Speedier Trains Drive Union Pacific to Record Efficiency

  • CEO sees velocity rising after topping 25 mph in quarter
  • Operating ratio at 60.3 percent is railroad's best ever

Union Pacific Corp. is getting service back on track after last year’s harsh weather and a surge in crude-by-rail slowed trains, and that’s helping drive record efficiency.

Average train speed topped 25 miles per hour (40 kilometers per hour) in the third quarter. That’s the fastest time since the end of 2013. The increased speed, along with cost cuts and higher prices, lead to a 2 percentage-point improvement in the operating ratio, a measure of expenses compared with sales, to 60.3 percent.

“We have room to improve off what we reported in the third quarter and I anticipate we will,” Chief Executive Officer Lance Fritz said in an interview.

Fritz is driving service higher while furloughing 2,700 workers and parking 950 trains in an effort to cope with carloads that dropped 6.3 percent in the third quarter from a year earlier. Service is key for the railroad to raise prices and win cargo from trucks. Core pricing rose 3.5 percent in the quarter, up a percentage point from a year ago.

“The beat was driven by solid cost management,” said Robert Salmon, an analyst with Deutsche Bank AG, in a note. The company “leveraged strong productivity gains as it right-sized headcount and improved network velocity.”

Shares Rise

Union Pacific gained 3.9 percent, the most in almost two months, to $97.01 at the close in New York.

The efficiency gains helped cushion a 10 percent revenue drop to $5.56 billion, which trailed the average estimate of $5.64 billion. Earnings of $1.50 a share beat the $1.43 average of 26 analysts’ projections compiled by Bloomberg.

Slumping demand for coal, crude oil and metals has the company heading for its first annual drop in sales since the recession in 2009. Quarterly U.S. rail-shipment volumes by 1.6 percent, with the biggest decline coming at Union Pacific, according to Association of American Railroads data. Union Pacific also lost market share to BNSF Railway Co. taken a year earlier while BNSF struggled with service.

Bright Spot

One of the few bright spots was shipments of autos, where the four largest U.S. railroads posted gains. The decline in coal cargo has hurt railroads the most because it makes up about 19 percent of rail traffic and fetches among the highest prices per carload. Coal isn’t poised for a comeback because of low prices and environmental regulations have prodded utilities to switch to cleaner-burning natural gas.

Union Pacific said it would reduce capital expenditures in 2016 from $4.2 billion this year, without specifying an amount. The company also will increase efficiency by running longer trains and turning around cars quicker in terminals.

Since the end of the third quarter, train speeds have risen to more than 26 miles per hour, matching a peak in 2012, and the railroad at least should be able to maintain that, Fritz said.

Union Pacific’s stock has dropped 19 percent this year, pointing toward the first annual decline since 2008. The shares reflect concern that manufacturing weakness will drag on rail cargo, said Robert W. Baird & Co. analyst Ben Hartford. U.S. industrial production fell in August and September as oil investment drops and the strong dollar crimps exports.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE