Cost pressures prompt Union Pacific to reduce financial outlook

By Bill Stephens for trains.com

Railroad faces rising costs from record fuel prices, overall inflation, and congestion

Union Pacific has lowered its financial expectations for this year in light of rising fuel prices, inflation, and the impact of its sluggish operations.

It’s now unlikely that UP will reach an operating ratio of around 55% for the year, Chief Financial Officer Jennifer Hamann told an investor conference on Tuesday. UP still expects its operating ratio to improve from last year’s 57.2, however.

UP paid an average of $4 per gallon of diesel fuel in April – a record for the railroad – and fuel costs have only continued to rise since then, Hamann says. Inflation is raising UP’s other costs, as well. And the crew shortages that have bogged down UP’s network have further raised costs.

“These headwinds also pressure our incremental margins, which are now likely to be below our original forecast of mid 60%,” Hamann says.

UP still expects full-year volume growth above the rate of industrial production, Hamann says.

But due to crew shortages and related congestion, UP has been unable to fully meet strong freight demand, says Kenny Rocker, UP’s executive vice president of marketing and sales. The railroad is only handling about 70% of coal shipments that want to move from the Powder River Basin in Wyoming to power plants, for example.

Although UP in April proposed limiting the traffic of some customers as a way to reduce congestion, no shippers faced embargoes, Rocker says. Instead, UP was able to work with shippers to reduce the number of active cars on the network, he says.

For the second quarter to date, UP’s traffic is down 2% compared to last year. Bulk traffic is down 1%, industrial products are up 4%, and premium traffic – which includes intermodal and automotive business – is down 6%, due mostly to a drop in international intermodal traffic.

Hamann and Rocker spoke at the UBS Global Industrials and Transportation Conference.

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