The chief executive of Union Pacific Corp. said surging imports from Asia and tighter transportation capacity have boosted prospects for the nation’s largest railroad operator after a period marked by service disruptions and higher costs.
In a presentation for Wall Street analysts in Omaha, Nebraska, Chief Executive Richard Davidson pointed to factors that should speed the emergence of the railroad, a closely watched gauge of US economic activity, from a difficult period that saw earnings to drop more than 60% last year.
The factors, he said, include population growth in the Southwest, where the company has a large service area, greater international trade, and a program to improve operational efficiency from the Los Angeles Basin to El Paso, Texas.
Even higher gasoline prices, he said, would give the rail an advantage over trucking companies.
“I don’t think I’ve seen the future look any more promising than it does today,” Davidson said, adding that the economy is so flush with imports that capacity has finally tightened on the rail system, leading to stable, and in some cases higher, transport prices.
“Demand now exceeds supply,” he said. “It’s a change which has brought new challenges to us but also brings along huge opportunities.”
That optimistic assessment from a railroad with its share of operational problems was likely to meet with market skepticism.
Merrill Lynch said two recent derailments in two days in the Powder River Basin in Wyoming could knock lower the quarterly profits of Union Pacific and Burlington Northern Santa Fe Corp. as the movement of about two million tons of coal were canceled.
Donald Broughton, an analyst with AG Edwards, likened Union Pacific’s operational improvements to a student improving from a D-minus to a D-plus. Citing statistics that show that the average speed of Union Pacific’s train speeds lagged Burlington Northern as well as the Canadian National Railway Co.
Broughton said that Union Pacific’s rail speeds were even lower than East Coast railroad Norfolk Southern Corp. That’s “appalling” for Union Pacific, he wrote in a recent note to clients, given that Western railroads traverse less densely populated terrain and the length of hauls are generally longer.
Dennis Duffy, Union Pacific’s executive vice president of operations, showed performance measures that confirmed a decline in train velocity since March, but said the company was at work on improvements. “We have some really nice bottleneck capacity enhancement projects yet to come,” he said.
Davidson, a 45-year railroad veteran who became CEO of Union Pacific in 1997, said that imports, which are sent by ship and generally carried away from ports by rail, mark a major growth opportunity for the company.
As international trade becomes a bigger part of the economy, however, gross domestic product may become a misleading indicator for companies like Union Pacific, he said.
A better measure of the macroeconomic environment for railroads, he said, is a combination of goods manufactured in the United States and goods imported into the United States for domestic consumption. By that measure, the economy for rails should grow four percent a year, better than three percent a year for GDP, he said. (Reuters)