Union Pacific (NYSE: UNP) has a number of cost-cutting measures it can deploy to counter an anticipated 25% reduction in rail volumes in the second quarter, but how that volume reduction will affect its operating ratio (OR) and its ability to translate cost-cutting into cost savings in the second quarter remains to be seen.
“It’s always easier to get productivity in a growing environment than a shrinking environment,” said Union Pacific (UP) President and CEO Lance Fritz during his company first-quarter earnings call on April 23. The company had said in January before the COVID-19 pandemic that it was expecting savings of roughly $500 million coming from productivity initiatives.
UP Chief Financial Officer Jennifer Hamann said it would be unlikely for the OR in the second quarter to improve over the second quarter of 2019 because of the anticipated 25% decline in rail volumes. UP also removed its full-year guidance, including its expectations for its full-year OR, because of the pandemic-induced uncertainty prevailing in the marketplace.
“It’s tough to keep up in terms of your cost-cutting when you have volumes come out that fast,” Hamann said. UP executives said during the company’s earnings presentation that quarter-to-date volumes are down 22% over the same period in 2019. “We are going to be very aggressive and do everything we can, but we are not going to give specific guidance relative to headcount for the second quarter or relative to the margins, but just know we’re going to pull every lever available to us.”
But the cost-cutting initiatives that it has available include reducing train starts and relying more on longer trains, employing efficiency measures at UP’s intermodal facilities and being more fluid in how UP handles railcars, according to Jim Vena, UP’s chief operating officer.
As rail volumes quickly ramped down around the start of the second quarter, UP took actions to match network capacity with demand, such as shutting down and idling five hump yards, tightening the schedules for UP’s manifest and auto trains, consolidating mechanical shops, reducing crew starts and consolidating intermodal traffic from UP’s eastern ramps to terminals at Los Angeles and Long Beach. That last action enabled longer trains to run on UP’s Sunset route, Vena said. UP also stored more railcars and locomotives and furloughed additional employees.
“I’m trying to do it in a systematic manner where we don’t impact the customer to the point where we lose business because of what we’re doing,” Vena said.
These productivity initiatives will help provide UP with cost savings, executives said, but the scale of the savings is hard to determine because of the depth and the speed of the pandemic-related volume downturn.
While executives are uncertain about the shape and the pace of the economic recovery, “from a service and efficiency perspective I am so thankful that we went through the tough process of implementing the Unified Plan 2020 [UP’s version of precision scheduled railroading] over the last 18 months,” Fritz said. “That work has put us in a position of great strength to deal with the future. When the time arrives, when COVID-19 is largely behind us, Union Pacific will be well positioned for long-term growth and excellent returns.”
As the U.S. recovers from the pandemic, UP sees its role in e-commerce as being the transporter of bulk products to the distribution site, and so UP’s role is “to have our eyes wide open to the winners of that world and align with them.”
Meanwhile, UP said its service product, coupled with its lower cost structure, enables the railroad to keep up with the trucking market, and it gives UP access into new markets.
“What is cool about having fundamentally shifted our cost structure is that it opens up more markets to us. Clearly, trucks are very competitive in a loose market like we’ve got right now,” Fritz said. “There are going to be elements of truck-competitive business that make no sense for us to pursue because somebody in the trucking world is willing to take it just to generate enough cash to survive, but our cost structure opens up a broader segment of that market to compete and win and generate an attractive return and we’re doing that.”
Earlier today, UP said its net profits for the first quarter rose 7%, with the company reaching a record OR despite lower revenues.
UP announced its first-quarter 2020 net income was $1.5 billion, or $2.15/diluted share, compared with $1.4 billion, or $1.93/diluted share, in the first quarter of 2019.
UP’s first-quarter OR was 59%, compared with 63.6% in the first quarter of 2019. Operating ratio, which is a company’s operating expenses as a percentage of its revenue, can be an indicator of a company’s financial health. A lower percentage implies improved financial health.
|Union Pacific||2020 Value||2019 Value||Y/Y Gross Change||Y/Y % Change|
|Freight revenue (in millions)||$4,880.0||$5,010.0||($130.0)||-2.6%|
|Revenue per carload||$2,516||$2,401||$115||4.8%|
|Gross ton miles (in millions)||201,297.0||210,319.0||-9,022||-4.3%|
|Revenue ton-miles (in millions)||99,683.0||106,650.0||-$6,967||-6.5%|
|Train velocity (mph)||25.4||24.6||1||3.3%|
|Dwell time (hours)||23.8||26.8||-3||-11.2%|
For more first-quarter financial results, go here.