which Vena attributed partly to trains doing more work en route.

Locomotive productivity rose 19% as the railroad ran longer trains and had 2,150 locomotives in storage as of June 30. Train length is up 10% this year, to 7,700 feet.

UP has nearly completed siding extensions on the remaining single-track sections of the Sunset Corridor between Los Angeles and El Paso, Texas, where the railroad is particularly focused on running longer trains.

The railroad will continue to invest in new and longer sidings to support increased train lengths, Vena says.

UP reduced operating expenses 7% in the quarter. The lion’s share of the expense reduction came from more efficient operations and productivity gains rather than savings related to lower traffic levels, CEO Lance Fritz says.

UP’s workforce shrank 6% in the quarter. Parking more locomotives and freight cars and running longer but fewer trains means the railroad needs fewer shop workers and train crews, Fritz says.

“We’ve taken a lot of work out of the network, and it’s being reflected now in our manpower,” Fritz says.

UP expects its employee headcount to fall 10% by the end of the year.

Overall, the railroad is banking on more than $500 million in productivity savings this year under its shift to an operating model based on the principles of Precision Scheduled Railroading.
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