netrashetty
Netra Shetty
The Union Pacific Railroad (reporting mark UP) (NYSE: UNP), headquartered in Omaha, Nebraska, is the largest railroad network in the United States. James R. Young is president, CEO and Chairman.[3][4]
UP's route map covers most of the central and western United States west of Chicago and New Orleans. As of December 31, 2008 UP operates on 32,012 miles (51,518 km) of track, of which it owns outright 26,171 miles (42,118 km).[5] Both numbers represent the highest amount of any railroad currently operating in the United States.[6][7] It has achieved this size as a result of purchasing a large number of other railroads, notably the Missouri Pacific, Chicago and North Western, Western Pacific, Missouri-Kansas-Texas, and the Southern Pacific (including the Rio Grande). Currently, Union Pacific owns 26% of Ferromex while Grupo Mexico owns the remaining 74%.
UP's chief railroad competitor is the BNSF Railway, which covers much of the same territory.
Union Pacific Corporation (NYSE: UNP) owns the Union Pacific Railroad Company, one of America's leading transportation companies and operator of one of the largest railroads in North America. The Union Pacific railroad stretches from the Mississippi River to the Pacific Ocean and is the only railroad that serves all six significant gateways to Mexico.[1] UNP caters to six commodity groups: agricultural, automotive, chemicals, energy, industrial products, and intermodal shipping. Between 2004 and 2010, approximately 85% of the company's business have been repriced to increase sales or revenue.[2] However, the recession of 2009 had detrimental effects on Union Pacific. 2009 operating income was $3.4 billion, a 17% decrease since 2008.[2] Economic conditions significantly reduced demand for the company's services across all market sectors, reducing overall sales volume by 16%.[2]
The company has significant pricing power that helped drive total freight revenues up 11% during 2008 and produce a milestone $2.3 billion in net income for the year;[1] from 2004 to 2009, UNP repriced 82% of its contracts, helping it to attain record earnings even as its overall shipping volume decreased 5% during 2008.[1]
Business Overview
Union Pacific operates the Union Pacific Railroad, a freight railroad linking 23 states in the western two-thirds of the United States.[1] The railroad serves six different sectors, with energy, industrial products, and agricultural shipments accounting for 56% of the company's revenues.[3][4] UNP's income depends on the volume of freight contracts it sells and the price of those contracts while its expenses primarily consist of labor, fuel costs, and track maintenance.
Contents
1 Business Overview
1.1 Business & Financial Metrics
1.1.1 2010 Fourth Quarter Results
1.1.2 2010 Third Quarter Results
1.1.3 2010 Second Quarter Results
1.1.4 2010 First Quarter Results
1.1.5 2009 Overview
1.2 Business Segments
2 Trends and Forces
2.1 Congress is reviewing Freight Railroad Pricing
2.2 UNP's performance is directly tied to prevailing economic conditions
2.3 Labor constitutes significant expense and risk
2.4 Oil prices influence a large portion of expenses
2.5 Weather has a direct impact on track maintenance costs
3 Competition
4 References
Business & Financial Metrics
2010 Fourth Quarter Results
UNP continued to report record figures for the fourth quarter of 2010. The company earned fourth quarter net income of $775 million, a 41% increase since year ago fourth quarter. [5] Quarterly operating revenue increased 17 percent in the fourth quarter 2010 to $4.4 billion versus $3.8 billion in the fourth quarter 2009.[5]
UNP's operating ratio, a ratio that shows the efficiency of a company's management by comparing operating expense to net sales, was 70.2%, a fourth quarter record for the company.[5] Strong volume growth, increased fuel cost recoveries, and core pricing gains contributed to the increase in the operating ratio.[5] The company's customer satisfaction rate of 90%, 200 basis points higher than year ago fourth quarter, is another quarterly record.[5] The company also reported that net income for the year of 2010 was a record not previously attained in the company's nearly 150-year history.[5]
Despite a 20% increase in diesel fuel prices in the 4th quarter, all of Union Pacific's segments reported growth:
Industrial Products up 27 percent.[5]
Intermodal up 25 percent.[5]
Energy up 16 percent.[5]
Agricultural up 14 percent.[5]
Chemicals up 14 percent.[5]
Automotive up 7 percent.[5]
2010 Third Quarter Results
UNP reported record figures for the third quarter of 2010. [6] The company earned third quarter net income of $778 million compared to $514 million in the third quarter of 2009.[6] This 51.3% increase in net income is coupled with a 20% growth in operating revenue from $3.7 billion in 3rd quarter 2009 to $4.4 billion this quarter.[6]
