By Laura Stevens And Betsy Morris
Union Pacific Corp., which outperformed many of its rail peers
in 2014 by bulking up capacity to handle surging demand, was caught
in a sudden first- quarter volume slide caused by a strong dollar,
weak coal and West Coast port delays.
Although quarterly earnings per share rose 9%, Union Pacific
became the latest railroad to disappoint Wall Street as cargo
volumes dropped faster than expected. Union Pacific reported
earnings of $1.30 a share compared with the $1.37 per share
expected by analysts surveyed by Thomson Reuters.
Union Pacific said volume dropped 2% in the first quarter as
power plants switched from coal to natural gas and as metal,
including materials for energy drilling, and waste shipments
declined. The labor dispute and monthslong problems at West Coast
ports caused a 12% decline in its international intermodal business
as imports slowed to "a virtual trickle," Chief Executive Lance
Fritz said in an interview.
Those developments were a sharp turnaround from last year, when
Union Pacific's volume demand increased 7%, prompting the railroad
to increase its train, engine and yard workforce by about 10% to
18,000 employees and add 822 locomotives.
"Managing a network is a constant balancing act to ensure you
have the right resources at the right place at the right time," Mr.
Fritz said on the analyst call. "This balancing act becomes more
difficult during significant volume swings."
As a result, the company has furloughed about 500 train, engine
and yard employees, and reduced planned hiring for the year by
about 400 workers. It has also stored 475 locomotives and is
actively evaluating whether to mothball more of its current
7,613-piece active fleet. It reduced its capital spending plans for
the year by $100 million to $4.2 billion.
Executives warned that inefficiencies resulting from its
larger-than-needed network could continue into the second quarter.
Coal--the biggest negative surprise in the quarter--is likely to
continue to be "the big swing factor" for Union Pacific going
forward, said Eric Butler, vice president of marketing and sales.
Coal volumes in the second quarter are expected to decline in the
mid-single-digit range versus a year ago, executives said. Coal
volumes fell 7% in the latest first quarter and revenue fell
5%.
Executives said they expect to see stronger growth for the
remainder of the year in its intermodal business as shippers
continue to switch from highways to rail for transporting
containers. They also expect to be able to increase prices beyond
the core pricing gains of 4% in the first quarter. They anticipate
gains in autos, lumber and building materials. The international
intermodal business should also recover quickly as West Coast ports
get back to normal.
Executives said they aren't worried the expansion of the Panama
Canal, due to open next year, will cause a big shift in cargo away
from Union Pacific's markets and to East Coast ports. The biggest
ships currently under construction won't fit through the widened
canal once it is open, and it is often cheaper to bring cargo to
the West Coast and to take it inland from there, they said.
"If you look at the cost of over land, bridge, rail
transportation--there is a natural economic driver to the West
Coast," added Mr. Butler. At most, the railroad expects East Coast
port market share to grow to 33% from its current 31%.
Union Pacific reported a profit of $1.15 billion, up from $1.09
billion a year earlier. Revenue edged down slightly to $5.61
billion from $5.64 billion.
Analysts polled by Thomson Reuters expected revenue of $5.7
billion. Analysts said earlier this week they had high expectations
for Union Pacific, which was expected to be hurt less than Eastern
railroads by the drop in coal volumes.
Write to Laura Stevens at laura.stevens@wsj.com and Betsy Morris
at betsy.morris@wsj.com
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