Union Pacific Running Well

Union Pacific photo

Since the early 2022 Service Crisis, we’ve seen the U.S. railroads, one-by-one, reach a point where service is arguably fully restored, at least to where it was prior. CSX was quick to rebound in late 2022, BNSF made good progress over the first half 2023 and reached a good operating state by late summer, and now we can declare Union Pacific running well and in good shape.

After some fairly stagnant operating metrics in the first half of 2023, followed by a tough summer and then Tropical Storm Hilary taking out a bridge in southern California in late August, we saw a visible step-up in UP’s operating performance in September and October. Over those two months, terminal dwell came down 3.4% sequentially, the proportion of the car fleet sitting idle for 48 hours or more fell from 1.4% to 1.1%, manifest on-time performance improved from 72% to 78%, intermodal on-time performance rallied from 82% to 90%, total car-miles per day improved from 196 to 224, and private car-miles per day went from 157 to 164.

In November, the icing went on the cake in the form of better network velocity, plus extended gains in some of these metrics. UP now has a good operating story to tell, with some of these metrics at or near multi-year highs.

Is there a Jim Vena effect here, or would this final restoration in service and efficiency have happened at the same pace regardless? We don’t know and don’t really care. As long as UP is running well, we’re happy. Congrats to Eric Gehringer and team. What does it mean for investors?

For the first time since 2020, in Q4 UP is likely to have higher volumes YoY (low single-digits) and materially better operating performance. Normally this would be very positive, but we haven’t yet lapped the big labor cost increases from the late 2022 industry labor deal, so earnings expectations still need to be tempered.

What’s more important, in our view, is the fact that the network is now in a state where it can process higher macro-driven volumes at high incremental margins. Clearly, we don’t know when the rebound in freight demand will occur, and—just like any of the railroads—there’s a question mark whether UP can handle higher loads while still maintaining acceptable operating efficiency and on-time performance. But time is now on UP’s side as it presumably strives to enhance resiliency before the network is invariably tested.