Union Pacific’s margins slip on higher costs, network snags

Union Pacific Corp.’s quarterly operating profit margins fell from a year earlier amid higher costs and network congestion that caused carloads to drop.

Operating margins were 40% in the second quarter, a decline of about 5 percentage points from a year earlier, even as higher prices drove sales up, Union Pacific said in a statement.

The railroad lowered its 2022 target for operating profit margins by about 2 percentage points to 42%.

The second quarter “was all about recovery and adding the necessary resources and experiencing the necessary costs to recover more quickly than we would otherwise,” Chief Executive Officer Lance Fritz said on a conference call with analysts.

The railroad is now poised to increase carloads in the second half of this year, he said.

U.S. railroads, including Union Pacific, have blamed declining train speeds and the longer times that railcars sit idle in yards on their inability to hire enough rail workers.

Customer complaints about deteriorating service led the Surface Transportation Board, which regulates the industry, to hold hearings earlier this year and order railroads to issue weekly reports on their operations.

Union Pacific’s shares fell less than 1% to $212.94 at 9:47 a.m. Thursday in New York.

The stock was down about 15% this year through Wednesday’s close.

Increased prices and higher fuel surcharges helped drive up second-quarter revenue by 14% to $6.27 billion even as carloads fell 1.4%.

Analysts had expected sales of $6.12 billion. Earnings were $2.93 a share, helped in part by share buybacks, more than the $2.84 a share analysts had predicted.

The worker shortage isn’t likely to ease anytime soon after the railroads and unions, which represent about 115,000 rail workers, hit an impasse on a labor agreement, which forced President Joe Biden to intervene last week by announcing a presidential panel to resolve the conflict.

“We are increasingly cautious on the U.S. rails’ ability to hire and retain sufficient labor while they are locked in a contentious union contract negotiation that could stretch into 4Q22,” Brian Ossenbeck, an analyst with JPMorgan Chase, wrote in a July 11 report.