Labor availability is the key issue that needs to be addressed in order to restore fluidity in the supply chain, Union Pacific CFO Jennifer Hamann said at a Stifel investor conference on Tuesday.
While UP (NYSE: UNP) is experiencing more labor stability, as seen by an uptick in hiring and other factors, the overall supply chain still needs dray drivers and warehouse workers to improve supply chain flows, according to Hamann. UP has ordered chassis to help relieve congestion but there are still boxes that are stacked, and more labor is needed to relieve those bumps, she said.
“I really feel like labor is the linchpin to this,” Hamann said.
Another issue facing the North American freight railroads this year is Canadian Pacific’s (NYSE: CP) proposed merger with Kansas City Southern (NYSE: KSU). Although UP’s business in Mexico accounts for only 10% to 11% of all business volumes, that business is still a “franchise strength” for UP, as seen through its 26% ownership of Mexican freight railroad FXE and the six access points where UP has cross-border access, according to Hamann.
As CP pursues federal approval to complete its acquisition of KCS, a merged CP-KCS is “a competitive dynamic we’re paying attention to” as UP will seek to ensure that its customers have the same competitive options, Hamann said. Of that 10% to 11% of business that UP has with Mexico, half of it involves FXE and the other half involves Kansas City Southern de Mexico, and UP will seek to ensure that business stays with UP and not move to CP, she said.
Volumes have started to pick up after the winter holidays, with bulk volumes up 9% on higher coal traffic and industrial volumes up 4% on growth in metals and minerals as well as forest products and plastics. However, a 9% decline in UP’s premium segment — which includes a 19% decline in intermodal volumes and within that a 25% decline in international intermodal volumes — is offsetting gains from UP’s other segments. Overall volumes first quarter to date are down 1% year-over-year.
Still, Hamann said, UP is “encouraged by the overall volume trend.”
As UP looks at the year ahead, the company expects a full-year operating ratio of about 55.5%, compared with 57.2% in 2021, as well as capital spending of around $3.3 billion. UP also expects full-year volume growth to exceed industrial production, according to Hamann’s presentation.
When asked whether UP’s deployment of precision scheduled railroading and pursuing company growth are goals that are at odds with each other, Hamann said they weren’t. Lower volumes can take away some of a company’s options in managing operations in terms of how to construct trains or set up traffic, but UP managed to lengthen trains at a time of declining volumes, she said.
“To be able to do some of the things we did with our initial PSR adoption … in a time of declining volumes [during the pandemic], I think actually masked some of the productivity gains we were making,” Hamann said.
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