Jennifer Hamann
Chief Financial Officer at Union Pacific
Thanks Eric, and good morning. As you heard from Lance union Pacific achieved strong 3rd quarter financial results with earnings per share of $2.57 on an operating ratio of 56.3%. As noted in an 8-K last month, we incurred additional expense this quarter related to wildfires, and weather the full impact of those events including loss revenue negatively impacted our operating ratio of 50 basis points and earnings per share by $0.05. Rising fuel prices throughout the quarter, negatively impacted operating ratio by 140 basis points. However, the year-over-year impact of our fuel surcharge programs added $0.05 to EPS.
Setting aside these exogenous issues, UP's core operational performance drove operating ratio improvement of 430 basis points and added $0.56 to EPS. Our performance demonstrates the resiliency and efficiency built into our franchise through PSR even when operating in less than ideal conditions.
Looking now at our 3rd quarter income statement on Slide 15 where we're showing a comparison to both 3rd quarter 2020 as well as 3rd quarter 2019. The comparison of 2021 to 2019 most clearly illustrates the efficiency we've achieved over the past 2 years, as we generated 9% higher operating income on 4% less volume. For 3rd quarter 2021, the operating revenue up 13% and operating expense only up 9%. We generated 3rd quarter record operating income of $2.4 billion, net income of $1.7 billion and earnings per share also with 3rd quarter records.
Looking more closely at 3rd quarter revenue. Slide 16 provides a breakdown of our freight revenue both year-over-year and sequentially versus the second quarter. Freight revenue totaled $5.2 billion in the 3rd quarter, up 12% compared to 2020 and 1% compared to second quarter. Looking first at the year-over-year analysis, although volume was flat, the overall demand environment remains strong and supports pricing actions that yield dollars exceeding inflation. On a year-over-year basis, those gains were further supplemented by a positive business mix, driving 650 basis points in total improvement. Lower intermodal shipments, combined with higher industrial shipments drove that positive mix.
Fuel surcharges increased freight revenue 600 basis points compared to last year as our fuel surcharge programs continue to chase rising fuel prices. Looking at freight revenue sequentially, lower volume versus the second quarter decreased rate revenue 250 basis points, highlighted by the factors that Kenny highlighted. Continued core pricing gains and a more positive business mix. Increased freight revenue 75 basis points on a sequential basis, driven by that same combination of higher industrial carloads and lower intermodal shipments. Finally, rise in fuel prices and the resulting uptick in sequential fuel surcharges increased freight revenue 125 basis points.
Now let's move on to Slide 17 which provides a summary of our 3rd quarter operating expenses, which increased 9% in total versus 2020. The primary driver of the increase was fuel expense, up 81% as a result of a 74% increase in fuel prices, a small offset to the higher prices was a 1% improvement in our fuel consumption rate. Better efficiency was a product of both our business mix and productivity initiatives, which offset inefficiencies associated with wildfires in the quarter.
Looking further at the other expense line. Compensation and benefits expense was up 3% versus 2020. Third quarter workforce levels were down 1% compared to last year despite our train and engine workforce growing 3%. This increase reflects the additional crews needed to navigate the network impact from bridge outages and whether. Management, engineering and mechanical workforces together decreased 3%. Wage inflation along with higher re-crew and overtime costs associated with our network issues increased cost per employee 4% while still a tad elevated this level of per employee compensation increase is more in line with future expectations.
Purchased services and materials expense was flat, as higher locomotive and freight car maintenance associated with the larger active fleet was offset by reduced contractor expense. And with automotive shipments forecasted to remain soft for at least the balance of the year, we now expect purchased services and material expense to only be up low-single digits for full year versus 2020. Equipment and other rents was flat consistent with volume. Other expense decreased 10% or $29 million this quarter, driven primarily by lower write-offs of in progress capital projects in 2021. As we look ahead to the 4th quarter. Recall that last year we incurred a one-time $278 million non-cash impairment charge in this expense category.
Looking now at our efficiency results on Slide 18 operating challenges during the quarter, again impacted our productivity, which totaled $45 million. In total for 2021 productivity is at 280 million dollars led by our train length improvement and locomotive productivity offset by roughly $55 million of weather and incident related headwinds. Our incremental margins in the quarter were a very strong 94% driven by solid pricing gains, positive business mix as well as continued efficiency. PSR clearly gives us the platform to add volumes to our network in an extremely efficient manner.
Turning to Slide 19, year-to-date cash from operations increased to $6.5 billion from $6 billion in 2020, a 9% increase. Our cash flow conversion rate was a strong 95% and year-to-date free cash flow increased $728 million or 38% driven by higher net income and lighter year-to-date, capital spend compared to last year. Supported by our strong cash generation and cash balances, we've returned $7.9 billion to shareholders year-to-date through dividends and share repurchases. Actions taken during the year include increasing our industry-leading dividend by 10% in May and repurchasing $27.5 million shares, totaling $5.9 billion. We finished the 3rd quarter with a comparable adjusted debt-to-EBITDA ratio of 2.8 times, which is on par with second quarter. We remain committed to returning great value to our owners and are demonstrating that again this year.
Wrapping things up on Slide 20, as you heard from Kenny, the overall economic environment remains positive. It provides confidence for the future growth of our company. Bulk is driven by strong grain volumes and coal continues to exceed expectations. Industrial volumes remain consistent and strong across many sectors like forest products, metals and plastics. So we are bullish on several fronts, but as you also well aware headwinds and autos and Intermodal persist, global supply chain disruptions, semiconductor shortages and the additional pressure with international intermodal volumes that Kenny just described continue to constrain our premium volume. So, balancing these variables and with just over 2 months left in the year, we now expect volume to be up closer to 5% for full year 2021. We are also adjusting our productivity guidance for the year, down to $350 million as the weather impact and related network challenges impede the progress we expect to make with our efficiency in 2021. To put that in context, however, at the end of this year we will have generated almost $1.8 billion of productivity since our implementation of PSR in late 2018. So great work overall by the team. And more importantly, this lower cost structure and improved service product provide Union Pacific the foundation for future growth and strong incremental margins.
Lower expectations for volume and productivity are headwinds to our 2021 operating goal. In addition, we've seen fuel prices continue to rise and pressure margins. In fact, over the last 30 days, barrel prices have increased around $10 with spot diesel prices up over $0.25 per gallon. Offsetting some of this margin pressure is a positive business mix and strong pricing environment. So, all in, we now expect our full year operating ratio improvement to be in the neighborhood of 175 basis point or not quite to the high end of the guidance range we established back in January, we view that level of improvement as another great milestone on our journey to 55.x operating ratio in 2022, especially in light of the unexpected headwinds we've had to overcome to get here.
Wrapping it up, it was a tough quarter operationally. We made great strides to strengthen our franchise and achieved solid results. In fact, we stand poised to finish 2021 as Union Pacific's most profitable year ever. That achievement would not be possible without our tremendous employees. So we're on the front lines every day serving our customers safely and efficiently while producing these record results. My thanks go out to team UP. So with that, I'll turn it back to Lance.
