Union Pacific (UNP)

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See all Bulls Reasons Bulls: Reasons To Buy The trucking industry is a distant second in terms of competition 100% agree The trucking industry is a distant second in terms of competition The railroad industry's main competition, the trucking industry, faces continued high labor and fuel costs. Railroads are implementing technological improvements, and are already three times as fuel-efficicent as trucks. View or Edit Reason 1 votes 100% agree "If margins are any indication, UNP is in the midst of a turn around" 0% agree "If margins are any indication, UNP is in the midst of a turn around" UNP's Unified Plan and continued technological improvements have helped UNP improve their operations ratio by 5% and operating income by 60% over the last year. View or Edit Reason 0 votes 0% agree If margins are any indication, UNP is in the midst of a turn around 0% agree If margins are any indication, UNP is in the midst of a turn around UNP's Unified Plan and continued technological improvements have helped UNP improve their operations ratio by 5% and operating income by 60% over the last year. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell UNP operating margins consistently lag peers 0% agree UNP operating margins consistently lag peers Over the last three years, UNP has had the worst operating ratio in the railroad industry. High track maintenance costs, severe weather, and service disruptions in key areas have all contributed to UNP's operational problems. View or Edit Reason 0 votes 0% agree UNP is vulnerable to strikes by its mostly unionized worked force 0% agree UNP is vulnerable to strikes by its mostly unionized worked force UNP is vulnerable to strikes or work slowdowns from the 87% of unionized employees in the company. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Good overview of the company. How does the company hedge against fuel price increases and has it... more [Dismiss] [Done] See All Suggestions

Top Contributors Michael Luddy Related Articles Burlington Northern Santa Fe (BNI) Railroads Auto Makers Chemical Industry Energy

UNP has benefited from the railroad industry's very strong pricing power as of late. The combination of a good economy, high fuel prices, and high railroad demand created this strong pricing power. Economic conditions, both nationally and internationally, affect the demand for these commodities and, in turn, UNP's revenues. While fuel prices increase operating costs for the railroads, the railroads are still about three times more fuel-efficient than their main competitors, long-haul trucks. This competitive advantage decreases demand for trucks and allows the railroads to charge higher prices due to the increased demand.

The favorable pricing environment has allowed UNP to make up for its operational troubles. UNP has posted the highest operating ratio (operating expense / operating revenue) in the industry over the last three years. UNP's largest operating expense is labor, but it has been UNP's maintenance and service issues that have been most detrimental. Eighty-seven percent of employees are unionized, making the company vulnerable to strikes or work slowdowns. Delays and disruptions from weather and operational problems affect revenues as well. UNP's profits also depend upon governmental, environmental, and pricing regulation.

[edit] Commodities

• Agriculture: Strong growth in ethanol has helped increase agriculture revenues.
• Automotive: UNP is the largest automotive carrier west of the Mississippi River and General Motors is the company's second largest customer.
• Chemicals: UNP dominates the chemical segment; 28% of chemical carloads originate from UNP.
• Energy: The Powder River Basin is the country's largest coal-mining region and UNP is in a prime location to access that region. 27% of coal carloads in the U.S. originate from UNP, which trails only Burlington Northern Santa Fe (BNI) with 31%.
• Industrial Products: A slowing housing market--and the resulting lower demand for lumber--reduced carloads in 2006 and 2007. This segment generally moves with the economy.
• Intermodal: Intermodal combines different forms of transportation to move commodities. About 60% of UNP's intermodal revenue is from international business.

[edit] Operations

Railroads are very difficult to manage. The railroads spend the majority of their capital expenditures on maintenance rather than growth. UNP faces these same issues, but has had greater difficulties than many of its peers over the past few years. Rail congestion, track damage, and problems in key intermodal and coal segments have all contributed to UNP's operational issues. In the past, acquisitions, such as Southern Pacific in 1996, caused massive service problems for UNP. Today, UNP's service and resource management have continued to lag its peers. Since the operating ratio spike in 2004, when it almost hit 90%, UNP's operating ratio has decreased. In 2007 their operating ratio fell to 79%, down from in 81.5% 2006 Still, UNP has shown a vulnerability to operational issues.

