Union Pacific Railroad’s pricing leverage may have been strong last year, but it’s due to get even stronger in 2012.
The nation’s largest freight railroad has more than $1 billion in “legacy” contracts priced below current market levels up for renewal this year, according to transportation industry analysts, raising the prospects of higher rates and better results even after UP reported the most profitable year in its 150-year history in 2011.
“The bar has been raised in terms of future expectations,” said James R. Young, chairman and CEO of the Omaha, Neb.-based rail operator.
UP’s results for last year, including a $3.3 billion net profit that was 18 percent ahead of the previous year, capped a strong year for U.S. freight railroads that demonstrated the command they have over pricing and their own financial fortunes.
A recovering domestic industrial economy helped UP compensate for weaker international container and agricultural volumes in the fourth quarter, when operating revenue and net profit rose much faster than overall freight volume. UP now expects automotive shipments, energy and industrial and domestic intermodal traffic to raise its revenue and profits in 2012.
The western U.S. railroad’s core pricing rose 5 percent in the fourth quarter. Fuel surcharge revenue and rate hikes drove fourth quarter revenue per carload, or yield, up 12.8 percent.
UP’s pricing “should accelerate materially starting in the first quarter,” the Wolfe Trahan investment research firm said in a statement. “None of the other rails have material legacy contract repricing opportunities the next two years.”
The company hailed 2011 as the most profitable year in its history, with the net earnings growth outpacing a 15 percent gain in revenue, to $19.6 billion.
In the fourth quarter, revenue climbed 16 percent to $5.1 billion, while net profit increased 24 percent to $964 million. That’s a 6.6 percent increase from the $904 million net profit UP reported on $5.1 billion in revenue in the third quarter.
“Both yields and revenue were better than expected” in the quarter, said Peter Nesvold, an analyst with investment research firm Jefferies. “The 5 percent year-over-year growth in core pricing showed acceleration from the 4.5 percent year-over-year growth last quarter … Importantly, this is before the $1 billion of near-term contract repricings kick in,” Nesvold said in a note to investors.
For the fourth quarter, automotive and chemical volumes were up 10 percent from a year earlier. Carloads of finished vehicles increased 14 percent and automotive parts shipments 7 percent.
Biofuels volume, including ethanol and biodiesel, grew 18 percent, while petroleum shipments leaped 46 percent, driven by increased output from drilling in the Bakken and Eagle Ford Shale deposits in North Dakota and Texas.
Hydraulic fracturing, or “fracking,” also boosted UP’s industrial products business, which saw volume increase 7 percent in the quarter from a year earlier. That included a 40 percent leap in non-metallic mineral shipments used in hydraulic drilling, including frac sand and steel pipe. Energy volume was up 8 percent, fueled by “solid improvement” in the export coal market and new business from U.S. utilities.
Tonnage only turned soft in agricultural products and intermodal shipments, largely because of weaker international markets. Overall, UP’s agricultural carloadings dropped 5 percent in the quarter. Export grain shipments declined 43 percent, but the railroad’s domestic grain volume increased 22 percent from a year earlier.
UP’s intermodal volume dropped 3 percent year-over-year, as lower import levels led to a 7 percent decline in inbound containers. However, domestic intermodal volume rose 3 percent as UP converted more truck freight to intermodal rail.
“That topped the previous quarterly (domestic intermodal volume) record that we set at the end of last year,” John J. Koraleski, executive vice president of sales and marketing, told investment analysts in a Jan. 19 earnings conference call.
Koraleski said he expects UP to draw more truckload freight off the highways in coming years as tight equipment capacity and a tough driver market accelerate truck pricing. “We continue to see intermodal as a long-term growth driver,” he said, “and in 2012 great service should bring new highway conversions in the domestic segment.”