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Union Pacific’s outlook for 2023 doesn’t include a recession

First-quarter net income flat year over year as higher costs eat away at revenue gains

Union Pacific released first-quarter 2023 results Thursday. (Photo: Jim Allen/FreightWaves)

Union Pacific sees numerous macroeconomic headwinds in 2023. A recession is not among them, officials said during the railroad’s first-quarter 2023 earnings call.

“We do not have planned in [our guidance] a recession. A recession would be a problem for us,” UP President and CEO Lance Fritz said during the Thursday call.

If the industrial economy continues to behave as it has been and if the destocking of inventory persists in the first half of the year, these conditions could help prevent a recession as well as support UP’s earnings projections for 2023. Consumers also need to not retreat from their recent spending habits, according to Fritz.

Indeed, UP (NYSE: UNP) said in its earnings release Thursday that it expects carload volumes to exceed industrial production, and its current industrial production forecast is a 0.7% decline between 2022 and 2023.

“As our service product is improving, we’re putting more assets into play to move more carloads, and that’s giving us greater flexibility to move those assets around to hit the markets that are available to us,” said CFO Jennifer Hamann. “We feel quite confident that we will be able to reach that goal as it relates to volumes and the rest of our full-year guidance.”

While some segments and commodities, such as grain and intermodal, are experiencing weaker markets in the near term, UP is finding opportunities in transporting goods such as biofuels and renewable diesel, metals and minerals, and automotive vehicles and parts, according to Kenny Rocker, executive vice president for marketing and sales. 

“We are facing economic uncertainty and a tough price environment in a few of our markets … [but] our diverse portfolio allows us to maintain our pricing guidance,” Rocker said. “To capture more demand, we’re working closely with Eric [Gehringer, UP executive vice president of operations] and his team to be agile and have resources available in locations where we need them.” 

UP grows head count, responds to potential regulatory challenges

Given uncertainties with how rail volumes might grow in the second half of the year, UP will consider tweaking and adjusting its hiring pipeline accordingly, Fritz said. The company expects attrition in 2023 to be about 10% in its train and yard workforce, which is typical, he said.

UP currently has around 1,000 employees in training, approximately 500 more than at the same time last year. 

“The hiring pipeline is full, but more importantly, we’ve been filling our classes everywhere,” which is different from last year, when there were more challenges to finding good candidates, according to Fritz. 

With rail safety still a hot topic following recent derailments, UP said it has been deploying technology such as its Precision Train Builder initiative to help prevent derailments, according to Gehringer.

UP has also installed additional wayside detectors to its network of nearly 7,000 detectors, and it has enhanced standards for how to use and share critical data, Gehringer said. 

“In engaging the legislators in D.C., we help them understand what would actually move the ball in terms of where regulatory efforts would make a difference and where it wouldn’t,” Fritz said. While the Federal Railroad Administration can help address issues related to wayside detection, there is “zero corollary” between train length and train derailments, while the redeployment of conductors to a ground-based role “has no impact on safety around the world empirically,” he said. 

Meanwhile, since the Surface Transportation Board approved the merger between Canadian Pacific and Kansas City Southern in March and no longer has to deliberate on it, the board’s attention is expected to turn to other issues. 

Other proceedings before STB that UP is monitoring include those related to setting alternative mechanisms to address rate disputes and reciprocal switching, which is when a shipper has access to one freight railroad but seeks access to a nearby competing freight railroad to cultivate a competitive pricing environment.

UP has been interacting with STB “virtually every day” on service issues, Fritz said. He noted that UP’s use of embargoes has fallen by 65% year to date and by 75% in the past two months. 

STB had chided UP for what it considered excessive use of embargoes as a means to relieve congestion.

“The overall industry, and certainly Union Pacific, is in a place where our service product is not prompting more scrutiny” from customers, Fritz said.

UP’s Q1 2023 results

Bad winter weather contributed to UP’s performance in the first quarter, officials said.

“The quarter had a real impact on our ability to capture demand, especially within our coal business, as well as added cost to the network. Through those events, our service products showed greater and greater resiliency, quickly rebounding each time as we were better positioned with crew resources to support our customers,” Fritz said during the earnings call. 

Net profit for the first quarter was $1.6 billion, or $2.67 per diluted share, compared with $1.6 billion, or $2.57 per diluted share, in the first quarter of 2022. 

First-quarter results include $107 million in other income from a one-time real estate transaction, UP said.

“In addition to weather issues, higher inflation reduced UP’s operating income and more than offset record first-quarter operating revenue,” Fritz said in the release.

Operating revenue grew 3% to $6.1 billion on higher fuel surcharge revenue and core pricing gains but was offset by a negative business mix and volume declines, UP said. Indeed, total revenue carloads fell 1%, while operating ratio — a metric that investors sometimes use to gauge a company’s financial health — worsened to 62.1% from 59.4%.

Expenses grew 8% to nearly $3.8 billion amid higher fuel costs. Operating income fell 3% to $2.3 billion year over year.

For the year, UP expects capital expenditures to total $3.6 billion, which is less than 15% of revenue.

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  1. Steve H

    As a UP employee we were given the layoff speech yesterday… with being told we are being targeted for a lay-off. Lance Fritz is being forced out and Jim Vena is the one who put Union Pacific on the road to Precision Scheduled Railroading. Vena caused the higher operation costs, massive cuts to the work force and is the reason why UP has has such a hard time finding candidates to fill the vacated spots since 2018 lay-offs. He also promised this with CSX and CN railroads. Sacrifice workers)some only on the job for 30 days), to add revenue only to cost the company more money in the long term. I guess it is true that “Labor does not contribute to profits” as the EPB was told by lawyers during the contract negotiations when there was a rail strike possibility just a few months ago. If UP thinks they have a hard time finding workers after the 2018-19 layoffs… they will have even harder times finding workers when they try to find them again in 3 years.

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Joanna Marsh

Joanna is a Washington, DC-based writer covering the freight railroad industry. She has worked for Argus Media as a contributing reporter for Argus Rail Business and as a market reporter for Argus Coal Daily.