Third quarter business volumes, as measured by total revenue carloads, grew 14 percent versus 2009's recession-affected levels as all six Union Pacific business groups reported volume growth.[6] All six business groups reported freight revenue growth in the quarter, up 21 percent versus third quarter 2009 to a total of $4.2 billion.[6] Double-digit volume growth, increased fuel cost recoveries and core pricing gains all contributed to the increase.[6] Quarterly diesel fuel prices increased 20 percent from an average of $1.87 per gallon in the third quarter 2009 to an average of $2.24 per gallon in the third quarter 2010.[6] Union Pacific's operating ratio was a best-ever 68.2 percent, 5.6 points of improvement versus 2009.[6]
Union Pacific, along with the railroad industry, has been helped by the fuel cost recovery pricing strategies specified by the U.S government. This is the primary reason for UNP's dramatic improvement since the lows of 2009.[6]
2010 Second Quarter Results
UNP has continued to recapture much of the post-recession demand increase. The company reported 2010 second quarter net income of $711 million compared to $465 million in the second quarter 2009.[7] Second quarter business volumes, as measured by total revenue carloads, grew 18 percent versus the prior year's recession-impacted levels.[7] This is the first time in six years that all six Union Pacific business groups reported volume growth in the same quarter..[7] Quarterly operating revenue increased 27 percent in the second quarter 2010 to $4.2 billion versus $3.3 billion in the second quarter 2009..[7]
Freight revenues for all six business groups increased in the second quarter, up 27 percent versus 2009 to a total of $4.0 billion..[7] Driving the increase were double-digit volume growth, increased fuel cost recoveries and core pricing gains..[7] Even though quarterly diesel fuel prices increased 46 percent from an average of $1.57 per gallon in the second quarter 2009 to an average of $2.29 per gallon in the second quarter 2010, a fraction of the fuel costs were recuperated via fuel cost recovery subsidies..[7]
The company also released specific freight revenue values to illustrate their growth:
Automotive up 105 percent..[7]
Intermodal up 35 percent..[7]
Industrial Products up 30 percent..[7]
Chemicals up 19 percent..[7]
Energy up 17 percent..[7]
Agricultural up 13 percent..[7]
On the efficiency side, Union Pacific's operating ratio was a best-ever 69.4 percent, an 8 point improvement versus 2009..[7] Strong volume growth combined with ongoing efficiency initiatives and quarterly pricing gains drove the record performance.
2010 First Quarter Results
Compared to the previous year's recession-impacted levels, first quarter business volume increased by 13%. All of Union Pacific's business groups, except for energy, reported quarterly growth. Year-over-year freight revenues increased in all six business groups, up 16 percent in total to $3.8 billion in the first quarter 2010 as a result of double-digit volume gains, increased fuel cost recoveries associated with higher diesel fuel prices, and core pricing gains. All of these contributed to the increase in operating income by 47% since the previous year's first quarter. [8]
All of the above contributed to a rebound in net income since the recession levels of the first quarter 2009[8]. However, Net income increased by 43% mostly due to a decrease in quarterly fuel prices by 43% from $2.16 per gallon in first quarter 2009 to $1.51 per gallon in first quarter 2010[8]. This is a gain reported due to an exogenous factor, and is not due to improved efficiency or otherwise company-oriented reasons.[8]
2009 Overview
In 2009, Union Pacific generated operating income of $3.4 billion, a decrease of 17% since 2008.[2] A reduction in volume by 16% drove the decrease in operating income. Similarly, net income of $1.9 billion declined from $2.3 billion in 2008.[2] However, increases in core pricing and improved productivity translated into an all-time record operating ratio of 76.0% for 2009.[2] For example, the company increased average train speed by 16% and improved car utilization by 8% with ongoing enhancements to its transportation plan and continued efforts to improve train processing at its terminals.[2]
The company continued to make adjustments to productivity. Expecting further slowdowns due to the economy, the company downsized road locomotives by 26% and freight car inventory by 18%.[2] This productivity initiative combined to reduce the company's workforce by 10%.[2] Union Pacific also reduced fuel consumption by 4%, saving 40 million gallons of fuel thanks to improvements in mileage and fuel efficiency.[2]
Overall, Union Pacific's average fuel price decreased by 44% in 2009, reducing operating expenses by $1.3 billion compared to 2008.[2] This is due to lower crude oil prices in the beginning of the year and the second half of 2008.
