UP profits tumble, but executives are cautiously optimistic about recovery

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Union Pacific oil and intermodal trains meet at La Fox, Ill., in 2019. UP saw a significant drop in earnings during 2020's second quarter, but executives are cautiously optimistic about improving business.
TRAINS: David Lassen

OMAHA, Neb. — Union Pacific executives were cautiously optimistic on Thursday about a rebound in traffic after the steep volume, revenue, and earnings declines in a second quarter dramatically affected by the COVID-19 pandemic. 

“As I reflect on what we’ve dealt with, and the results of the quarter, the true character of our organization was revealed, and it makes me very proud of the entire Union Pacific team,” CEO Lance Fritz said on the company’s earnings call today.

The railroad expects its full-year volume to be down about 10%. But UP expects a combination of improved productivity and price increases to help improve the railroad’s full-year operating ratio.

For the quarter, UP’s operating income sank 27%, to $1.6 billion, as revenue declined 24%, to $4.2 billion. Earnings per share declined 25%, to $1.67. The railroad’s operating ratio increased 1.4 points, to 61%.

Overall, the quarter’s traffic was down 20%. Volume was down in all three of UP’s business units: Bulk volume declined 15%; industrial sank 18%; and premium, which includes intermodal and automotive, fell 23%.

So far in July, premium traffic is up 2% compared to a year ago, while bulk is down 13% and industrial is down by 16%. 

Kenny Rocker, executive vice president of marketing and sales, said there’s still considerable uncertainty surrounding the economic impact of the pandemic. But he was optimistic about the rebound in intermodal traffic, boosted both by strong demand and new contract wins with international and domestic customers.

Intermodal volume has been gaining strength in recent weeks and is 25% above its low point in April. “All the dynamics show that we’re going to have a pretty solid peak season,” Rocker says.

UP’s key operating metrics all improved year-over-year, although the historic flooding that disrupted key parts of the railroad in the second quarter last year made for easier comparisons. Car miles per day increased 11%, dwell decreased 16%, and train speed was up 10%.

Trip plan compliance, a measure of on-time performance, improved to 82% for intermodal shipments and 76% for manifest and auto traffic compared to last year’s second quarter. Those were improvements of 13 points and 17 points, respectively. Compared to the first quarter, intermodal trip plan compliance deteriorated by 3 points, while manifest and auto improved 12 points.

UP reduced the number of train, engine, and yard employees by 32% compared to a year ago, a drop steeper than the traffic decline due to a focus of moving tonnage on fewer but longer trains.

Although UP has begun recalling furloughed workers as volume has rebounded, returning volume will be added to existing trains, so people will not return to work as quickly, Chief Financial Officer Jennifer Hamann says.

UP has completed 16 of the nearly 40 15,000-foot sidings it plans to build this year to handle the railroad’s longer trains, Chief Operating Officer Jim Vena says. Four more long sidings will be completed by the end of the month.

Train length was up 23%, or 1,600 feet, compared to a year ago. Boosting average train length to 8,664 feet saved the railroad $75 million in the quarter.

UP closed its Global 3 intermodal terminal in Chicago during the quarter as part of its streamlining of intermodal operations in and around the Windy City. Construction has begun on an intermodal terminal expansion at Settegast Yard in Houston, which will enable UP to concentrate all Houston-area intermodal operations at one location.

Also in Houston, UP has begun an expansion project that will enable Englewood Yard to handle longer trains and boost switching capacity. 

UP currently has more locomotives parked than in service due to the combination of traffic declines and moving tonnage on longer trains, Vena says.

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