[edit] Trends and Forces

[edit] Economic Conditions

Both national and international economic conditions can affect the demand for the commodities that UNP services. A downturn in the U.S. economy may have an effect on the housing market or automobile purchases. That in turn could reduce demand for the industrial products and automotive segments, respectively. UNP is dependent on the production of its two largest customers, APL Limited and General Motors. International trade is the largest driver of intermodal revenue because the intermodal segment deals with imports and exports. Economic conditions overseas (most notably in Asia) as well as currency valuations affect international trade and UNP's revenues.

[edit] Labor

Labor is the largest operating expense for UNP. About 86% of UNP's 50,089 employees are part of a railroad union. Maintaining union-level wages, hours, and working conditions incurs certain costs for the company. The high percentage of unionized employees makes UNP especially vulnerable to strikes, work stoppages, or work slowdowns. In 2005, UNP started negotiations with the unions for new contracts. Further, liabilities and personal injury are a danger in the railroad industry. Personal injury expense totaled $203 million in 2007, although UNP has taken steps to increase safety. Personal injury expense is down $80M from 2006.

[edit] Trains vs. Trucks - Labor

Both the railroad industry and the trucking industry have high labor costs, but trucking currently faces a more difficult labor situation. Because labor turnover in the trucking industry is currently over 100%, the trucking companies must deal with huge driver shortages and incur greater labor costs. The American Trucking Association (ATA) reports that the trucking industry is short 20,000 drivers. As a result, the railroads are able to absorb the trucking industry's unmet demand. While both industries depend on labor, railroads have a competitive advantage.

[edit] Oil Prices

High oil prices have resulted in high fuel costs for UNP and the rest of railroad industry. UNP uses fuel surcharges to raise prices depending on the cost of diesel. This was most apparent in the 1st Quarter 2008 earnings, where volume was flat but earnings surged on increased pricing and fuel surcharges.^[1] This shows the insulation Union Pacific has from oil prices in the near term.

[edit] Trains vs. Trucks - Fuel Costs

The trucking industry has had to raise their prices to cover rising fuel prices. Although high fuel prices have increased costs for the railroad companies, they have also helped provide stronger pricing power. The railroads have an advantage as trains are three times more fuel-efficient than their competitors in the trucking industry.

[edit] Weather

Severe weather and natural disasters can delay or disrupt railroad operations. Damaged infrastructure increases track maintenance costs and temporarily reduces rail capacity. Railroads spend more on capital expenditure as a percentage of revenue than all other North American industries. In 2006, UNP spent $1.5 billion--almost 10% of revenues--on track maintenance. Track delays and closings disrupt damaged areas and can easily spread throughout the system. UNP's success depends partially on weather in critical regions: coal mined from the Southern Powder River Basin, for example, accounts for 70% of UNP's energy segment.

[edit] Regulation

UNP faces government regulation from the Surface Transportation Board (STB) and U.S. Department of Transportation. The railroad industry was de-regulated in 1980. Re-regulation of the railroad industry would restrict pricing flexibility and put UNP in a difficult financial situation. There is currently minimal indication that the railroad industry could become completely regulated again, but the STB has restricted the way railroads calculate fuel surcharges. UNP is also subject to environmental regulation. Like many railroads, UNP must transport hazardous materials and must deal with liabilities associated with spills, accidents, and disposal.

