UP Revises 2Q, Full-Year 2023 Operating Ratio Forecast

UP Executive Vice President and Chief Financial Officer Jennifer L. Hamann

Union Pacific’s (UP) added labor expense this year, combined with lower business volumes and increased operating costs, “will likely result in a full-year 2023 operating ratio that exceeds 2022 levels,” according to the Class I railroad’s June 13 Securities and Exchange Commission (SEC) filing.

UP will incur a one-time pre-tax expense of around $70 million in second-quarter 2023 from the ratification of a crew staffing agreement with the International Association of Sheet Metal, Air, Rail and Transportation Workers-Transportation Division (SMART-TD)**, UP Executive Vice President and Chief Financial Officer Jennifer L. Hamann told attendees of the 2023 Wells Fargo Industrial Conference, according to the filing. This expense is slated to increase the railroad’s second-quarter operating ratio by around 120 basis points.

Additionally, a recent change in the Nebraska State income tax rate is expected to add nearly $75 million to UP’s after-tax income in second-quarter 2023, according to the filing. Hamann reaffirmed prior guidance regarding volume, price and capital allocation, the filing reported.

UP’s first-quarter 2023 operating ratio came in at 62.1%, deteriorating 270 basis points from first-quarter 2022’s 59.4%. “Falling fuel prices in the quarter positively impacted the operating ratio by 190 basis points,” the Class I said during its April 20 financial report. At that time, the railroad maintained its full-year guidance of:

• Carloads to exceed Industrial Production. According to UP, the Industrial Production forecast was -0.7%.
• Pricing dollars in excess of inflation dollars.
• Capital spending of less than 15% of revenue; a capital plan of $3.6 billion.

UP had also expected an operating ratio improvement.

For full-year 2022, UP’s operating ratio was 60.1%, deteriorating 290 basis points from full-year 2021, according to the railroad’s Jan. 24 financial report.

** SMART-TD on May 31 reported that the ratified contract provides for:

• “A $27,500 signing bonus upon the contract’s ratification.
• “Continues to require the conductor’s position as being based in the cab of the locomotive.
• “30 years of protections for brakemen/switchmen who have assignments abolished.
• “Continued use of brakemen/switchmen as needed.
• “No rules changes regarding switching between road and yard crews.
• “Additional pay for assigned road and yard service performed with a reduced crew.
• “Expanded utility position that is paid $50 per hour and has a set schedule.
• “Overtime in pool freight.”

“This agreement serves to protect the train and yard service crafts and ensures these crafts as the crafts of the future,” said SMART-TD Vice President Brent Leonard, who was one of three labor leaders participating in negotiations. “SMART-TD is the only transportation craft with agreements protecting their position now and into the future and does so without tying their position to that of another craft.”