Rocky Mountain Trucking LLC

While half of the railroad unions still need to approve and ratify their tentative agreements with U.S. freight railroads, one of the larger issues that has come up during the negotiation process has been reexamining what kind of work schedule locomotive engineers and conductors should have. 

Train engineers and conductors traditionally have had a schedule that has been considered unpredictable and erratic because it depends on the railroad’s ever-changing operational needs as well as uncertainties with crew availability.

Union Pacific and others are having that discussion about work responsibilities right now with the unions, according to UP President and CEO Lance Fritz.

“We’ve committed and we’ve started and been in negotiation with some of our crafts — the unscheduled jobs, specifically — to try to find ways to get scheduled time off,” Fritz told investors during UP’s (NYSE: UNP) earnings call Thursday to discuss third-quarter 2022 results. 

“But it’s a far bigger issue that needs to be addressed on property in job design that’s underway. We think there’s a path to do that without a substantial or meaningful impact on overall headcount requirements, because what we’re trying to do is we’re trying to make availability of employees flat across the week, right, so you don’t get spikes in crew availability and layoffs. The way you do that is you make time off predictable. And we think that trade-off is feasible. We think it’s absolutely going to be happening. We don’t think there’s a large impact on employment through that.”

The railroad industry overall has relied on furloughing employees in times of lower market volumes, with the expectation that those employees would return once volumes rose again. 

But when the Class I railroads cut their ranks during the COVID-19 pandemic-induced volume trough in the spring of 2020, staffing didn’t return to the same headcount levels when volumes rebounded, causing industry stakeholders to question whether the railroads had reduced their ranks too deeply. Some stakeholders also argued that the drop in headcount levels resulted in deteriorating rail service.

If U.S. economic conditions soften in 2023, UP officials said they will be weighing the market factors that influence headcount levels, noting that there is still some uncertainty because not all the labor agreements have been ratified yet.

UP officials said the railroad would continue to use the same processes it has employed in the past to ensure UP doesn’t fall short of hiring goals, and it will look at attrition. But there are also questions that have yet to be resolved because there are still agreements out for ratification, said Eric Gehringer, UP’s executive vice president for operations. Those questions include how to adjust to requests for additional time off while ensuring adequate staffing. 

So far this year, UP has graduated 890 new employees and has an additional 518 employees currently entering who are expected to graduate by January 2023, according to Gehringer. UP has focused on adding employees to more challenged crew locations, which has resulted in improving network efficiency, he said.

Where volumes could grow in 4th quarter

Looking to the fourth quarter and 2023, UP expects volume growth in several key areas: renewable diesel, coal and automotive, according to Kenny Rocker, UP executive vice president of marketing and sales. Higher natural gas prices generate coal demand within domestic and export markets, while the improving supply of cars and vehicle inventory replenishment is driving automotive volumes, he said. 

And although demand for forest products is softening and the forecast for industrial production is decelerating, construction could “be a positive” due to strong project demand in the South, Rocker said. 

“Overall, we still foresee a favorable demand environment for the fourth quarter,” Rocker said.

UP is “closely monitoring” domestic intermodal demand amid falling spot truck rates, climbing inventories and an anticipated softening in parcels. Those market conditions have yet to be reflected in truck’s contract rates, but UP will still watch the situation and know more in early December, Rocker said. 

Meanwhile, international intermodal volume is benefiting from improved fluidity between ports and inland terminals, according to Rocker and Fritz. 

“One of the things that is encouraging to us is that we’re seeing the percentage of traffic that goes onto the West Coast and move to our inland facilities,” Rocker said, when asked about whether UP has concerns about more volumes shifting from West Coast ports to East Coast ports. “And so again, that means that less of that product is being transloaded on the West Coast. So that is a positive to us, encouraging to us.” 

Said Fritz: “We’ve taken some of the [intermodal container] box count down off of the ports. That’s approaching back to normal. We still have an issue with trying to get boxes off the inland ramps and process through warehouses. There’s a lot of inventory sitting in warehouses right now. And U.S. consumers are going to have to chew through that for us to be able to get street times and box dwell on the destination side back to normal.”

Another factor that could influence UP’s performance in the fourth quarter and into next year is inflation, officials said.

“There are a lot of moving parts. There are going to be some headwinds into next year, inflation is quite real. But as we look at rolling up a budget and starting are really at the tail end of putting our plan together, for sure, we are confident we can get pricing above inflation,” Fritz said.

UP now expects full-year carload growth of 3% between 2021 and 2022, with a full-year operating ratio of 60%, amid softening markets and more clarity on what impact the new labor agreements will have on costs, according to UP CFO Jennifer Hamann. 

OR is a financial metric that investors sometimes use to gauge the health of a company, with a lower OR implying improved financial health. 

UP said in April when releasing first-quarter 2022 earnings that the OR for 2022 would be around 55%. The railroad then revised that figure to 58% when it released second-quarter 2022 earnings in July.

“We made real progress during the quarter to increase network fluidity and better meet customer demand. … We’re continuing to take steps in the fourth quarter to better meet that demand and drive costs from the network,” Fritz said. “While the year hasn’t played out as originally planned, our volumes have outpaced our peers, demonstrating the growth mindset that we’re instilling within our organization.”

UP’s 3rd-quarter 2022 earnings results

Net profit for UP was $1.9 billion, or $3.05 per diluted share, in the third quarter of 2022, compared with net profit of $1.7 billion, or $2.57 per diluted share, in the third quarter of 2021.

The third-quarter 2022 figure includes a $114 million charge for a change to prior period accounting estimates related to new, tentative and ratified labor agreements, UP said. 

Operating revenue rose 18% to $6.6 billion in the third quarter amid higher fuel surcharge revenue, volume growth and core pricing gains, UP said.

Carloads rose 3% on higher automotive volumes, metals and minerals volumes, and industrial chemicals and plastics volumes, amid other gains.

Adjusted operating income rose 13% to $2.7 billion, and third-quarter OR was 59.9%, compared with 56.3% in the third quarter of 2021. 

“We made positive strides in the third quarter to increase network fluidity and better meet customer demand,” Fritz said in a release. “Inflationary pressures and operational inefficiencies continued to challenge us. We reported strong revenue and operating income growth in the quarter through increased fuel surcharge revenue, volume gains, and solid core pricing. As we close out 2022, we will maintain strong price discipline while improving efficiency and service to capitalize on the available demand.”

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