[edit] Competitors

UNP's main competition comes from other railroads, the long-haul trucking industry, and barge operators. Burlington Northern Santa Fe Corporation (BNI) is UNP's primary railroad competitor. Many of their tracks run parallel and they service many of the same ports. UNP is the larger of the two companies and is the only railroad that services all six gateways to Mexico. However, BNI has faced fewer operational problems than UNP. BNI's average operating ratio over the past five years is about 4% lower than UNP's. UNP created the Unified Plan in 2005 to lower their operating ratio. It is designed to increase speed, efficiency, and improve asset utilization by changing their transportation system. The plan is young and the impact has not been huge, but, since 2005, average train speed has increased 2% and average dwell time has decreased almost 13%. In addition, with help from strong pricing, UNP's operating ratio has dropped 5% over the last year.

 Union Pacific

	Select All  |  Select None Metrics Total Debt Number of Locomotives Number of Freight Cars Revenue per Car Revenue Ton Miles Net Debt to Total Capitalization Freight Revenues Fuel Cost Consumer Revenue Intermodal Revenue Freight Revenue per Thousand Ton Miles Coal Revenue Industrial Revenue Agriculture Revenue Net Income Cancel

	Select All  |  Select None Companies Union Pacific (UNP) American Railcar Industries (ARII) Canadian National Railway Company (CNI) Canadian Pacific Railway (CP) Greenbrier Companies (GBX) Guangshen Railway Company (GSH) Genesee & Wyoming (GWR) Kansas City Southern (KSU) Norfolk Southern (NSC) Portec Rail Products (PRPX) Providence and Worcester Railroad Company (PWX) FreightCar America (RAIL) Trinity Industries (TRN) Wabtec (WAB) CSX (CSX) Burlington Northern Santa Fe (BNI) Cancel

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Company	Data From	Freight Revenue per Thousand Ton Miles	Coal Revenue	Industrial Revenue	Agriculture Revenue	Net Income
Burlington Northern Santa Fe (BNI)	2007	$23.3[2]	$3.28B[2]	$3.68B[2]	$2.72B[2]	$1.83B[3]
Canadian National Railway Compan… (CNI)	2006	$36[4]	$592M[5]	$604M[5]	$905M[5]	$2.09B[6]
CSX (CSX)	2007	$40.3[7]	$2.6B[2]	Add	$786M[8]	$1.34B[2]
Norfolk Southern (NSC)	2006	$46.2[9]	$2.33B[10]	$3.14B[10]	Add	$1.48B[11]
Union Pacific (UNP)	2006	$13.9[12]	$2.95B[13]	$5.27B[13]	$2.4B[13]	$1.61B[14]

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[edit] Trains vs. Truck - Overview

The trucking industry has had to continually raise prices due to increasing labor and fuel costs. Although the railroads are generally less reliable, the increased demand due to high trucking prices has allowed the railroads to increase prices more slowly than the trucking industry. This increased pricing power helped UNP achieve record revenues and profitability in 2006. Technological improvements in the railroads have also reduced costs and are necessary if the railroad industry is to remain competitive. Continued labor difficulties in the trucking industry and high oil prices have kept the railroads' pricing power strong.

[edit] References

1. ↑ http://www.forbes.com/feeds/ap/2008/04/24/ap4931846.html
2. ↑ ^{2.0 2.1 2.2 2.3 2.4 2.5} SEC Filing
3. ↑ Google Finance
4. ↑ CNI,2006,40-F,page-20,item 6
5. ↑ ^{5.0 5.1 5.2} CNI,2006,40-F,page-AR16,item 6
6. ↑ CNI,2006,40-F,page-AR52,item 6
7. ↑ Computed from other data
8. ↑ SEC filing
9. ↑ NSC,2006,10-K,page-NA,item 1
10. ↑ ^{10.0 10.1} NSC,2006,10-K,page-NA,item 7
11. ↑ NSC,2006,10-K,page-NA,item 6
12. ↑ UNP,2006,10-K,page-28,item 6
13. ↑ ^{13.0 13.1 13.2} TRN,2006,10-K,page-20,item
14. ↑ UNP,2006,10-K,page-16,item 6