Union Pacific Profit Rises 13% as Railroads Benefit From Higher Freight Rates

Executives, however, are bracing for a slowdown in business. Omaha, Neb.-based Union Pacific on Thursday lowered its full-year outlook on volumes and share repurchases.

Shares of several railroad stocks closed lower on Thursday, as investors and analysts showed concern about how companies navigate a potential slowdown in cargo as well as rising costs, including those for labor. Union Pacific closed down nearly 7% and CSX closed down 3%, while the S&P 500 closed nearly 1% lower.

For Union Pacific, business volumes rose 3% despite some customers in September seeking alternate modes of freight transport amid the threat of a national labor strike. Freight revenue rose 18% to $6.11 billion.

Executives told analysts on a conference call that there is a softening volume of lumber, parcels and industrial material, but they still see strong demand to transport coal, construction materials such as rock, and auto parts and automobiles. Further reductions in levels of the Mississippi River have also diverted grain freight from barges to the railroads, they added, highlighting the opportunity to capture more volume.

Fuel surcharges assessed to customers have helped bolster revenue, but growth is slated to slow in the current quarter, said Union Pacific Chief Financial Officer

Jennifer Hamann.

Despite this, she added that Union Pacific is confident that it will still be able to retain its pricing power and secure pricing above the inflation rate.

CSX said its quarterly profit rose to $1.11 billion from $968 million a year earlier. Revenue rose 18% to $3.9 billion.

CSX said it retained pricing power despite lower volumes in some cargo, including steel shipments and fertilizer and chemicals. Overall, volumes rose 2% from the prior year.

CSX maintained its growth targets for 2022 and is continuing hiring efforts as there is still unmet demand because of labor constraints. Executives said they could “right-size” their network if the economy weakens more, including cutting costs such as parking their locomotives. “If softening demand comes, we’ll come out of it strong,” said

Jamie Boychuk,

executive vice president of operations at CSX.

CSX’s new chief executive officer

Joe Hinrichs

said he is focused on improving operational efficiency and providing better service for customers as head count climbs.

The former auto executive took over from

Jim Foote

last month. Foote will remain as an adviser through March 31.

In July, President

Joe Biden

appointed a federal panel to intervene in contract negotiations between major railroads and a group of labor unions because there was minimal progress in the talks. The two sides weren’t able to come to a tentative agreement until a day before a deadline that would have allowed workers to go on a strike.

So far, of the 12 labor unions involved in bargaining, six have ratified new agreements.

Members of one union, Brotherhood of Maintenance of Way Employees Division, voted last week not to ratify the initial agreement. Two of the largest unions, Brotherhood of Locomotive Engineers and Trainmen and SMART Transportation Division, started to send ballots to their members this week.

The railroads and BMWED have been renegotiating for a new tentative agreement, and Union Pacific said that the new agreement will bring more clarity in changes in travel allowances for workers who travel and are away at worksites for days. The move addresses the predominant reason for the initial voting results, said Union Pacific Chief Executive

Lance Fritz,

adding that a labor strike could still be avoided. 

Union Pacific recorded a $114 million accounting charge in the quarter in connection with the tentative and ratified labor agreements. Jacksonville, Fla.-based CSX said the impact from the tentative labor agreements and inflation amounted to $97 million in the quarter.

Trade groups representing railroad customers such as chemical, agricultural and manufacturing companies said they have suffered after years of poor rail service that deteriorated further during the Covid-19 pandemic as companies struggled under a surge in orders, equipment shortages and worker absences.

Union Pacific said that it reached its 2022 hiring target of 1,400 train, engine and yard employees. While a third of them are still undergoing training, there has been more crew availability, which has helped to ease congestion and reduce delivery times, giving the railroad more room to fulfill unmet demand, executives said.

Write to Esther Fung at esther.fung@wsj.com

Corrections & Amplifications
Union Pacific was misspelled as Union Pacfiic in an earlier summary headline of this article. (Corrected on Oct. 20)