Freight revenues declined 22% year-over-year to $13.4 billion.[2] Freight revenues and volumes for all six commodity groups decreased, reflecting adverse economic conditions. Overall, the 16% decrease in volume were largely due to declines in automotive and industrial products shipments. Lower fuel surcharges due to lower fuel prices also reduced freight revenues for the year. [2]
[9] [10]
Business Segments
Union Pacific only has one reportable operating segment: its railroad segment.[3] This segment operates a railroad with 32,094 route miles that links Pacific Coast and Gulf Coast ports with the Midwest and eastern United States gateways .[3][11] It also provides access to several key Mexican gateways and imports and exports freight across the Canadian and Mexican borders.[3] Although Union Pacific's rail network is well-integrated across commodity groups, energy and industrial products were the biggest revenue generators for UNP in 2008.[3]
In 2009, the majority of UNP's freight revenues came from energy-related shipments.[3]
UNP Revenue by Commodity Group[3]
2009 Revenue ($millions) 2008 Revenue ($millions) 2007 Revenue ($millions)
Agricultural 2,666 3,174 2,605
Automotive 854 1,344 1,458
Chemicals 2,102 2,494 2,287
Energy 3,118 3,810 3,134
Industrial Products 2,147 3,273 3,077
Intermodal 2,486 3,023 2,925
Energy (22% of 2009 Freight Revenue):[3] No sector generated more revenues for Union Pacific than the energy sector in 2009.[3] UNP's energy shipments primarily consist of coal and coke shipments to utilities, factories, and water terminals.[4] Coal from the Southern Powder River Basin in Wyoming[12] is the biggest driver of UNP's energy freight revenue growth.[4]
Industrial Products (15% of 2009 Freight Revenue):[3] This sector includes lumber shipments, steel, construction products, paper, consumer goods, metals, and industrial minerals.[4] Transportation services for government entities and waste companies are also included in the "Industrial Products" tally.[4]
Agricultural (19% of 2009 Freight Revenue):[3] UNP's agricultural shipments include whole grains, commodities produced from these grains, and food and beverage products including fresh and frozen fruits and vegetables, dairy products, and beverages.[4] Union Pacific has exposure to most of the United States' primary grain markets and creates a link between producing areas in the Midwest and West with Pacific Northwest export terminals, Gulf ports, and Mexico.[4]
Intermodal (18% of 2009 Freight Revenue:[3] Intermodal shipments consist of a hodgepodge of container and trailer shipments as well as time-sensitive delivery services for businesses willing to pay a premium.[4] UNP's intermodal business is done with both domestic and international clients.[4]
Chemicals (15% of 2009 Freight Revenue):[3] Union Pacific services chemical-producing areas along the Gulf Coast and in the Rocky Mountain region and two-thirds of UNP's chemical shipments are liquid and dry chemicals, plastics, or liquid petroleum products.[4] The company ships soda ash from Wyoming and California to glass producers all over the country as well as fertilizer from the Gulf Coast, West Coast, and Canada to farmers in the Midwest.[4]
Automotive (6% of 2009 Freight Revenue):[3] UNP is the largest automotive carrier west of the Mississippi River; it acts as the shipper for seven vehicle assembly plants and distributes imported vehicles from six West Coast ports and Houston, ultimately delivering finished cars to 38 automotive distribution centers where they are taken to dealerships by truck.[4] The company also transports automotive parts.[4]
Trends and Forces
Congress is reviewing Freight Railroad Pricing
In a recent report presented by the U.S. Senate Commerce Committee it is stated that the discretionary pricing power enjoyed by the freight rail transport companies are putting excessive pressure on freight customers.[13] The freight railroad operators are enjoying this pricing power since 1980 when the U.S. government adopted an act to improve profitability of the railroad industry by allowing rail transporters to hike price on captive shippers like electric utilities, chemical and agricultural companies in order to improve profitability of the struggling railroad industry.[13] If this act is to be reversed, the entire freight railroad industry may be severely affected. [13]
UNP's performance is directly tied to prevailing economic conditions
Both national and international economic conditions affect the demand for the commodities that UNP transports; the state of the economy directly affects the amount of goods being shipped and UNP freight orders being placed. For example, a significant change in the U.S. economic climate can affect automobile purchases and hurt UNP's business with General Motors, one of its two biggest customers.[14] Furthermore, international economic shifts directly affect UNP's intermodal segment, which deals with imports and exports and accounted for 18% of the company's revenue in 2008.[4]
