To regain favor with shippers, Union Pacific is attempting to improve service metrics — a goal that is within reach now that hiring efforts have been largely successful and warm-weather holidays that would have kept workers on vacation have passed, executives said during UP’s call Thursday discussing second-quarter 2022 financial results.
“What we really need to pay attention to is whether or not car velocity is improving.” Is there still extra inventory leaving the network? And are we seeing an increase in locomotive utilization and total asset utilization? Because it will essentially generate what we need to have to happen” to restore customers’ faith in UP’s service, President and CEO Lance Fritz told investors.
Crew availability is also critical to enable the network to be entirely flexible, according to Fritz. Although the terminals are “usually in pretty excellent order” and terminal dwell is “decent,” he believes that boosting UP’s over-the-road performance begins with staff availability.
Fritz vehemently denied assertions made by opponents of precision scheduled railroading (PSR) that adopting that operating style harmed UP’s service capabilities.
“Let me begin by emphasizing that PSR is not the source of our troubles in the second quarter,” he stated. “When you look at our pre-transformation to today, all of that headcount change is because we took work off the network, we run one-third fewer trains, which necessitated one-third fewer locomotives, and we also ran one-third fewer trains and maintained one-third fewer locomotives.” So we removed work from the network that didn’t need to be there because we were contacting cars more than necessary and had too many special commodities unit trains going around the network.”
Instead, the outages happened because “we ran the network tight,” Fritz explained. “And we didn’t see the stack of dangers that were in front of us, with COVID still affecting crew availability, [volume] increase on the way and routine weather events.” When you’re running tight, you don’t have a lot of time to recuperate. We got into difficulties, and inventory expanded on us, and we had to take some drastic actions to correct it. We did that in the second quarter.”
President Joe Biden’s appointment of an emergency board to investigate the ongoing labor contract dispute and make potential recommendations to unions and the broader freight rail industry “takes off the table all the anxiety and conflict of a labor force that hasn’t seen a rise in two and a half or three years.” And you put it to rest. “And then we can get busy on property deals that are really, truly important to us,” Fritz said.
Meanwhile, UP management maintained that increasing flexibility at UP’s inland terminals was the correct reaction to West Coast port congestion and efforts to blame the railroads.
“You want to make sure that those inland terminals can stay fluid,” said Eric Gehringer, UP senior vice president of operations.
“We don’t want to get to the point where we have an overwhelming number of trains holding outside of Chicago,” Gehringer said, referring to what happened last year. “And, to be clear, we haven’t had it for the entire quarter.” In Chicago, we are still in flux.”
Instead, chassis supply at West Coast ports remains a concern, including overseas chassis over which UP has no control, according to Kenny Rocker, UP senior vice president for marketing and sales. According to Rocker, UP is working with customers to see how they can get the greatest efficiency out of their own chassis.
UP revised its 2022 projection, stating that it now anticipates its full-year operating ratio to reach 58 percent, rather than the over 55 percent it predicted when it published first-quarter 2022 financial results in April.
“As we departed the [second] quarter and into the third quarter, we encountered a few headwinds that either persisted or did not abate as predicted.” So, for one thing, we had anticipated a faster speed when recovering the network. And, more crucially, we expected volume to increase sooner as the network improved,” Fritz explained.
“Restoring volume is really the major driver of increasing our operating ratio and basically shoring up the financials.”
In the second quarter of 2022, UP earned a net profit of $1.8 billion, or $2.93 per diluted share, compared to a net profit of $1.8 billion, or $2.72 per diluted share, in the second quarter of 2021.
“As expected, the Second Quarter was difficult as we curtailed carloadings and incurred expenses to regain network mobility,” Fritz said in a news statement. “We also had record high fuel prices and rising inflation, which added pressure to our total costs.” Higher fuel surcharge revenue, good core pricing, a favorable mix, and sustained train size initiatives offset cost challenges. As a result, operating revenue and income increased. Our network fluidity increased over the quarter, and we are well positioned to grow volumes in the second half of 2022 while improving our service product.”
According to UP, operating revenue increased 14 percent to $6.3 billion due to increased fuel surcharge volume, core pricing gains, and a favorable business mix, with volume, declines marginally offsetting those revenue gains.
Operating income increased by 1% to $2.5 billion, but total operating expenses increased by 25% to approximately $3.8 billion.
According to Rocker, volumes declined 1% year on year in the second quarter as growth in UP’s industrial segment was more than offset by a decline in UP’s premium segment. Efforts to increase network fluidity by lowering UP’s active freight car inventory, he claimed, also had a negative impact on UP’s three business units. Furthermore, ongoing global supply chain problems put additional strain on intermodal shipments.
According to Fritz, the operating ratio increased to 60.2 percent due to record-high fuel prices and network recovery measures. However, fuel surcharge revenue, core price growth, and a favorable business mix mitigated these constraints, according to Fritz.
