Operating income declined 2%, to $2.2 billion, as revenue sank 7%, to $5.5 billion. Net income also fell 2%, to $1.5 billion. Earnings per share rose 3%, to $2.22, but missed Wall Street analyst expectations by 10 cents, according to I/B/E/S.
UP’s operating ratio improved 2.2 points to 59.5%, a company record.
“That’s quite an achievement when you consider the falloff in volume during the quarter,” CEO Lance Fritz told investors and analysts on the railroad’s earnings call.
Of UP’s four business segments, only industrial products showed volume growth. It was up 2% for the quarter thanks to strong demand for construction materials and plastics.
Energy was down 15%; premium, which includes intermodal and automotive traffic, was down 11%; and agriculture was down 2%. The railroad expects similar volume trends in the fourth quarter.
In the energy segment, frac sand volume was down 45% as oil and gas drillers turned to local sources of sand, and coal traffic was down 17% amid low natural gas prices, the retirement of coal-fired generating plants, and the loss of a contract to rival BNSF Railway.
But shipments of petroleum, liquefied petroleum gas, and renewables rose 18%. UP expects crude oil shipments to rise as Alberta eases production quotas and more Canadian crude is exported to U.S. refineries on the Gulf Coast.
UP’s domestic intermodal volume was off by 11% due to soft demand and loose trucking capacity. About 2% to 3% of UP’s intermodal volume decline this year is attributable to the elimination of service in low-density lanes, Fritz says.
International intermodal volume declined 12% due to the impact of tariffs and trade uncertainty. Finished vehicle traffic declined 4% amid declining auto production. UP was optimistic that the tentative agreement between General Motors and the United Auto Workers would help auto volume rebound somewhat in the fourth quarter.
Kenny Rocker, executive vice president of marketing and sales, says UP’s improving service ultimately will help it gain additional intermodal and merchandise volume. Trip plan compliance improved 10 points for the quarter, to 71%.
More substantial volume gains will have to wait for trucking capacity to tighten, trade headwinds to subside, and economic growth to accelerate, Fritz says.
UP scaled back its capital spending to $3.1 billion for the year, with represents a $100 million reduction in growth projects given current volume trends, Chief Financial Officer Rob Knight says.
The railroad maintained its guidance for a sub-61% operating ratio this year and a sub-60% operating ratio next year, however.
Railroad executives are putting lipstick on a pig.
I think I hear the sound of an industry going down the drain. They can only hope business recovers to further fatten and line their pockets. The best recovery of freight will be the marginal low tariff commodities. Railroads certainly are not the mainstream of ground transportation anymore. You want to move it on time economically, ship by truck. Once in the industry, I have heard over and over the decades how the railroads were going to go after business. Baloney! The railroads have utterly given up on the concept. Their low cost structure should have translated into significant tariff reductions to compete with the organic trucking industry. Instead, most of the money is going to Wall Street.
When the O/R reaches zero, the traffic reaches zero, and the profits go to infinity … I can see it now …
The above comments are genetic in nature and do not form the basis for an attorney/client relationship. They do not constitute legal advice. I am not your attorney. Vote for George Tirebiter.
On this trend, eventually the O/R will reach Zero.
The lemmings are scampering towards the PSR cliff. But don’t worry, the executives and hedgies will cash out long before the crash.
Pity the shippers, the public hit with higher prices and increased highway congestion from trucks and the environment. Sacrificed at the alter of O/R and Wall Street.
“That’s quite an achievement when you consider the falloff in volume during the quarter,” CEO Lance Fritz told investors and analysts on the railroad’s earnings call.
Yes it is quite an achievement when all but one freight category decline and income & revenue also decline & that is seen as a positive. Maybe this next quarter they can shoot for 30% decline in freight, then the celebration will really start.
When operating income drops, they borrowed money to buy back enough shares to make the earnings per share go positive to try and hide the fact that their profit wasn’t as good the previous year. I hope their bonus’ were based on earnings instead of earnings per share. As a stockholder I feel deceived.
More evidence that operating ratio isn’t the be-all and end-all of Class 1 railroad financials.