(The following story by Stacie Hamel appeared on the Omaha World-Herald website on October 22.)
OMAHA — Union Pacific Corp. said Thursday that soaring fuel prices and high expenses from inefficient service during the third quarter reduced net income from continuing operations by 33 percent compared with last year.
The decline in earnings came in spite of record revenue.
The Omaha-based company, which operates the largest railroad in North America, reported net income from continuing operations of $202 million, or 77 cents per share, for the quarter, compared with $300 million, or $1.15 per share, in third quarter 2003. The results still topped the consensus estimate of 75 cents per share from analysts surveyed by Thomson First Call.
Net income fell 36 percent when results include income from a trucking unit that later was sold, making last year’s third-quarter total $317 million.
Revenue of $3.1 billion for the quarter ended Sept. 30 – up 4 percent from last year’s $2.95 billion – was the second quarter in a row of revenue over $3 billion and was a company record.
“One fact that stood out clearly this quarter is that Union Pacific, and the entire rail industry, is experiencing unprecedented levels of demand,” Chairman and Chief Executive Dick Davidson said. “Unfortunately, operational challenges associated with these record volumes and our resource shortages are preventing us from making the most of this increasing demand.”
The company is focused on improving and is implementing plans that will make a difference, he said.
Morgan Stanley analyst James Valentine said the quarter’s results are disappointing.
“They failed to capitalize on strong industry volumes and pricing,” Valentine told Bloomberg News. “It is amazing that in the strongest demand environment in a decade that they will expect earnings declines of 30 to 40 percent from prior peak fourth-quarter performance.”
U.P. began to show strain during third quarter 2003 from a sudden increase in demand that coincided with an unexpected number of train-crew retirements. The retirements came after improvement in federal benefits. In response, the railroad has been hiring more employees, especially conductors, and adding locomotives to handle demand.
U.P. has employed an average of 48,000 people this year, compared with 46,371 last year. The railroad’s 2004 goal is to have hired 5,450 conductors.
The cost attributed to hiring and training during the third quarter was $35 million. Service inefficiency and lower train speed cost $44 million, compared with the same period last year.
The impact of record-high diesel prices cost the company $121 million in this period over last year’s. The railroad paid an average of $1.25 per gallon in this quarter, compared with 90 cents in third quarter ’03.
Revenue in four of the railroad’s six business groups was higher this quarter, led by industrial products with a 9 percent increase and chemicals, up 8 percent.
For the first nine months of the year, Union Pacific earned $525 million, down 27 percent from $723 million a year ago. Per-share earnings were $2 a share, compared with $2.79 per share a year ago. Revenue rose 5 percent to $8.99 billion from $8.58 billion a year ago.
The outlook for the fourth quarter is per-share earnings of 65 cents to 75 cents, Davidson said. While strong demand has continued and network efficiency is continuing to improve, fuel prices also have continued to rise.
Union Pacific shares rose 32 cents to close at $61.