Union Pacific’s new CEO wants to win

As Union Pacific seeks to climb its way out of 2023’s headwinds of elevated inflation rates and higher labor costs, the ways that the Western U.S. Class I railroad — and newly installed CEO Jim Vena — expect to manage productivity in the near and longer term were of interest to Wall Street investors taking part in UP’s earnings call Thursday to discuss the railway’s third-quarter 2023 financial results.

“I know this railroad, and I understand the opportunity. To win, you need a strong management team, the right culture and a great franchise. And that’s the goal: win and be the best in the industry,” Vena said in prepared remarks.

Vena became UP’s CEO on Aug. 14. He had previously served as the railroad’s chief operating officer in 2019 and 2020.

One way that UP will seek to change is getting more decision-making input from those more attune to the railway’s day-to-day operations, according to Vena, who said that input will help the company improve rail service, use resources and assets more efficiently and keep costs manageable.

“A key early initiative of mine is to drive decision-making lower in the organization. This means reducing layers and simplifying how we work. We need to deliver value with speed. This is a cultural change to empower our people,” Vena said.

That input also includes how to improve productivity at the asset level, Vena continued.

The U.S. Bureau of Labor Statistics defines productivity as “a measure of economic performance that compares the amount of goods and services produced (output) with the amount of inputs used to produce those goods and services.”

In response to an analyst’s question, Vena said, “The way I look at it is, there’s nothing wrong with hump yards, but they have to fit into the fluidity and the touch points of how many times we touch cars and how many cars we actually have to handle.”

He added that UP needs to lower its dwell time at the yards, terminals and intermediate points, which should drive productivity gains.

“You can’t have nine levels — from the CEO to the people who actually do the work — and expect that the message is clear, the decisions are made clear and there isn’t some hiccup. … I want to drive it so that we have way less layers. And that means, with less layers, the people out in the field are empowered to make the right decision: which train to hump, which train to switch. How do we move the cars? What are we doing for customers? What are we doing for scheduling? How are we loading? Is our loading pattern right? [There are] so many things that we can do,” Vena said.

Meanwhile, actions that UP took in the third quarter to grow productivity included storing 300 locomotives, reducing the re-crew rate and growing train length, according to Eric Gehringer, UP executive vice president of operations.

When asked how much Canadian Pacific Kansas City was a threat to UP’s business, Vena cited UP’s network advantage and ability to run at higher speeds, in addition to its partnership with Ferromex, which operates in Mexico and in which UP has a 26% ownership stake.

“There’s nothing wrong with a little competition. I want to win, [CPKC President and CEO Keith Creel] wants to win,” Vena said.

While CPKC might have an advantage in origination and destination pairings, UP’s advantage is that “we’ve got this great network. We go through 23 states. … We have a 70 mile per hour railroad. We’re fast. … CPKC is going to make it difficult and we’re going to make it difficult.

“Now I don’t chase price. This is not a price discussion. It’s about a service and access to markets and how we do it. And I’ll walk away from business if somebody wants to lower their price. Go ahead, take the business, I’ll bring in a business that fits our network that makes sense. So that’s how I think of competitors, and I could have that discussion about all the other railroads.”

UP’s financial results for Q3

UP’s (NYSE: UNP) net profit for the third quarter of 2023 slipped 19% amid a 10% drop in overall revenues, the Western U.S. Class I railroad said Thursday morning.

Third-quarter 2023 net income was $1.53 billion, or $2.51 per diluted share, compared with nearly $1.9 billion, or $3.05 per diluted share, for the third quarter of 2022.

Overall operating revenue was $5.9 billion, down 10% year-over-year (y/y). Of that, freight revenue totaled $5.5 billion, which is a 9% decrease compared with the same period in 2022.

However, UP reduced operating expenses by 4% in the third quarter to $3.76 billion amid a 25% decrease in fuel expenses and a 6% decrease in compensation and benefits.

Operating income was $2.18 billion in the third quarter, down 17% y/y. Operating ratio, a metric that investors sometimes use to gauge the financial health of a company, rose from 59.9% to 63.4% A lower OR can imply improved financial health.