After tumultuous quarter, Union Pacific works to adjust network

Reuters News
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Posted: Apr 23, 2015 12:54 PM

By Nick Carey

CHICAGO (Reuters) - Union Pacific Corp is scrambling to cope with opposing trends across its network after a drop in freight volumes in the first quarter, the No. 1 U.S. railroad's top executive said on Thursday.

Coal demand fell 5 percent in the quarter from a year earlier as utilities took advantage of low prices to burn natural gas instead. Overall freight volumes were down 2 percent, and the company reported a lower-than-expected profit on Thursday.

Chief Executive Officer Lance Fritz told Reuters the railroad had struggled to deal efficiently with the "abrupt" fall in coal volumes.

All had been rosy for Union Pacific just months earlier, in the fourth quarter. Overall freight volumes rose 6 percent, and coal, its second-largest business line, increased 9 percent as demand soared and utilities pushed to increase inventories ahead of the winter.

A similar drop-off in coal has affected other railroads - CSX Corp, Norfolk Southern Corp and Kansas City Southern. CSX and Norfolk Southern also complained that a strong dollar, which makes U.S. goods less competitive in overseas markets, had affected coal exports.

Fritz said the currency situation affected some of the company's businesses, but the labor dispute at West Coast ports masked the true extent of dollar's impact.

The dispute brought flows of intermodal freight to a virtual standstill late in the quarter.

"We expected there would be a slowdown, but we did not anticipate volumes to go to near-zero," Fritz said.

Intermodal, Union Pacific's largest business line, uses standardized containers filled with consumer goods that can be hauled by ship, train and truck.

Fritz said the railroad found it hard to adjust quickly to the changes in demand. It expects coal shipments to be down by a mid single-digit percentage rate in 2015, but now that the West Coast dispute is over, intermodal consumer goods shipments are picking up.

"It's hard to put a button on (adjusting the network)," Fritz said, "but we will continue to improve throughout the second quarter."

Analysts on Thursday said they were confident the railroad would get its network running more efficiently.

"We expect Union Pacific to make adjustments to its network to preserve pricing," Jim Corridore of S&P Capital IQ wrote in a research note, "and we see improvement in volumes as we move through the year."

(Reporting by Nick Carey; Editing by Lisa Von Ahn)


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