OMAHA, Neb. — Union Pacific’s third-quarter financial results – with volume, revenue, and profits all on the upswing — are proof that the railroad’s strategy is working, CEO Jim Vena says.
UP this morning (Oct. 24) reported that operating income increased 11%, to $2.46 billion, as revenue grew 3%, to $6 billion. Earnings per share increased 10%, to $2.75. The railroad’s operating ratio improved 3.1 points, to 60.3%, as operating expenses declined by 2%.
“Our third-quarter results do an excellent job of capturing the progress we’ve made under a strategy to lead the industry in safety, service, and operational excellence,” Vena told investors and analysts on the railroad’s earnings call. “And you’re seeing how that leads to financial success. I’m very pleased with where we sit today compared to where we started a little over a year ago.”
Volume increased by 6% overall in the quarter, driven largely by international intermodal and grain traffic.
Volume in UP’s bulk segment declined 3%, as a 13% rise in grain traffic was not enough to overcome a 17% drop in coal volume. Volume in the railroad’s industrial segment declined 2%, with gains in industrial chemicals, plastics, and energy traffic unable to offset declines in metals, minerals, and forest products business. Premium volume — which includes intermodal and automotive — grew 6%, thanks to a 14% increase in intermodal traffic.
The railroad’s operational and service metrics improved for the quarter. Freight car velocity increased 5%, to 210 miles per day, as terminal dwell declined. The intermodal service performance index improved by a point, to 86%, while the manifest/automotive service index improved 5 points, to 89%.
“The operating team did a great job of improving service while we handled more business. That was possible due to the efficiency of our network and our ability to maximize asset utilization,” Vena says. “While the business of railroading can be unpredictable, it’s the fundamentals of how you operate the company — anticipating and reacting to change — that ultimately matters.”
UP came into the year expecting a drop in international intermodal traffic. Instead, a number of factors — including labor unrest at East Coast ports and on Canadian National and CPKC in Canada — prompted importers to shift cargo to West Coast ports. Container volume surged at Los Angeles and Long Beach, as well as in Seattle/Tacoma, boosting UP’s international intermodal traffic by 33% in the third quarter.
UP was able to handle the volume spike by tapping its capacity buffer of crews, locomotives, and well cars, Vena says. Containers spent more time on the docks, however, and UP’s average intermodal train speed fell as volume increased.
Eric Gehringer, executive vice president of operations, says he expects intermodal train speed to rebound in short order as the railroad deploys more crews and cars in the Los Angeles Basin and works with CSX and Norfolk Southern to ensure that Eastern gateways are fluid.
“Was there pressure on the system? Absolutely,” Vena said in an interview. But the entire supply chain, including steamship lines, port terminals, and shippers, worked together to move the freight without major backlogs, he says.
In the first half of the year, neither UP nor port officials were aware that there would be such a large swing in volume in the third quarter. Although Vena says the railroad and ports have good visibility on incoming volume, unexpected surges still occur. The fact that the ports and UP bent but did not break shows what the railroad and the ports of L.A. and Long Beach can handle. “It’s a heck of a success story for us,” Vena says.
UP said its safety performance improved during the quarter, but the railroad did not provide specific data on its employee injury or train accident rates.
The railroad updated its financial outlook for the remainder of the year. UP now expects fourth-quarter results to largely mirror those of the third quarter and improve on a year-over-year basis.