Labor and fuel costs accounted for over half of UNP's expenses in 2009.[15][16]
Labor constitutes significant expense and risk
Labor is the largest operating expense for UNP and about 86% of UNP's 48,242 employees are part of a railroad union.[4] Maintaining union-level wages, hours, and working conditions resulted in compensation and benefits for employees accounting for 28.8% of the company's total expenses in 2009.[15] The high percentage of unionized employees also makes UNP especially vulnerable to strikes, work stoppages, or work slowdowns. Furthermore, liabilities and personal injury are a real danger for employees in the railroad industry; personal injury expense totaled $203 million in 2007 but was reduced by $82 million during 2008 because of research conducted by the company guiding it to enhance its injury prevention efforts.[17]
Oil prices influence a large portion of expenses
Oil prices have a significant impact on Union Pacific's expenses - in 2009, the company spent $1.76 billion on fuel (12.5% of its total expenses).[15] UNP uses a fuel surcharge program to offset expenses related to rising oil prices but surcharge rates for any given month are set two months in advance and consequently reflect outdated oil prices;[18] as a result, the fuel surcharge does not always protect UNP from losses related to oil volatility. However, the 2009 fuel expenses are less than half of the total fuel expense for 2008 due to decrease in fuel prices.
2009 Fuel Surcharges[18]
Month Surcharge on Shipments On-Highway Diesel Fuel Avg. Price
January 16.5% $2.292
February 12.0% $2.195
March 10.5% $2.092
April 9.5% $2.220
May 8.5% $2.227
June 10.0% $2.529
July 10.0% $2.540
August 13.0% $2.634
September 13.0% $2.626
October 14.0% $2.672
November 14.0% $2.792
December 14.5% $2.745
Weather has a direct impact on track maintenance costs
Severe weather and natural disasters can delay or disrupt railroad operations and result in revenue loss. Damaged infrastructure resulting from such weather also increases track maintenance costs. In 2008, UNP spent $1.7 billion on track maintenance.[19] Track delays and closings disrupt damaged areas and can easily spread delays and stoppages throughout UNP's entire rail network.
Competition
UNP's main competition comes from other railroads, the long-haul trucking industry, and barge operators. Burlington Northern Santa Fe Corporation is UNP's most significant railroad competitor while the company's competition with non-railroad freight services is difficult to quantify.
Burlington Northern Santa Fe: UNP's primary competitor primarily operates in the western half of the United States; as a result, Burlington Northern Santa Fe and UNP directly compete for delivery contracts.[20] Burlington Northern Santa Fe is the second-largest U.S. railroad company with over 6,300 locomotives and 32,000 route miles. The company ships freight, such as coal and agricultural products, throughout the western two thirds of the United States.[21]
Canadian National Railway Company: Canadian National Railway Company (or CN) operates the largest rail network in Canada and the only transcontinental network in North America. The company operates approximately 20,300 route miles in 8 Canadian provinces and 16 U.S. states.. This company primarily operates in Canada but also has track running through the middle of the United States; competes with UNP for deliveries less frequently than Burlington Northern Santa Fe.[22]
Norfolk Southern: Norfolk Southern's largest business is moving coal, and the company operates in the eastern half of the United States. While not a very close competitor, NSC competes with UNP on occasion.[23] The largest commodities after coal are intermodal containers, agricultural products such as corn, cars, and consumer products.[24] Its principal subsidiary is wholly-owned Norfolk Southern Railway Company, and it also has joint ownership (along with CSX (CSX)) of Consolidated Rail Corporation. Altogether, it has a network of 21,000 miles of track throughout 22 U.S. states, the District of Columbia and Ontario, Canada.[25]
UP's route map covers most of the central and western United States west of Chicago and New Orleans. As of December 31, 2008 UP operates on 32,012 miles (51,518 km) of track, of which it owns outright 26,171 miles (42,118 km).[5] Both numbers represent the highest amount of any railroad currently operating in the United States.[6][7] It has achieved this size as a result of purchasing a large number of other railroads, notably the Missouri Pacific, Chicago and North Western, Western Pacific, Missouri-Kansas-Texas, and the Southern Pacific (including the Rio Grande). Currently, Union Pacific owns 26% of Ferromex while Grupo Mexico owns the remaining 74%.
