Inflation and higher labor costs are two concerns for Union Pacific in the second half of this year, but company executives said improved service offerings, such as a reduction in transit time for the Falcon Premium intermodal service, will help it and other railroads win volumes back from trucks.

“We need to bring new business in. … We need to cover what inflation gave us and the extra cost that we have, both from an employee base and structurally,” UP CEO Jim Vena said at Morgan Stanley’s investor conference Tuesday. “I’m comfortable that we have the mechanisms in place [to get there].” 

Vena, an industry veteran who has held leadership positions at both UP and CN, has been UP’s CEO for about a month, replacing Lance Fritz.

One way to bring in additional business is through expanded service offerings. UP (NYSE: UNP), along with Canadian railway CN (NYSE: CNI), announced Tuesday at the conference that their Eagle and Falcon Premium intermodal services have been able to shave off a day in transit time. 

Grupo Mexico’s Ferromex is also a partner in the Falcon Premium service, which provides customers shipping goods such as automotive parts, food, freight all kinds, home appliances and temperature-controlled products with access to Canada, Mexico and the U.S. The three railways have interchange points in Mexico, Chicago, major West Coast cities and such U.S. cities east of the Mississippi River as Detroit and Louisville, Kentucky. 

In announcing the reduction in transit time, UP noted that the services run seven days a week between GMXT terminals in Mexico — Monterrey, Nuevo Leon, and Silao, Guanajuato — and Texas at UP’s interchange with GMXT at Eagle Pass and UP’s Port Laredo intermodal terminal. 

Customers can also use the UP from Texas to Chicago, where shipments then connect to CN’s line to connect to all points in Canada. 

“To take 24 hours on a service that runs from Monterrey, Mexico, up to Chicago is a big deal. It really is — people that want speed, people that want reliability,” Vena said.

“So, we want to leverage that network,” he continued. “[But] it’s more than just that. It’s not the one lane. … Do you want to go to Seattle? Do you want to go to Portland? Do you want to go to the Bay Area? Do you want to go to California?” 

Shaving off one day of transit time for the Falcon Premium intermodal service could bode well for UP and CN’s customers, executives said. This is especially so as UP is facing a number of third-quarter headwinds that make year-over-year comparisons “tough,” according to UP CFO Jennifer Hamann.

She said those headwinds include Inflationary pressures, new sick leave agreements that are expected to cost around $50 million in the back half of 2023, the implementation of new work-rest agreements and higher purchased services and fuel costs.

“Normally, you’d see some seasonal growth from the second quarter to the third quarter, and that just hasn’t materialized here in 2023. Our volumes are flattish going from Q2 to Q3, and if you look on a year-over-year basis, we’re down about 3%, so continued softness in the transportation demand side of the equation,” Hamann said.

But despite those headwinds, car velocity — a key metric that reflects asset utilization — is higher, reaching as high as 200 miles per day, according to Vena. 

Vena also discussed his views on operating ratio, a metric that investors sometimes use to gauge the financial health of a company. OR is a term that the freight rail industry has avoided mentioning lately because of its association with precision scheduled railroading (PSR), which itself has garnered negative connotations in the broader public. PSR was a tool that the Class I railroads used to streamline operations and cut costs, but some have argued that PSR was a way to reduce head count levels in order to cut costs.

But Vena said OR improvements merely reflect the initiatives that a railroad has undertaken successfully to improve service and make operations more efficient.

“I’m good talking about OR. That’s a good metric that just sort of tells you where the heck your railroad is. I think we can be the best margin railroad in North America. My story hasn’t changed from the last time I was here. Nothing changed and we delivered good OR before and we’re going to get there [again],” Vena said.

UP has gotten flak recently from the rail unions and Federal Railroad Administration Administrator Amit Bose over recent furloughs of 94 craft employees. Bose also raised concerns last week over whether the furloughs were having any impact on UP’s safety programs. UP has said the furloughs occurred because of lower rail volumes.

Vena didn’t mention the furloughs in his responses to questions fielded at the investor conference, but he stressed that safety is a core goal of the company. 

“I’ll promise you this. We’re going to be the best. We’re going to have the best margin. We’re going to have the best service and we’re going to have the best safety record. And if we do that, customers will want to come with us. They’ll see what we can do and we’ll win,” Vena said.

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