UP vows to improve service, craft employees’ quality of life in 2023

To counter looming macroeconomic headwinds in 2023, Union Pacific aims to boost rail service, which will include looking at how to improve the quality of life of craft employees, according to executives speaking on UP’s fourth-quarter 2022 earnings call Tuesday.

It’s important to find a way that some craft employees, who are currently on call for a job with an unpredictable schedule, can have more predictability, UP President and CEO Lance Fritz told investors during the earnings call.

“That’s the way that the staffing for the railroad is handled,” Fritz said. “And so we’re actively in those discussions because there is a path forward to be able to create more predictability in that work for those craft professionals.”

While some union members have criticized UP’s effort to test one-person train crews, which the railroad says could give train conductors more predictable schedules because of how operations would be modified, other ways to boost predictability are in the works as well.

Those include a pilot program in Kansas, where a group of train and yard employees are working with a defined schedule instead of one that has them on call, according to Eric Gehringer, UP executive vice president of operations.

“What we’re watching for is to ensure that the actual days that we have planned for them to have off occur,” Gehringer said. “And if that translates to more availability on the days in which they’re scheduled to work, that’s the win-win solution that we’re looking for.”

UP also expects to “look at crews differently going forward” by having additional staff available even when there is an economic downturn so that the rail network is able to respond to growing demand once conditions improve, according to Fritz.

The 2023 goals, which also include productivity gains, are what UP CFO Jennifer Hamann called “a virtuous circle,” with one goal feeding into another.

“As we improve crew availability, as we improve predictability, that improves our service product and improves our ability to grow. And with that service product comes further pricing opportunities as well,” Hamann said.

UP will be watching how inflation and interest rates affect its customers and the broader economy; meanwhile, potential softness for industrial production, U.S. imports and housing starts are also possible headwinds in 2023.

While UP expects U.S. industrial production to soften in 2023, the railroad anticipates that carload volume on a full-year basis will grow, bucking that downward trend.

“We remain optimistic that we will beat industrial production with our strong focus on business development,” said Kenny Rocker, UP executive vice president for marketing and sales.

UP also plans to lean into industries where there could be growth markets, such as renewable diesel, petrochemicals, and finished vehicles and automotive parts, Rocker said.

When UP could hit its stride because of improved service is unclear, although the railroad is continuing efforts to bolster its craft employee ranks, executives said.

“We’re not putting a fine button on when exactly we declare victory. What I will say is, you look at how we’re performing coming into 2023, and the network’s fluid,” Fritz said. “We’ve still got tight spots in the network that are limiting our ability to grow and ship all the demand, like in coal and maybe to a lesser extent in rock, and we’re hiring actively in those areas that would support the network for that growth.”

Meanwhile, Fritz defended UP’s use of embargoes, saying the purpose is to control product flow and protect serving yards for customers.

By using embargoes, a railroad limits the number of cars on the rail network as a means to encourage fluidity and avoid backups. UP issued a “catastrophic embargo” in the Midwest in December that was extended to January because of severe winter weather, while the railroad had gotten flak over greatly increasing its use of congestion-related embargoes in 2022.

“If a particular customer has way more inventory in that serving yard than what they can handle or what supports their business, it can crowd out the service product for others,” Fritz said.

Pausing congestion-related embargoes enables UP to “absorb the feedback and make some additional changes in how we approach excess inventory,” he continued.

The silver lining to this exchange among UP, customers and the Surface Transportation Board about embargoes is that UP has been seeking to improve visibility for customers, according to Rocker.

“We’ve had some pretty difficult conversations with customers, but one of the positives that has come out of that is creating tech solutions for them,” Rocker said. UP has provided more visibility in terms of the number of cars on the network, release rates and what inventory is online, which customers use to inform their supply chain-related decisions, he said.

Said Fritz: “We are thinking more broadly about what is necessary to support growth in our service product, and it takes a lot of different forms.” For instance, UP’s investments in the intermodal space include technological offerings that help truckers enter and exit ramps more efficiently, which in turn helps hasten the move of boxes off the ramp, he said.

Although UP’s capital spending plan of $3.6 billion for 2023 is an increase from last year, the budget is still less than 15% of revenue.

The capital budget will include increased locomotive spending of $175 million. UP hopes to have over 1,000 modernized locomotives by the end of 2025, which will ultimately improve locomotive productivity, according to Gehringer.

UP is also investing in additional capacity at its Inland Empire terminals in Southern California and expanding its footprint in Kansas City, Missouri. The railroad will invest in additional sidings, too.

“While growth in 2023 may be challenging given the uncertainty of the economic backdrop, we will continue to make strategic capital investments in support of our long term growth objectives,” Fritz said in prepared remarks.

Q4 financial results

UP (NYSE: UNP) reported net income of $1.6 billion, or $2.67 per diluted share, for the fourth quarter of 2022, compared with $1.7 billion, or $2.66 per diluted share, for the fourth quarter of 2021.

Operating revenue rose 8% to $6.2 billion on higher fuel surcharge revenue, core pricing gains and volume growth. Total revenue carloads grew 1% year over year.

But operating expenses rose 14% to nearly $3.7 billion. Among those higher expenses were fuel, up 43% year over year to $853 million; purchased services and materials, up 18% to $633 million; and compensation and benefits, up 10% to $1.2 billion.

Operating income fell 1% to $2.4 billion.

“In the fourth quarter, we grew carloads as we continued to face challenges hiring craft professionals in critical locations and experienced the impact of extreme winter weather on our network in December,” Fritz said in a release. “As a result, revenue growth was more than offset by elevated operating expenses from operational inefficiencies and a higher inflationary environment.”

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