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.
When you’ve fired that many people you really should be able to show record profits. If they could just find buyers for all of the stored power.
I am not against stock buybacks per se. But one troubling aspect of several of the PSR roads is how they often tout returning more than 100% of earnings to shareholders. They typically do that by borrowing money long term and using the cash to buy back stock. Interest expense going forward has to rise as more and more debt is outstanding. That raises concern for the ability of the leveraged organization to weather an economic downturn, especially if it is a long one.
Glorious short-term profit for ruinous long-term outlook and strong and harmful re-regulation, if not outright operating meltdown. Nothing hippy about it questionning the logic, just smart people pushing their analysis a little further than the next quarter.
Can’t argue with profits. It’s what made this great-n-glorious country great-n-glorious.
And, don’t forget, if you complain about how this great-n-glorious country is run, you can just LEAVE!
Love it or leaving it hippy! And get a #goshdarn# haircut!
Bradley a lot of us snicker (or is it cry and moan and gnash teeth) less about the fat cutting and more about the loss of business to trucks due to poor, slow, variable service, the difficulty in getting a fast rate quote, and the audacity of charging higher rates for such lousy service quality.
Of course cutting fat (but not muscle and bone) helps keep the rates down and thereby become more attractive in modal competition. We like the idea of sweating the assets (but not abusing the remaining help) and using the higher revenue to debottleneck and increase market share. Oh wait. It doesn’t reduce rates or result in growth focused capital spending (until years later and so far only on CN when it melted down). It just goes to stock buybacks.
Braden, no it wasn’t. Less intermediate classification of whole trains combined with “block for destination yard” at origin means more work events en route for block swapping.
The idea works ***in theory*** for a physical plant suited to it. And would trade off lots of terminal dwell for a little less velocity and more line haul capacity (due to fewer but longer trains). But if the locations for those work events aren’t suited to the long trains and become a bottleneck for other trains needing to work the same location, or if meets take longer because sidings can’t accommodate the longer trains the theory goes out the window and velocity plummets and recrews and missed “precision” connections increase.
Plus I don’t know how you maintain good consist makeup principles regarding empty placement on a per block basis on these long trains unless you use DPU on all of them, which adds to time spend building these trains at origin.
For years we’ve read and snickered at the railroads because if their infamous “fat”. We’ve all heard the story’s of losing a boxcar full of new Cadillacs on some remote siding. Now they’ve finally started to do something tangible about it, and everyone is crying for the good ol’ days.
Simple fact is the investors own the companies, and at present the majority of these owners are insisting on leaner, more efficient operations making better returns. I dare say any business out there of any size is under the same pressure from the owners. Even if that owner is the only employee.
Traffic and revenue declined, yet income is up, with a half BILLION in productivity gains projected for this year. I’m afraid they’re not hearing everyone telling them how wrong they are…
Trains doing more work enroute??? Hmmmm wasn’t PSR suppose to cut work enroute?? ….
CSX CEO yesterday after a dismal quarterly report: “Both global and U.S. economic conditions had been unusual this year, to say the least, and have impacted our volumes. You see it every week in our reported carloads. The present economic backdrop is one of the most puzzling I have experienced in my career,” CEO Jim Foote says.
Guess you can only cut so far. UP is two years behind in the PSR game – give it time and they’ll be in the same position.
It really seems that no one cares about the working people in our country anymore all anyone can talk about is how to get rid of workers and how wonderful it is when we can do this.Lets start talking about getting rid of overpaid CEOs and the flunkies who tell them how great they are.the American worker built this country and the true leaders know this.