Union Pacific operational overhaul gains traction, shares rise

Union Pacific operational overhaul gains traction, shares rise

(This April 18 story corrects to show operating ratio declined, error also occurred in previous updates)

FILE PHOTO: A Union Pacific rail car is parked at a Burlington National Santa Fe (BNSF) train yard in Seattle, Washington, U.S., February 10, 2017. REUTERS/Chris Helgren

By Lisa Baertlein and Rachit Vats

(Reuters) – U.S. railroad operator Union Pacific Corp on Thursday reported a better-than-expected quarterly profit as price increases and cost controls offset the impact of severe winter weather and record flooding that damaged rails in the Midwest.

The quarter was a test for the second-largest U.S. railroad’s sweeping operational overhaul, and the results sent shares up 4.9 percent to $177.63.

Efforts to streamline operations and create surge capacity helped railway crews reroute the 50 to 60 daily trains that use the east-west main line that floodwaters severed for almost two weeks, Chief Executive Lance Fritz told Reuters.

“We’re gaining traction. … I see us coming back quickly and strongly,” Fritz said.

Net income at Union Pacific, which serves the Western two-thirds of the country, rose 6.2 percent to $1.4 billion, or $1.93 per share, in the first quarter. That topped analysts’ average forecast of $1.89, according to IBES data from Refinitiv.

Total operating revenue fell 1.7 percent to $5.4 billion. Weather and the U.S. trade war with China reduced export grain carloads, but pricing rose nearly 2.8 percent.

Expenses dropped 3.2 percent, assisted by workforce reductions and a switch to longer trains, which reduces fuel, maintenance and labor costs.

The Omaha, Nebraska-based company early this year hired former Canadian National Railway Co executive and turnaround expert Jim Vena as its chief operating officer and tasked him with overseeing its plan to lower costs and improve service and reliability.

Union Pacific’s first-quarter operating ratio – a measure of operating expenses as a percentage of revenue – declined 1 point to 63.6 percent, despite the weather disruptions. A lower ratio means more efficiency and higher profitability.

The railroad, which is working to get that key performance metric below 60 percent by 2020, said it was increasing network flexibility by reallocating investments.

For example, it paused work on its $550 million rail yard facility in Brazos, Texas, and earmarked unused 2019 capital for projects along its southwestern “Sunset” corridor. Seven rail lines converge at Brazos and the project, started in January 2018, was the largest facility investment in its 155-year history.

Transportation companies are a bellwether for business activity and investors are watching them closely as the global economy cools.

The U.S. economy is flashing warning signs as manufacturing softens and stimulus from the $1.5 billion tax-cut package ebbs.

Trade “is the thing that could tip us into a worse economy,” Fritz said.

Reporting by Rachit Vats in Bengaluru and Lisa Baertlein in Los Angeles; Editing by Dan Grebler and Peter Cooney

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