Operating ratio at record low as UP earnings soar

Union Pacific earned second-quarter net income of $711 million, or $1.40 per diluted share, compared to $465 million, or $0.92 per diluted share, in the same quarter last year. Wall Street had expected per-share earnings of $1.21. UP shares rose 5% in morning trading Thursday.

“Beyond strong earnings growth, the real highlight was achieving a 69.4% operating ratio—our first sub-70 quarterly mark,” said Jim Young, UP chairman and CEO (pictured at left). “We demonstrated great volume leverage, efficiently handling an increase in carloadings at modest incremental cost.”

UP said its total revenue carloads grew 18% from last year’s recession levels, adding that “this is the first time in six years that all six Union Pacific business groups reported volume growth in the same quarter.”

Operating revenue increased 27% in the second quarter to $4.2 billion versus $3.3 billion in the second quarter of 2009.

Driving the increase in addition to volume growth were higher fuel cost recoveries and core pricing gains. The price of fuel rose 46% from an average of $1.57 per gallon in the second quarter of 2009 to an average of $2.29 per gallon in the second quarter of 2010.

“While the pace and direction of the economic recovery is uncertain, we expect and are prepared to handle continued volume growth on our network, both in 2010 and beyond,” Young said. “As carloadings increase, we are focused on meeting the increased expectations of customers and shareholders to move new and existing business safely, efficiently, and more profitably. We’re also planning for tomorrow, investing for growth as we deliver higher shareholder returns.”

Commented Dahlman Rose Director-Equity Researtch and Railway Age Contributing Editor Jason Seidl, “Indeed, UP is continuing to show it can take on freight at strong incremental margins. After reporting less-than-stellar pricing in 1Q10 due largely to negative intermodal pricing, that very segment helped carry core pricing in 2Q10. The company indicated that with major domestic legacy deals behind it, intermodal joined the other five groups in posting core price gains. Overall, core price improved about 5%. We still believe that 1Q10 represented the bottom of Union Pacific and overall railroad pricing. Indeed, the company said it was very positive about pricing outlook for the rest of 2010 and beyond. We are increasing our earnings estimates to reflect UP’s sound execution and a still improving freight market. We believe UP remains well positioned to benefit further from the ongoing freight recovery and still has a good degree of operating leverage to be exercised in the second half of 2010.”