UP's chief railroad competitor is the BNSF Railway, which covers much of the same territory.
Union Pacific Corporation (NYSE: UNP) owns the Union Pacific Railroad Company, one of America's leading transportation companies and operator of one of the largest railroads in North America. The Union Pacific railroad stretches from the Mississippi River to the Pacific Ocean and is the only railroad that serves all six significant gateways to Mexico.[1] UNP caters to six commodity groups: agricultural, automotive, chemicals, energy, industrial products, and intermodal shipping. Between 2004 and 2010, approximately 85% of the company's business have been repriced to increase sales or revenue.[2] However, the recession of 2009 had detrimental effects on Union Pacific. 2009 operating income was $3.4 billion, a 17% decrease since 2008.[2] Economic conditions significantly reduced demand for the company's services across all market sectors, reducing overall sales volume by 16%.[2]
The company has significant pricing power that helped drive total freight revenues up 11% during 2008 and produce a milestone $2.3 billion in net income for the year;[1] from 2004 to 2009, UNP repriced 82% of its contracts, helping it to attain record earnings even as its overall shipping volume decreased 5% during 2008.[1]
Business Overview
Union Pacific operates the Union Pacific Railroad, a freight railroad linking 23 states in the western two-thirds of the United States.[1] The railroad serves six different sectors, with energy, industrial products, and agricultural shipments accounting for 56% of the company's revenues.[3][4] UNP's income depends on the volume of freight contracts it sells and the price of those contracts while its expenses primarily consist of labor, fuel costs, and track maintenance.
Contents
1 Business Overview
1.1 Business & Financial Metrics
1.1.1 2010 Fourth Quarter Results
1.1.2 2010 Third Quarter Results
1.1.3 2010 Second Quarter Results
1.1.4 2010 First Quarter Results
1.1.5 2009 Overview
1.2 Business Segments
2 Trends and Forces
2.1 Congress is reviewing Freight Railroad Pricing
2.2 UNP's performance is directly tied to prevailing economic conditions
2.3 Labor constitutes significant expense and risk
2.4 Oil prices influence a large portion of expenses
2.5 Weather has a direct impact on track maintenance costs
3 Competition
4 References
Business & Financial Metrics
2010 Fourth Quarter Results
UNP continued to report record figures for the fourth quarter of 2010. The company earned fourth quarter net income of $775 million, a 41% increase since year ago fourth quarter. [5] Quarterly operating revenue increased 17 percent in the fourth quarter 2010 to $4.4 billion versus $3.8 billion in the fourth quarter 2009.[5]
UNP's operating ratio, a ratio that shows the efficiency of a company's management by comparing operating expense to net sales, was 70.2%, a fourth quarter record for the company.[5] Strong volume growth, increased fuel cost recoveries, and core pricing gains contributed to the increase in the operating ratio.[5] The company's customer satisfaction rate of 90%, 200 basis points higher than year ago fourth quarter, is another quarterly record.[5] The company also reported that net income for the year of 2010 was a record not previously attained in the company's nearly 150-year history.[5]
Despite a 20% increase in diesel fuel prices in the 4th quarter, all of Union Pacific's segments reported growth:
Industrial Products up 27 percent.[5]
Intermodal up 25 percent.[5]
Energy up 16 percent.[5]
Agricultural up 14 percent.[5]
Chemicals up 14 percent.[5]
Automotive up 7 percent.[5]
2010 Third Quarter Results
UNP reported record figures for the third quarter of 2010. [6] The company earned third quarter net income of $778 million compared to $514 million in the third quarter of 2009.[6] This 51.3% increase in net income is coupled with a 20% growth in operating revenue from $3.7 billion in 3rd quarter 2009 to $4.4 billion this quarter.[6]
Third quarter business volumes, as measured by total revenue carloads, grew 14 percent versus 2009's recession-affected levels as all six Union Pacific business groups reported volume growth.[6] All six business groups reported freight revenue growth in the quarter, up 21 percent versus third quarter 2009 to a total of $4.2 billion.[6] Double-digit volume growth, increased fuel cost recoveries and core pricing gains all contributed to the increase.[6] Quarterly diesel fuel prices increased 20 percent from an average of $1.87 per gallon in the third quarter 2009 to an average of $2.24 per gallon in the third quarter 2010.[6] Union Pacific's operating ratio was a best-ever 68.2 percent, 5.6 points of improvement versus 2009.[6]
