Mark Szakonyi, January 23, 2015, JOC.com
Union Pacific Railroad said U.S. West Coast port congestion will remain a drag on its volume growth until the International Longshore and Warehouse Union and waterfront employers agree to a contract.
UP said it has a contingency plan ready if there is a work stoppage and has shared those plans with customers, Eric Butler, UP executive vice president of marketing and sales, said during a Thursday earnings call, in which the railroad reported a 22 percent increase in net income to a record $1.4 billion. In preparation for a possible shutdown of West Coast ports, UP said it is staging equipment in critical locations and would embargo ocean containers so that the velocity of the rest of its network wouldn’t suffer if such an event occurs.
Butler said that amidst what are seen as worsening delays at West Coast ports in recent weeks, shippers “were doing what they need to do to protect their supply chains.” Shippers have diverted some shipments away from the U.S West Coast ports to U.S East Coast and Canadian ports, resulting in the railroad losing some volume. Once the West Coast port congestion issues are resolved, Butler said he was confident that Los Angeles and Long Beach ports would be the “premier way” for shippers to get their goods into the country.
Despite the uncertainty, UP is still optimistic about intermodal growth, particularly domestic intermodal traffic expansion, as it expects shippers to move more loads from the highway to the rails due to tightening truck capacity resulting into higher rates. Butler said intermodal services are 10 percent to 30 percent cheaper than over-the-road trucking rates, depending on the lane. Even though lower oil prices have pulled down truck fuel surcharges, Butler said he was confident that intermodal still enjoyed a “sweet spot” and has pricing power.
“We feel really good about our opportunities in price going forward,” he said.
Volumes of domestic intermodal moves in the fourth quarter jumped 10 percent year-over-year to a record high, reflecting strong conversion from truck to rail and transloading. UP has aggressively added new services, including ones tapping growing U.S.-Mexico cross-border trade. UP’s international intermodal traffic in the last three months of 2014 inched up 2 percent from the same period in 2013, as U.S. economic strength offset the headwinds of reduced West Coast port productivity.
Total intermodal volume last quarter rose 6 percent, fueling a 11 percent year-over-year increase in intermodal business to $1.1 billion. Intermodal revenue accounted for roughly 20 percent of the railroad’s total fourth quarter freight revenue, which rose 9 percent year-over-year to nearly $5.8 billion.
UP acknowledged that its intermodal service was below expectations in the fourth quarter, but noted that service improved even during the peak season and keeps getting better. Average UP intermodal train speeds, a key metric of overall performance, have become steadily faster in recent weeks, according to statistics reported to the Association of American Railroads.
UP said its plan to invest $4.3 billion on capital projects, pending approval from its board of directors, will help it expand capacity and continue to restore network fluidity. The tentative capital plans for this year is roughly $200 million more than the railroad spent in 2014.