By Betsy Morris And Laura Stevens
Union Pacific Corp. Chief Executive Jack Koraleski told analysts
Thursday that congestion at West Coast ports is hurting the
railroad's first-quarter volumes and that the railroad is making
preparations in case a labor dispute results in the ports shutting
down.
"In the event of a total shutdown, what we would do is we would
put an embargo in place and we would no longer accept freight
destined for those ports," Mr. Koraleski said in an interview after
the earnings call. "In other words, whoever has possession of that
container at that point in time would just have to keep it."
Even the current cargo slowdown is a big problem for a railroad.
If a railroad doesn't slow its pace, it risks having too many
trains clogging the tracks, as they wait to get into the ports, and
tying up the rest of its system.
For that reason, "we have tailored back our service to reflect
the volume," Mr. Koraleski said in the interview. "We have parked
equipment in strategic locations. We have been in very close
contact with our customers."
The Omaha, Neb.-based railroad Thursday posted a 22% increase in
fourth-quarter earnings, reflecting volume increases in all six of
its business groups. But the situation at the ports began to really
hurt it during the quarter.
During that period, the company's international intermodal
volumes rose only 2% compared with its domestic intermodal
business, which was up about 10%. The situation at the West Coast
ports, along with the outlook for crude oil prices, are a couple of
"uncertainties on the horizon," the chief executive said.
This month, federal mediators were brought in to help with labor
talks at the ports, a situation that has become a nail-biter for
retailers, manufacturers, importers and now railroads. Contract
talks between the International Longshore and Warehouse Union,
representing workers, and the Pacific Maritime Association,
representing port employers, began in May. As the dispute has worn
on, the congestion on the West Coast has worsened, shippers say,
particularly at the ports of Los Angeles and Long Beach, which
handle about 40% of containerized freight for the nation.
The port problems are beginning to have a wider impact. Last
month, FedEx Chief Executive Fred Smith told analysts he believed
"the slowdown in the West Coast ports has been a much bigger deal
than most people think" and predicted that would show up when
retailers report their fourth-quarter results. Earlier this month,
an Institute for Supply Management report indicated that the labor
disputes and slowed traffic through the West Coast ports are
affecting inventories and supplier deliveries.
In the latest quarter, Union Pacific's total revenue carloads,
or volume, improved 6%, led by industrial products, which climbed
10%, and coal, which grew 9%. Intermodal volume increased 6%.
Analysts have been expecting nearly all freight-rail companies
to post strong results despite a steep decline in prices for crude
oil, which is one of the fastest-growing parts of the rail
business.
While shipping crude oil isn't a big part of Union Pacific's
business, the railroad said it expects crude oil to be "a headwind"
throughout the year. "Ultimately, if oil prices remain at current
levels it will impact our crude oil shipments," said Eric Butler,
executive vice president marketing and sales.
The railroad said the impact on shipments of sand used in
hydraulic fracturing will depend on "how the energy markets play
out." Crude oil, sand, pipe and related drilling materials make up
4.5% of the railroad's volumes. Union Pacific's crude oil volume
rose 7% in the quarter. Volume of nonmetallic minerals rose 28%,
driven primarily by a 35% increase in sand.
Canadian Pacific Railway Ltd. on Thursday reported higher
revenue and earnings for the fourth quarter and a record operating
ratio that beat analyst expectations.
The Calgary, Alberta-based railroad said it exceeded its
operational and financial goals for the year and is now two years
ahead of schedule on targets it had set for 2016.
During a call with analysts Thursday, Canadian Pacific
executives said that the West Coast port issues had resulted in an
uptick in international business because of increased business in
Vancouver. It ended up largely neutral to the company's bottom
line, in part because the extra business has driven increased
costs, executives cautioned.
The railway posted a 9% improvement in freight revenue in the
latest quarter, including a 20% gain in revenue from crude-oil
shipments, a 27% increase in U.S. grain-shipment revenue and a 2%
improvement from Canadian grain.
"CP fully recognizes the impact of short-term volatility in
commodity prices, but given the diversity of its business and
proven ability to control costs, we're confident in our ability to
execute on our plan going forward," Mr. Harrison said.
CP posted a fourth-quarter profit of 451 million Canadian
dollars ($365 million), or C$2.63 a share, well ahead of
year-earlier results, which were hurt by a big asset-impairment
charge.
Adjusted to exclude items, CP earned C$2.68 a share, up from
C$1.91 a year earlier and exceeding the C$2.56 a share analysts
polled by Thomson Reuters were expecting.
Revenue rose 10% to a record C$1.76 billion, also beating the
C$1.61 billion analyst estimate.
Tess Stynes and Judy McKinnon contributed to this article.
Corrections & Amplifications
An earlier version of this article gave incorrect volume growth
for Union Pacific's industrial products revenue carloads and
intermodal carloads. Industrial products volume increased 10% and
intermodal volume rose 6%.
Write to Betsy Morris at betsy.morris@wsj.com and Laura Stevens
at laura.stevens@wsj.com
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