UP touts Q3 financial performance, Unified Plan 2020 progress

(source: Progressive Railroading 10/25/2018)

By Jeff Stagl, Managing Editor

Today, Union Pacific Railroad announced its third-quarter diluted earnings per share reached $2.15, representing a 43 percent year-over-year increase and an all-time quarterly record.

In addition to sharing that encouraging financial result — as well as a few disappointing ones — during an earnings conference this morning, UP senior executives provided an update on the recent implementation of the railroad’s Unified Plan 2020, which includes the adoption of precision scheduled railroading (PSR) tenets.

Other Q3 financial results show operating revenue grew 10 percent to $5.9 billion as carloads increased 6 percent to 2.3 million units. UP logged volume increases in industrial, premium and agricultural products traffic, which more than offset declines in energy-related carloads, senior execs said. Premium (international and domestic intermodal/finished vehicle traffic) revenue soared 18 percent to $1.7 billion, industrial products revenue climbed 13 percent to $1.5 billion, agricultural products revenue rose 6 percent to $1.1 billion and energy (coal, frac sand and petroleum-related traffic) revenue inched up 1 percent to $1.2 billion.

In addition, operating income increased 9 percent to $2.3 billion and net income ballooned 33 percent to $1.6 billion. However, operating expenses rose 10 percent to $3.7 billion and the Q3 operating ratio (OR) was flat at 61.7 percent. The OR was impacted in part by costs associated with lingering network inefficiencies, said UP Chairman, President and Chief Executive Officer Lance Fritz during the conference.

“While we reported solid financial results, we did not make the service and productivity gains that we expected during the quarter. However, we are making progress implementing our new Unified Plan 2020 and we are well-positioned to drive improvement going forward,” he said.

Eliminating operational inefficiencies and boosting productivity along with service performance are the primary reasons the Class I began to implement the plan Oct. 1. The PSR principles to be adopted under Unified Plan 2020 — which best fit UP’s network — call for shifting the operational focus from moving trains to moving cars; minimizing car classification events and dwell time; employing general purpose trains by blending services; and balancing train movements to improve asset utilization, senior execs said.

UP rolled out the plan first in its Mid-America Corridor, which runs north-south between points in northern Minnesota and southern Texas, and accounts for about half of the railroad’s carload traffic. The Class I so far has made about 150 transportation plan design changes in the corridor, which has helped reduce transit time for many shippers, said Executive Vice President of Operations Tom Lischer.

In addition, the plan has helped UP remove more than 6,000 cars and 625 locomotives from service since Aug. 1 — with another 150 locomotives pegged for removal by year’s end — and reduce the train, engine and yard workforce from 15,751 to 15,401 employees, he said. In the near term, the plan is expected to help UP consolidate its operating regions from three to two; reduce the number of service units from 17 to 12; close a locomotive facility in South Morrill, Nebraska, in January; rationalize other terminals; restructure the engineering department; and further reduce the workforce.

For example, the Class I plans to cut 475 management positions and 200 contractor positions by year’s end, and further trim management personnel next year as the Unified Plan 2020 rollout continues through 2019, said EVP and Chief Financial Officer Rob Knight.

The plan so far has helped UP improve a number of key service metrics in a short time, with “much more to come as we roll it out,” said Fritz. The railroad is employing a phased approach to implementation, with the Sunset Route between Los Angeles and El Paso, Texas, pegged next for plan adoption.

Looking ahead, the plan is expected to help UP achieve several financial targets both for the remainder of this year and in 2019, said Knight, such as reducing 2018 capital expenditures by $100 million to $3.2 billion. By 2018’s end, the Class I anticipates low- to mid-single-digit volume growth and an improved OR, and by 2019’s end expects at least $500 million in productivity savings, he said.

By 2020, UP expects to reach its OR target of 60 percent and capex target of less than 15 percent of annual revenue.