Union Pacific Corporation Earnings Hurt by Falling Freight Volumes

Shipping rate increases and lower fuel costs weren't enough to offset a broad-based decline in demand.

Joe Tenebruso
Joe Tenebruso
Oct 29, 2015 at 10:05AM

Source: Union Pacific

Union Pacific (NYSE:UNP) reported third-quarter results last week. Lower freight volumes, led by a sharp fall in coal shipments, continue to take a toll on the railroad operator's revenue and profits.

The raw numbers 


Q3 2015

Q3 2014

Growth (YOY)


$5.215 billion

$5.819 billion


Operating Income

$2.208 billion

$2.330 billion


Earnings Per Share




Source: Union Pacific Q3 2015 earnings press release.

What happened with Union Pacific this quarter?

  • With the exception of the automotive segment, which was flat year over year, Union Pacific's freight revenue was down across the board, including coal (18%), industrial (16%), intermodal (11%), chemical (6%), and agricultural (4%). All told, third-quarter freight revenue fell 10% year over year to $5.2 billion, as volume declines more than offset the benefit of price increases.
  • However, Union Pacific's operating ratio (a key metric defined as operating expenses divided by operating revenues) came in at an all-time quarterly record of 60.3% -- a full two percentage point improvement from Q3 2014 -- thanks in part to a 40% lower average diesel fuel price during the quarter.
  • Cash flow generation also remained strong, with operating cash flow for the first nine months of 2015 increasing 5% to $5.6 billion. Some of that cash was allocated to share buybacks, with Union Pacific repurchasing 13.8 million shares at an aggregate cost of more than $1.2 billion in the third quarter.

What management had to say
"Total volumes decreased about 6% in the quarter, more than offsetting another quarter of solid core pricing gains," said Chairman and CEO Lance Fritz in a press release. "On the cost side, we've made significant progress aligning our resources to current demand, and I am pleased to report a quarterly record operating ratio of 60.3%."

Looking forward
Union Pacific's management warned that some of the challenges currently impacting the company might linger into 2016, with Fritz saying:

As we finish 2015 and head toward next year, we continue to face many uncertainties. Energy prices, the consumer economy, grain markets and the strength of the U.S. dollar will all be key to future demand. Over the long term, we are well positioned to safely provide our customers with excellent service, while delivering strong value to our shareholders.

Union Pacific's revenue will probably remain under pressure if natural gas prices remain low, which tends to reduce demand for coal from U.S. power plants. Continued strength in the U.S. dollar could also dampen results, as it increases the cost of U.S. coal for international buyers, thereby further reducing demand for Union Pacific's shipping services. Still, Union Pacific has done an admirable job of meeting these challenges by cutting costs and improving the efficiency of its operations. That should help to mitigate the damage from further weakness in freight volumes and could also lead to a sharp rebound in profits if volumes eventually recover.