Union Pacific volumes, contracts, and cost-cutting approach... (Tony Hatch - ABH Consulting)

20161212 Tonyhatch (Cropped)

Union Pacific seemed a tad more confident that it was “recovering the network” (Lance Fritz), whilst admitting they had expected both the “pace being a little quicker” and the “volume coming on sooner as the network improved” (the critical issue of the nature of “pent-up demand” and the labor/service equation). They see no irregular issue with employee attrition, unlike CSX. That H2/FY volume target faces greatly easing comparisons but starting at +1% for the first half (after a -1% Q2/22) makes it seem ... optimistic. But, they have two/thirds of their H2 volume outlook listed as “+”.

  • IM volumes down 8% but domestic up 1%, helped by one of their two big wins (despite a deterioration in IM Trip Plan Compliance over the quarter). Management expressed confidence in their having the capacity (and soon, the crews) to “on-board” (sorry) the new IMC wins. That has been an ongoing whispered question – I look forward to learning more at IANA Intermodal EXPO (as well as more on the ILWU contract and Rule AB5) after Labor Day … in Long Beach.
  • UNP also appears to have won some coal and Industrial Chems/Plastics contracts as well as auto parts from OTR; manifest/auto TPC improved each month of the quarter.
  • They suffered a 500+bps hit to OR, 380bps due to what they honestly called “core results” performance; UP saw significant increases not only of course in fuel but in compensation (7%), Purchased Services/Materials (+30%), and Equipment/Rents (+15%).  Headcount was up 2% YOY but T&E up 5%.
  • Price and Mix were up (only?) 4.25% - a sign of that rail/rail competition?
  • There was an interesting part in the webcast Q&A where UP leadership defended using temporary embargoes to steady service, and prevent deeper fluidity problems  - CSX had stated a day earlier their deep reluctance to utilize that tool; CMO Kenny Rocker noted that they have a slew of contract wins coming after embargoes.
  • Also, interesting closing commentary from Lance – essentially saying that they would not change their approach to cost-cutting, including labor, in the event of a recession. Rails have without fail been able to “flex down” faster than investor modeling in a known downturn (see 2001, 2008, 2020); and after every recovery is understood they were able to “flex” back up – until 2021. I hope upon reflection they change that answer…