The railroad views ‘solid’ peak season, barring any major pandemic effects
By Joanna Marsh for freightwaves.com
Union Pacific (NYSE: UNP) is looking for opportunities to take more market share away from trucks, whether that means through investments or through its own service product, executives said during the company’s second-quarter earnings call Thursday.
“I wouldn’t be surprised if there are other investments we make that look more like the activity Loup does, where you’re providing ancillary services from the railroad, but they are primary services to a customer. And it makes us a more valuable supplier, it makes us stickier and opens up even more markets for us,” said Union Pacific (UP) President and CEO Lance Fritz during the call. Loup Logistics, a UP subsidiary, provides door-to-door intermodal shipping, transload and logistics services.
For now, UP is touting its existing services and competitive pricing, pointing to recent wins in the e-commerce and parcel space. Those arrangements with business partners from those arenas boost UP’s domestic and international intermodal prospects, according to Kenny Rocker, UP’s senior vice president for marketing and sales.
“We have aligned ourselves with a number of e-commerce winners. We’ve been able to win business in those markets. We feel very bullish about the wins. They are coming on now. We’re expecting more,” Rocker said.
UP’s efforts come amid expectations that the trucking market will remain competitive with it into the back half of 2020, especially as intermodal shipments potentially pick up during the peak season and into the winter holidays.
“When we look at the forecast, we certainly expect that truck utilization and those rates will improve monthly well into 2021, which will put us in a better position to not only win more business but get a little bit more margin on that business,” Rocker said.
Expectations for peak season
The peak season traditionally has been from August to October, with retailers getting ready for back-to-school sales and stocking inventories ahead of the winter holiday season. During this time, other commodities, such as grain, also experience an increased need for transportation services.
In recent years, industry stakeholders have been debating how much peak season still exists, but with the COVID-19 pandemic this year, there is a renewed focus on how much rail demand might grow in the second half of this year.
Although the coronavirus pandemic and communities’ responses to it could still evolve, “our volumes are really increasing each week. They’re pretty strong. All the dynamics show that we’re going to have a pretty solid peak season. … So it looks to me, barring any type of second wave, that we’re going to be in a really good position to have a really solid peak season,” Rocker said.
Operational changes at UP
The COVID-19 pandemic accelerated the pace for some operational adjustments at UP, executives said.
Those adjustments included running longer trains, which has reduced train starts and utilized fewer locomotives. They also included extending sidings to allow longer trains to run and eliminating switches and “touch points.” Around 40 projects to extend sidings to 15,000-16,000 feet are part of UP’s capital investment plan.
The outcome for customers in running trains is that it lessens network congestion, Fritz said.
“The number of trains on our network at any given time are about one-third less, which is much more than what you see in volume. And how that translates into a service product is there’s less network congestion on average anywhere you look, less meets passes, et cetera,” Fritz said. “That allows each train more free running time and it really makes the network a little easier to dispatch, and that translates into a service product.”
UP is also continuing with redesigning its operations in Chicago and Houston. Houston changes include consolidating intermodal facilities to one location and expanding switching capability and the ability to run longer trains at its Englewood Yard.
As volumes began to grow again from April lows, UP has kept some of the operational adjustments it made during the pandemic. As volumes rebound even more, the railroad now expects to maintain some of those changes it made during the height of its response to the pandemic.
“There is opportunity across the board in operations still” to improve UP’s productivity, said Jim Vena, UP’s chief operating officer. “Is it as easy as walking in like I did the first day at Pine Bluff [a UP facility in Arkansas] and say we’re shutting it down after I was here for two weeks? No. I don’t think so. But I’ve got my eye on a couple of yards that need to be tuned up. And if they don’t tune up, they’ll be gone.”
But should UP need to add more assets and workforce to match network needs, it would consider doing so, according to UP CFO Jennifer Hamann.
While UP doesn’t expect to return assets and its workforce on a one-for-one basis, “you will need to add train starts as the volume grows, and there’s people associated with that. There’s locomotives, there’s freight cars, car hire, and you’re going to burn a little more fuel,” Hamann said. “Our task, and what we feel very confident about, is that we will be able to do that in a more efficient way as the volumes come back, and we look forward to that because volume is definitely the friend of a railroad.”
UP’s net profit in the second quarter fell 28% amid a 20% decline in volumes resulting from the economic impact of the coronavirus pandemic.
Second-quarter net income totaled $1.1 billion, or $1.67 per diluted share, compared with $1.6 billion, or $2.22 per diluted share, in the second quarter of 2019.
For more on UP’s second-quarter financial results, go here.