Union Pacific, along with the railroad industry, has been helped by the fuel cost recovery pricing strategies specified by the U.S government. This is the primary reason for UNP's dramatic improvement since the lows of 2009.[6]
2010 Second Quarter Results
UNP has continued to recapture much of the post-recession demand increase. The company reported 2010 second quarter net income of $711 million compared to $465 million in the second quarter 2009.[7] Second quarter business volumes, as measured by total revenue carloads, grew 18 percent versus the prior year's recession-impacted levels.[7] This is the first time in six years that all six Union Pacific business groups reported volume growth in the same quarter..[7] Quarterly operating revenue increased 27 percent in the second quarter 2010 to $4.2 billion versus $3.3 billion in the second quarter 2009..[7]
Freight revenues for all six business groups increased in the second quarter, up 27 percent versus 2009 to a total of $4.0 billion..[7] Driving the increase were double-digit volume growth, increased fuel cost recoveries and core pricing gains..[7] Even though quarterly diesel fuel prices increased 46 percent from an average of $1.57 per gallon in the second quarter 2009 to an average of $2.29 per gallon in the second quarter 2010, a fraction of the fuel costs were recuperated via fuel cost recovery subsidies..[7]
The company also released specific freight revenue values to illustrate their growth:
Automotive up 105 percent..[7]
Intermodal up 35 percent..[7]
Industrial Products up 30 percent..[7]
Chemicals up 19 percent..[7]
Energy up 17 percent..[7]
Agricultural up 13 percent..[7]
On the efficiency side, Union Pacific's operating ratio was a best-ever 69.4 percent, an 8 point improvement versus 2009..[7] Strong volume growth combined with ongoing efficiency initiatives and quarterly pricing gains drove the record performance.
2010 First Quarter Results
Compared to the previous year's recession-impacted levels, first quarter business volume increased by 13%. All of Union Pacific's business groups, except for energy, reported quarterly growth. Year-over-year freight revenues increased in all six business groups, up 16 percent in total to $3.8 billion in the first quarter 2010 as a result of double-digit volume gains, increased fuel cost recoveries associated with higher diesel fuel prices, and core pricing gains. All of these contributed to the increase in operating income by 47% since the previous year's first quarter. [8]
All of the above contributed to a rebound in net income since the recession levels of the first quarter 2009[8]. However, Net income increased by 43% mostly due to a decrease in quarterly fuel prices by 43% from $2.16 per gallon in first quarter 2009 to $1.51 per gallon in first quarter 2010[8]. This is a gain reported due to an exogenous factor, and is not due to improved efficiency or otherwise company-oriented reasons.[8]
2009 Overview
In 2009, Union Pacific generated operating income of $3.4 billion, a decrease of 17% since 2008.[2] A reduction in volume by 16% drove the decrease in operating income. Similarly, net income of $1.9 billion declined from $2.3 billion in 2008.[2] However, increases in core pricing and improved productivity translated into an all-time record operating ratio of 76.0% for 2009.[2] For example, the company increased average train speed by 16% and improved car utilization by 8% with ongoing enhancements to its transportation plan and continued efforts to improve train processing at its terminals.[2]
The company continued to make adjustments to productivity. Expecting further slowdowns due to the economy, the company downsized road locomotives by 26% and freight car inventory by 18%.[2] This productivity initiative combined to reduce the company's workforce by 10%.[2] Union Pacific also reduced fuel consumption by 4%, saving 40 million gallons of fuel thanks to improvements in mileage and fuel efficiency.[2]
Overall, Union Pacific's average fuel price decreased by 44% in 2009, reducing operating expenses by $1.3 billion compared to 2008.[2] This is due to lower crude oil prices in the beginning of the year and the second half of 2008.
