To bring Union Pacific back to favored status among shippers, the company is seeking to improve service metrics — an achievable goal since hiring efforts have been largely successful and warm-weather holidays that would keep 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, are we seeing car velocity improve? Are we seeing excess inventory continue to exit the network? And are we seeing our locomotive utilization and overall utilization of our assets improve? Because that’ll generate basically what we need to have happen” to restore customers’ faith in UP’s service, President and CEO Lance Fritz told investors.
Crew availability is also important to enabling the network to be completely fluid, Fritz said. Although the terminals are “in generally pretty good shape” and terminal dwell is “good,” improving UP’s over-the-road performance starts with crew availability, he said.
Fritz strongly disputed claims by detractors of precision scheduled railroading (PSR) that adopting that operating model affected UP’s service capabilities.
“Let me start first by saying emphatically that PSR is not the cause of our problems in the second quarter,” he said. “When you look at our pre-transformation to today, all of that head count change is because we took work out of the network, we run one-third fewer trains, which required one-third fewer locomotives and also one-third fewer people running the trains and maintaining the locomotives. So, we took work out of the network that didn’t need to be there because we were touching cars more than we needed to and we had too many special commodity unit trains running around the network.”
Instead, the service disruptions occurred because “we ran the network tight,” Fritz continued. “And we did not recognize the stack up of risks that were in front of us, with COVID continuing to impact crew availability, [volume] growth coming on and normal weather events. When you run tight, you just don’t have a lot of opportunity to recover quickly. We got into trouble and inventory grew on us, and we had to take some pretty significant measures to fix that. And we did in the second quarter.”
The appointment of an emergency board by President Joe Biden to look at the ongoing labor contract dispute and offer potential recommendations to the 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 raise in two-and-a-half or three years. And you put that to bed. And then we can get busy on deals that we care about on property, which are really, really important to us,” Fritz said.
Meanwhile, UP executives said prioritizing fluidity at UP’s inland terminals has been the proper response to the congestion at the West Coast ports and efforts to place that blame on the railroads.
“What you want to make sure you do is ensure that those inland terminals can remain fluid,” said Eric Gehringer, UP executive vice president of operations.
“We don’t want to get to the point where we’ve got an excessive number of trains holding outside of Chicago,” which is what happened last year, Gehringer said. “And to be clear, for this entire quarter, we haven’t had that. We remain fluid in Chicago.”
Instead, chassis availability continues to be an issue at the West Coast ports, including international chassis, which UP has no control over, according to Kenny Rocker, UP executive vice president for marketing and sales. UP is working with customers to see how they can get the most efficiency out of their own chassis, Rocker said.
UP updated its 2022 guidance, saying now that it expects its full-year operating ratio to be 58% instead of its guidance of over 55%, given when UP announced first-quarter 2022 financial results in April.
“As we exited the [second] quarter and came to the third quarter, there’s a few headwinds that either continued or didn’t abate as we expected. So, one is, while we were recovering the network, we had anticipated the pace being a little quicker. And more importantly, we had anticipated volume coming on sooner as the network improved,” Fritz said.
“And getting the volume back is really the primary driver of improving our operating ratio and really shoring up the financials.”
Q2 2022 financial results
UP posted a net profit of $1.8 billion, or $2.93 per diluted share, in the second quarter of 2022, compared with net profit of $1.8 billion, or $2.72 per diluted share, in the second quarter of 2021.
“As anticipated, the Second Quarter was a tough one as we limited carloadings and increased expenses to recover network fluidity,” Fritz said in a news release. “We also experienced record high fuel prices and increasing inflation, adding pressure to our total costs. Offsetting the cost pressures were higher fuel surcharge revenue, solid core pricing, a positive mix, and continued train size initiatives. The result was operating revenue and income growth. Our network fluidity improved through the quarter, and we are positioned to grow volumes in the back half of 2022 while continuing to improve our service product.”
Operating revenue rose 14% to $6.3 billion amid higher fuel surcharge volume, core pricing gains and a positive business mix, UP said, with volume declines slightly offsetting those revenue gains.
Operating income grew 1% to $2.5 billion, while total operating expenses rose 25% to nearly $3.8 billion.
Volumes in the second quarter fell 1% year over year as growth in UP’s industrial segment was more than offset by a decline in UP’s premium segment, according to Rocker. Efforts to improve network fluidity by reducing UP’s active freight car inventory also negatively impacted UP’s three business groups, he said. Furthermore, continued global supply chain disruptions put pressure on intermodal volumes.
Operating ratio rose to 60.2% on record-high fuel prices and network recovery efforts, according to Fritz. But fuel surcharge revenue, core pricing gains and a positive business mix offset these pressures, Fritz said.
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