Supply chain disruptions reduce Union Pacific intermodal volumes

Extended chassis dwell times and a shortage of truck drivers dampened Union Pacific intermodal traffic in the third quarter, but the railroad hopes volumes rebound once the disruption subsides and consumer activity continues. will resume after the pandemic, executives said during UP’s third-quarter earnings call.

“There are some very nice markers that tell us that the economy is in a fairly solid position. And maybe we’ll stay there for a while, ”President and CEO Lance Fritz said on Thursday’s call. “There is a lot of money in deposit accounts that people are sitting on. And this is dry powder that has yet to be rolled out in expenses. As long as consumers keep spending on things, it’s really good for the goods economy, which of course is the part of the economy that we participate in.

Fritz continued: “[Once] the COVID pandemic is under control and [we] getting continued signs of normalcy… consumers will be spending that money and the low inventory-to-sales ratio will result in a need for continued storage. … Certainly, as we head into 2022, it looks like a solid environment. “

Reducing supply chain disruptions, Fritz said, means paying more attention to ensuring an adequate workforce among truck drivers, in warehouses and distribution centers, as well as in ports.

“I believe the Biden administration has essentially identified the increase in throughput capacity and capacity, and understands the need to help put the workforce available in these jobs and make more of the workforce. of labor available for jobs. … If we could snap our fingers on the back end, we would love to see more truck and warehouse distribution capacity. This is the first thing we would like to see. I think that would fundamentally change the time spent on the road for the chassis and gearboxes, ”said Fritz.

UP (NYSE: UNP) intermodal volumes in the third quarter were down 6% year-on-year to 809,000 units, although intermodal revenues increased 8% to $ 1.15 billion. UP attributed the drop in volume to the tight barrel market and lack of barrel capacity to support the entire supply chain.

To mitigate supply chain disruptions inland, the railroad used its previously unused Global III facility near Chicago, and it placed 5,000 cars strategically across the network, according to Eric. Gehringer, Executive Vice President of Operations. UP has also extended the hours of operation of some ramps and changed the hours of operation of the ICTF in Los Angeles to operate 24 hours a day, Gehringer said.

“We can take the volume. We can manage the volume efficiently, [but] we need the back end of the supply chain with warehouse capacity, warehouse workforce, trucking capacity and trucking workforce to be there to meet this call, ”he said.

As supply chain issues ease, opportunities to provide customers with visibility into network flows should be a priority for UP and the industry at large, said Fritz.

The railway should “keep its eyes open for opportunities to be fundamentally better for customers.” The first step has a lot to do with the transparency and visibility of the existing supply chain between the partners, ”said Fritz. “We’re working really hard in this space with every one of the supply chain partners we have, whether it’s a technology platform that we can all use to see KPIs and the current state of. each, or something more. “

Third Quarter Financial Results

Despite global and national supply chain challenges, UP achieved an operating ratio (OR) of 56.3%, a third quarter record and up from an OR of 55, 1% in the second quarter of 2021.

Investors sometimes use OR to assess the financial health of a company, with a lower OR implying better health.

UP’s third quarter net income was $ 1.7 billion, or $ 2.57 per diluted share, compared with $ 1.4 billion, or $ 2.01 per diluted share, in the third quarter. quarter 2020.

“The Union Pacific team successfully overcame global supply chain disruptions, a major bridge failure and additional weather events to produce strong quarterly revenue growth and financial results,” Fritz said in a statement. “During the quarter, the team achieved strong base price gains, leveraged business development to produce a positive business mix and generated productivity to offset stable volume. We also set a quarterly record for fuel consumption rates as we continue to move towards our goal of reducing our absolute greenhouse gas emissions. “

Although third quarter volumes were flat year over year, freight revenue increased 12% to $ 5.17 million thanks to “higher fuel surcharges, strong price gains and a positive mix, ”said Kenny Rocker, executive vice president of marketing and sales.

“Gains in our bulk and industrial segments were driven by market strength and our business development efforts. These gains were offset by declines in our high-end business group as our served markets continue to be affected by semiconductor chip shortages and global supply chain disruptions, ”said Rocker. .

Operating expenses increased 9% to $ 3.13 million, due to an 81% increase in fuel expenses.

Meanwhile, wildfires and other weather events have strained the operations of UP’s network, with quarterly freight car speeds falling 13% to 195 daily miles per car, said UP.

UP maintained its target of 55% RO for 2022, although it now expects volume growth closer to 5% for 2021, down from the previous forecast of 7%.

“Industrial volumes remain constant and strong in many sectors such as forest products, metals and plastics. We are therefore optimistic on several fronts, ”said CFO Jennifer Hamann. “But as you also know, headwinds in automotive and intermodal persist. Global supply chain disruptions, semiconductor shortages and the added pressure with international intermodal volumes… continue to constrain our premium volumes. ”

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