(The following report by Stacie Hamel appeared on the Omaha World-Herald website on June 10.)
OMAHA — When Union Pacific Corp. announced Wednesday that second-quarter earnings will be lower than expected, Chairman and Chief Executive Dick Davidson again declined to estimate when rail service would run smoothly.
“The timing of the service recovery is still difficult to predict, but we remain absolutely focused on putting these issues behind us so that we can take better advantage of our franchise strength and the unprecedented demand for rail service expected in the years ahead,” Davidson said.
Davidson gave a similar answer last month when he faced unhappy shippers at a forum in San Francisco.
Analysts at J.P. Morgan Chase weren’t reticent about predicting that congestion on U.P.’s 23-state system – the largest in North America – will last into 2005 and, in fact, might grow worse in the meantime.
“We do not expect an improvement in operations until early 2005,” analysts stated in a report issued Wednesday in response to U.P.’s announcement.
U.P. said Wednesday that second-quarter earnings will suffer from the expense of adding train crews and equipment to cut congestion. Earnings were estimated in the lower-than-expected range of 60 cents to 65 cents per share.
High fuel prices also added to increased operating expenses, the company said.
The earnings estimate is less than the $1.05 per share from continuing operations in the second quarter of 2003 and the 96 cents per share forecast for second quarter 2004 in a Thomson Financial analyst survey.
U.P. will announce results July 22 for the period ending June 30.
The company has been trying to recover from service delays and crew shortages amid heavy shipping demand.
Demand is expected to soar this fall with the start of the peak shipping season. The J.P. Morgan analysts said U.P. hasn’t hired enough of the 4,000 crew members it set as a goal, which will hamper its ability to handle the extra freight, the report said.
“We expect a volume surge during the fall peak season to result in renewed widespread service problems. We thus do not expect a sustained and material improvement in service levels” until late this year or early 2005, the report says.
U.P. said it expects 3,400 conductors to have graduated from training by the end of the third quarter. It also is adding locomotives “almost daily.”
J.P. Morgan and Smith Barney analysts lowered their earnings forecasts for U.P. for the remainder of 2004 and for 2005. Smith Barney also lowered a 2006 estimate.
Smith Barney analysts estimated Wednesday in a published report that it could be mid-2005 before U.P.’s average train speed reaches the highly fluid point of 24 mph. Average train speed is a primary performance measure for railroads.
U.P.’s average speed was 21.2 mph in April and May, 11 percent below second quarter 2003 and 3 percent below the first quarter of this year. Average speed increased to 21.8 mph during the first week of June.
“Average train speeds will ebb and flow, as opposed to achieving consistent improvement” because of the network nature of a railroad, the Smith Barney report said. “In other words, any recovery (or degradation) in average train speeds, should occur gradually over time. . . . We think it easily could take till mid-2005 or longer to reach these levels again.”
U.P.’s announcement marked the second quarter in a row the company has made an early announcement on earnings. First-quarter earnings were 63 cents per share, compared with an average analysts’ estimate of 79 cents.
The company is recovering some fuel costs through surcharges to shippers, but those haven’t kept up with fuel price increases. Diesel prices are expected to average about $1.15 per gallon in the second quarter, a year-over-year increase of more than 30 percent, or 27 cents per share.
U.P. stock fell $1.21 to $58.78 Wednesday on the New York Stock Exchange.