Union Pacific Sees Broad Volume Growth as Fuel Costs Threaten Operating Ratio

Key Points

• Union Pacific reported broad-based volume growth, with carloads up about 5% and industrial volume up 5.2% month to date. Service remained stable, with car velocity in the mid-230s and terminal dwell below 20 hours.
• Higher fuel prices could pressure profitability: fuel raised the second-quarter operating ratio by roughly 120 basis points, and a similar or greater impact is possible in the third quarter as prices approach $5.20–$5.30 per gallon.
• Industrial, grain and domestic intermodal demand are supporting growth, while investments in network capacity and technology are helping Union Pacific handle more business with fewer trains. CEO Jim Vena also highlighted progress on the proposed merger and increased competition from autonomous trucking.

Union Pacific NYSE: UNP CEO Jim Vena said the railroad is seeing broad-based volume growth in the current quarter while maintaining service levels, though rising fuel prices could pressure its operating ratio in the near term.

Speaking alongside Chief Financial Officer Jennifer Hamann at an investor event, Vena said carloads were up about 5% during the quarter, with industrial volume up 5.2% month to date. He said the company’s car velocity had returned to the “mid-230s” and terminal dwell was below 20 hours, indicating the network is handling higher freight volumes without a deterioration in service.

“We are handling the increase in business without degrading our service product,” Vena said, adding that the railroad remains focused on bringing on profitable business rather than managing solely toward an operating-ratio target.

Industrial, Grain and Intermodal Drive Demand

Hamann said industrial demand has been broad-based across multiple segments. Bulk volume was down about 1%, largely reflecting weak coal demand tied to low natural-gas prices, but grain demand has been strong entering the Midwest harvest season.

Domestic intermodal remains the largest contributor to quarterly growth, Hamann said. She described it as good business for the railroad and said Union Pacific could record its fifth consecutive quarter of year-over-year domestic intermodal records.

The company is also seeing some benefit from trucking-market capacity constraints and higher trucking costs. Hamann said the rail industry’s fuel-efficiency advantage relative to trucks appears to be contributing to freight conversions to rail, in addition to cyclical demand changes.

However, Vena cautioned that higher fuel prices are ultimately not favorable for the broader economy. “We sure don’t want to damage, and have the economy damaged by having high fuel prices,” he said, though he added that the company had not yet seen a material slowdown in most freight categories.

Fuel Costs Could Weigh on Operating Ratio

Hamann said Union Pacific expected third-quarter fuel prices to average roughly $4.25 per gallon, while current prices were closer to $5.20 to $5.30 per gallon. She said fuel increased the company’s operating ratio by approximately 120 basis points in the second quarter and could have an impact of that size or greater in the third quarter.

Union Pacific uses contractual and tariff-based fuel surcharge programs, Hamann said, while the company also has applied lane-specific peak-season surcharges in intermodal markets with tight capacity.

On pricing, Hamann said longer-term intermodal contracts contain flexibility that has supported volumes but may cause pricing gains to lag. Spot-market bid activity occurs primarily in the spring, and she said a stronger pricing environment could benefit results more significantly in the back half of 2027 if current market conditions persist.

Capacity and Technology Investments

Vena said the company has substantial available network capacity following investments made since 2019. Union Pacific currently operates with more business than it did in 2019 while running 24% fewer trains, he said. The railroad has also invested about $1.2 billion over the past eight or nine years to expand intermodal capacity.

The company continues to invest in terminal and operating technology, including gate systems designed to speed truck access, terminal tools intended to improve switching productivity, and upgraded dispatch and network-control systems. Hamann said Union Pacific is developing technology that could increasingly automate terminal decisions and crew instructions.

Vena also pointed to a planned “dynamic operating plan” that would allow the railroad to adjust train operations more quickly as business conditions change.

CEO Highlights Merger Process and Competition

Vena said the Surface Transportation Board had moved the company’s proposed merger process forward after accepting the application on May 28. He said the next stage would require parties opposing the transaction to provide detailed arguments and that he expects a decision timeline around May 28 of the following year, followed by 30 days for a decision.

He said Union Pacific had received support letters from more than 2,000 groups or individuals, including more than 500 customers. Vena also discussed an agreement with Canadian National that he said would address track concentration and terminal issues while expanding CN’s ability to move freight between Canada and Mexico through Memphis.

Vena argued that a single-line railroad spanning more of the country would provide faster service, fewer handoffs and lower costs than multi-railroad moves. He also said autonomous trucking represents a competitive development railroads must address rather than ignore, noting that the technology is already operating with drivers present.

“If we stay the same, we just lose business,” Vena said.

About Union Pacific (NYSE:UNP)

Union Pacific Corporation is a transportation company that operates Union Pacific Railroad, one of the largest freight railroad networks in the United States. The company provides rail transportation and logistics services for a broad range of commodities, including agricultural products, automotive goods, chemicals, coal, industrial products, and intermodal shipments.

Union Pacific's railroad network serves the western two-thirds of the United States, connecting major markets and ports across approximately 23 states.

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