With rail volumes expected to improve year-over-year in the fourth quarter and into 2021, Union Pacific (NYSE:UNP) will seek to fine-tune its deployment of precision scheduled railroading (PSR) by continuing to focus on asset productivity. This includes taking measures such as lengthening trains farther and speeding up the network.
UP expects “positive year-over-year growth” in the fourth quarter. Coupled with positive volumes in the first quarter, the company expects full-year volumes to be down by around 7%.
“Locomotives are going to be way more productive. Our train length, I see 10,000 feet, OK? I see our car freight velocity up another 5% or 10%. So I think that we are just starting,” said Union Pacifc (UP) Chief Operating Officer Jim Vena during the company’s third-quarter earnings call Thursday.
UP announced earlier in the week that Vena, who joined UP in January 2019, would be moving into a senior advisory role at the start of 2021 before retiring in June.
Vena continued, “The mechanisms, the measures, the culture is all there to succeed. And I am not worried about it. And I am going to keep my Union Pacific stock. I’m not going to go out there and sell it because I’m very confident that we’re going to do the right thing.”
While productivity measures are anticipated to help UP next year, other factors could determine how much profit will arise from moving different types of commodities. How much volumes improve is one uncertainty, while another is the commodity mix.
“Productivity is going to continue. That will be a help. We haven’t nailed down that target, but it’s going to be healthy. And we’ve got plenty of initiatives moving into next year that we’ll keep a shoulder into,” Vena said.
But “mix is a real big question mark. I don’t see much reason to change our current mix experience until the industrial economy really starts recovering a little bit quicker and with more strength than we’ve seen so far post our trough in May,” Vena said. “So that’s the biggest question mark, I think, that will dictate just how much margin improvement we are able to attain next year.”
Meanwhile, efficiency measures such as consolidating intermodal operations in Chicago and improving network speed will help UP compete against its competitors, including not just Western U.S. railroad BNSF (NYSE: BRK) but also Canadian Pacific (NYSE: CP) and CN (NYSE: CNI) for businesses seeking access to the U.S. or Canadian West Coast ports, Vena said.
“The railroad is as fluid as it ever has been. We do not have a capacity issue. And in fact we are spending money to actually make it more efficient,” Vena said. In the third quarter, UP and others within the supply chain got tangled from congestion at the U.S. West Coast ports as inland customers were restocking their inventories.
Measures such as improving customer visibility at the ports and working with the ports to ensure more efficient service and moving containers out quicker will also help UP compete, he said.
UP executives also said the company has gotten more domestic and international intermodal business, including a contract win for international intermodal. UP has also grown its e-commerce business and increased its exposure to retailers in the parcel sector, executives said.
“The team has done a great job of inserting [intermodal] product into our supply chain. Whether it’s match-backs in Dallas, whether it’s reloads out of the Midwest, we’re doing everything we can to make it sticky for our customers,” said Kenny Rocker, executive vice president of marketing and sales.
“We’ve worked with the ports to set some really strong standards to get out of the port, working with Jim’s team. I talked about the technology on the API side, where we’re working with our largest international carriers so that we can have visibility [as] to when they come in. … So we’re taking a … very proactive approach to winning in those markets,” Kenny said.
Meanwhile, as Canadian Pacific and CSX (NASDAQ: CSX) shared in their third-quarter earnings call this week, UP is also developing its real estate assets.
“We’ve been assessing our land, looking at our land. I won’t go into details of where we are and how we think about it longer term, but I can tell you that we would expect to take advantage of the resources near the port,” Rocker said.
Vena pointed to UP’s work with a property developer to develop land around the Dallas intermodal terminal.
“There’s opportunities like that that we either have in the hopper or have already executed or are beginning development plans for,” Vena said.
Third-quarter financial results
In the third quarter, average train length increased by 28% to approximately 9,000 feet. UP has also completed 28 15,000-foot sidings, which allow for longer trains in both directions and will result in reducing train starts. Another eight sidings will be completed by the end of 2020.
UP also described some changes it made to its network. It curtailed the east hump at its yard in North Platte, Nebraska, so that railcars going there will now be processed at the active west hump or they will undergo flat switching. The railroad also said the network redesign of its Chicago intermodal consolidation should be finished by year’s end, while efforts are underway to consolidate the Houston intermodal facilities to one location with expanded switching capability and the ability to run longer trains.
UP also took on additional workforce reduction in its operating department and integrated intermodal operations into the transportation department, according to Vena.
UP’s net income was $1.4 billion, or $2.01 per diluted share, in the third quarter of 2020 compared with $1.6 billion, or $2.22 per diluted share, in the third quarter of 2019.
|Union Pacific||2020 Value||2019 Value||Y/Y Gross Change||Y/Y % Change|
|Freight revenue (in millions)||$4,596.0||$5,146.0||-$550.0||-10.7%|
|Carloads (000s) (includes intermodal)||2,044||2,129||-85.00||-4.0%|
|Revenue per carload||$2,248||$2,417||-$169.00||-7.0%|
|Gross ton miles (in millions)||196,998.0||215,487.0||-18,489.00||-8.6%|
|Revenue ton-miles (in millions)||97,913.0||108,107.0||-10,194.00||-9.4%|
|Train velocity (mph)||25.3||25.2||0.10||0.4%|
|Dwell time (hours)||22.8||23.6||-0.80||-3.4%|
Operating revenue fell 11% year-over-year to $4.9 billion amid a 4% decrease in revenue carloads.
But operating expenses were lower in the third quarter year-over-year, falling 12% to $2.9 billion. Meanwhile, UP’s average quarterly diesel fuel price was 35% lower, at $1.36 per gallon. Indeed, UP’s fuel expenses fell 40% to $301 million year-over-year.
The railroad eked out an all-time quarterly record operating ratio (OR) in the third quarter despite a 11% drop in operating revenue.
UP’s OR was 58.7% for the quarter, compared with 59.5% in the third quarter of 2019, amid lower fuel prices.