Freight revenues declined 22% year-over-year to $13.4 billion.[2] Freight revenues and volumes for all six commodity groups decreased, reflecting adverse economic conditions. Overall, the 16% decrease in volume were largely due to declines in automotive and industrial products shipments. Lower fuel surcharges due to lower fuel prices also reduced freight revenues for the year. [2]
[9] [10]
Business Segments
Union Pacific only has one reportable operating segment: its railroad segment.[3] This segment operates a railroad with 32,094 route miles that links Pacific Coast and Gulf Coast ports with the Midwest and eastern United States gateways .[3][11] It also provides access to several key Mexican gateways and imports and exports freight across the Canadian and Mexican borders.[3] Although Union Pacific's rail network is well-integrated across commodity groups, energy and industrial products were the biggest revenue generators for UNP in 2008.[3]
In 2009, the majority of UNP's freight revenues came from energy-related shipments.[3]
UNP Revenue by Commodity Group[3]
2009 Revenue ($millions) 2008 Revenue ($millions) 2007 Revenue ($millions)
Agricultural 2,666 3,174 2,605
Automotive 854 1,344 1,458
Chemicals 2,102 2,494 2,287
Energy 3,118 3,810 3,134
Industrial Products 2,147 3,273 3,077
Intermodal 2,486 3,023 2,925
Energy (22% of 2009 Freight Revenue):[3] No sector generated more revenues for Union Pacific than the energy sector in 2009.[3] UNP's energy shipments primarily consist of coal and coke shipments to utilities, factories, and water terminals.[4] Coal from the Southern Powder River Basin in Wyoming[12] is the biggest driver of UNP's energy freight revenue growth.[4]
Industrial Products (15% of 2009 Freight Revenue):[3] This sector includes lumber shipments, steel, construction products, paper, consumer goods, metals, and industrial minerals.[4] Transportation services for government entities and waste companies are also included in the "Industrial Products" tally.[4]
Agricultural (19% of 2009 Freight Revenue):[3] UNP's agricultural shipments include whole grains, commodities produced from these grains, and food and beverage products including fresh and frozen fruits and vegetables, dairy products, and beverages.[4] Union Pacific has exposure to most of the United States' primary grain markets and creates a link between producing areas in the Midwest and West with Pacific Northwest export terminals, Gulf ports, and Mexico.[4]
Intermodal (18% of 2009 Freight Revenue:[3] Intermodal shipments consist of a hodgepodge of container and trailer shipments as well as time-sensitive delivery services for businesses willing to pay a premium.[4] UNP's intermodal business is done with both domestic and international clients.[4]
Chemicals (15% of 2009 Freight Revenue):[3] Union Pacific services chemical-producing areas along the Gulf Coast and in the Rocky Mountain region and two-thirds of UNP's chemical shipments are liquid and dry chemicals, plastics, or liquid petroleum products.[4] The company ships soda ash from Wyoming and California to glass producers all over the country as well as fertilizer from the Gulf Coast, West Coast, and Canada to farmers in the Midwest.[4]
Automotive (6% of 2009 Freight Revenue):[3] UNP is the largest automotive carrier west of the Mississippi River; it acts as the shipper for seven vehicle assembly plants and distributes imported vehicles from six West Coast ports and Houston, ultimately delivering finished cars to 38 automotive distribution centers where they are taken to dealerships by truck.[4] The company also transports automotive parts.[4]
Trends and Forces
Congress is reviewing Freight Railroad Pricing
In a recent report presented by the U.S. Senate Commerce Committee it is stated that the discretionary pricing power enjoyed by the freight rail transport companies are putting excessive pressure on freight customers.[13] The freight railroad operators are enjoying this pricing power since 1980 when the U.S. government adopted an act to improve profitability of the railroad industry by allowing rail transporters to hike price on captive shippers like electric utilities, chemical and agricultural companies in order to improve profitability of the struggling railroad industry.[13] If this act is to be reversed, the entire freight railroad industry may be severely affected. [13]
UNP's performance is directly tied to prevailing economic conditions
