Union Pacific (NYSE:UNP) released its third-quarter earnings on Thursday, reporting record revenue of $5.6 billion and net income of $1.15 billion. Earnings per share of $2.48 were up 13% over last year. All this is in the face of terminally declining shipments of coal, the company's largest revenue driver, as well as flooding in Colorado that wiped out some Union Pacific trackage and ultimately cut operating income by $10 million.

Union Pacific powers forward. Photo credit: Union Pacific.

All North American railroads are suffering from a decline in coal as cheap natural gas prices make coal less competitive. Western railroads like Union Pacific are in a better position, both because historically they have been less dependent on coal as their Eastern counterparts and because the primary Western source of coal, from the Powder River Basin, is naturally cleaner than Appalachian coal and is more able to pass regulatory muster. Nonetheless, coal carloads did fall by 7% in the third quarter, the largest absolute and proportional decline in all of Union Pacific's categories. Agricultural products and intermodal cargoes were also down slightly.

Union Pacific did see big gains in shipments of cars and industrial products, a category that includes raw materials and finished goods like cement and other construction inputs, household appliances, wind turbine components, and steel. These gains, plus a slight uptick in chemicals led by shipments from oil- and gas-producing shale formations, managed to mitigate Union Pacific's slips in coal, agricultural, and intermodal to result in flat volume shipments for the year.

Despite no volume growth, Union Pacific was able to drive revenue growth through better pricing, raising rates by an average of 3.5%. The company was also able to execute cost-cutting and efficiency gains that drove its operating ratio, the percentage of total revenue spent on running the business, down to 64.8% for the quarter, the lowest in its recent history and a good sign for its goal to drive annual operation ratios below 65% by 2015. 

Union Pacific did warn, however, that rate increases wouldn't sustain earnings growth indefinitely, with VP of Operations Lance Fritz saying the railroad did not expect 2014's pricing gains to match 2013's.  That means, for future growth, Union Pacific will have to rely on higher volumes and an ever-lower operating ratio. Eastern-based railroad rival CSX (NASDAQ:CSX) released its own earnings earlier this week, and while even worse hurt by coal shipments, CSX managed massive increases in intermodal shipments and chemicals, particularly crude oil and fracking sand. If Union Pacific can emulate this performance while continuing to push its operating ratio downward, it can have another record year ahead of it even without big price increases.

Fool contributor Daniel Ferry has no position in any stocks mentioned. The Motley Fool owns shares of CSX. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.