Both national and international economic conditions affect the demand for the commodities that UNP transports; the state of the economy directly affects the amount of goods being shipped and UNP freight orders being placed. For example, a significant change in the U.S. economic climate can affect automobile purchases and hurt UNP's business with General Motors, one of its two biggest customers.[14] Furthermore, international economic shifts directly affect UNP's intermodal segment, which deals with imports and exports and accounted for 18% of the company's revenue in 2008.[4]
Labor and fuel costs accounted for over half of UNP's expenses in 2009.[15][16]
Labor constitutes significant expense and risk
Labor is the largest operating expense for UNP and about 86% of UNP's 48,242 employees are part of a railroad union.[4] Maintaining union-level wages, hours, and working conditions resulted in compensation and benefits for employees accounting for 28.8% of the company's total expenses in 2009.[15] The high percentage of unionized employees also makes UNP especially vulnerable to strikes, work stoppages, or work slowdowns. Furthermore, liabilities and personal injury are a real danger for employees in the railroad industry; personal injury expense totaled $203 million in 2007 but was reduced by $82 million during 2008 because of research conducted by the company guiding it to enhance its injury prevention efforts.[17]
Oil prices influence a large portion of expenses
Oil prices have a significant impact on Union Pacific's expenses - in 2009, the company spent $1.76 billion on fuel (12.5% of its total expenses).[15] UNP uses a fuel surcharge program to offset expenses related to rising oil prices but surcharge rates for any given month are set two months in advance and consequently reflect outdated oil prices;[18] as a result, the fuel surcharge does not always protect UNP from losses related to oil volatility. However, the 2009 fuel expenses are less than half of the total fuel expense for 2008 due to decrease in fuel prices.
2009 Fuel Surcharges[18]
Month Surcharge on Shipments On-Highway Diesel Fuel Avg. Price
January 16.5% $2.292
February 12.0% $2.195
March 10.5% $2.092
April 9.5% $2.220
May 8.5% $2.227
June 10.0% $2.529
July 10.0% $2.540
August 13.0% $2.634
September 13.0% $2.626
October 14.0% $2.672
November 14.0% $2.792
December 14.5% $2.745
Weather has a direct impact on track maintenance costs
Severe weather and natural disasters can delay or disrupt railroad operations and result in revenue loss. Damaged infrastructure resulting from such weather also increases track maintenance costs. In 2008, UNP spent $1.7 billion on track maintenance.[19] Track delays and closings disrupt damaged areas and can easily spread delays and stoppages throughout UNP's entire rail network.
Competition
UNP's main competition comes from other railroads, the long-haul trucking industry, and barge operators. Burlington Northern Santa Fe Corporation is UNP's most significant railroad competitor while the company's competition with non-railroad freight services is difficult to quantify.
Burlington Northern Santa Fe: UNP's primary competitor primarily operates in the western half of the United States; as a result, Burlington Northern Santa Fe and UNP directly compete for delivery contracts.[20] Burlington Northern Santa Fe is the second-largest U.S. railroad company with over 6,300 locomotives and 32,000 route miles. The company ships freight, such as coal and agricultural products, throughout the western two thirds of the United States.[21]
Canadian National Railway Company: Canadian National Railway Company (or CN) operates the largest rail network in Canada and the only transcontinental network in North America. The company operates approximately 20,300 route miles in 8 Canadian provinces and 16 U.S. states.. This company primarily operates in Canada but also has track running through the middle of the United States; competes with UNP for deliveries less frequently than Burlington Northern Santa Fe.[22]
Norfolk Southern: Norfolk Southern's largest business is moving coal, and the company operates in the eastern half of the United States. While not a very close competitor, NSC competes with UNP on occasion.[23] The largest commodities after coal are intermodal containers, agricultural products such as corn, cars, and consumer products.[24] Its principal subsidiary is wholly-owned Norfolk Southern Railway Company, and it also has joint ownership (along with CSX (CSX)) of Consolidated Rail Corporation. Altogether, it has a network of 21,000 miles of track throughout 22 U.S. states, the District of Columbia and Ontario, Canada.[25]
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