Union Pacific Sees Rail Rates Firming

Union Pacific Sees Rail Rates Firming

Union Pacific Railroad officials see their 3.5 percent “core pricing” gains in the first quarter as the low point of 2010, and look for their overall rates to strengthen more as the year continues.

Throughout this year “if volume and demand pick up it should create a stronger pricing environment,” Chairman, President and CEO James R. Young told analysts after Thursday’s report of a strong first quarter profit.

Robert M. Knight, UP’s chief financial officer, said the 3.5 percent included about a half point tied to fuel cost recovery while other price increases often came from renewing old shipment contracts at higher rates, and the company still has some remaining contracts to adjust.

“Our legacy renewals also provide us with better fuel cost recovery,” Knight added, “and although this does not contribute to our core price numbers, it definitely improves our intermodal and overall company margins.”

The railroad’s intermodal pricing has been negative in the recession with a low-priced, long-term contract with shipment consolidator Pacer International in the mix. But UP and Pacer redid their terms last fall, and the new terms allow higher pricing to kick in over time. “This will be the last quarter that we have negative pricing in our intermodal franchise,” said Jack Koraleski, executive vice president for marketing and sales.

He also said the largest legacy contract of the first three months was a large automotive shipments deal that repriced at mid-quarter, so “there is greater strength moving forward from that.”

Finally, said Koraleski, much of UP’s non-contract business, which moves under public tariffs, “is still reflective of last year’s softer economic terms. Those will change over time as we go through the year with continued strengthening in the economy. So we’re feeling pretty good about what our price picture looks like going forward.”

Those tariffs are already starting to change, he said. “As we start to see truck capacity tighten and truck pricing going up, those kinds of things, we’re back at the table looking for opportunity” to firm up rail pricing for truck-competitive tariff loads.

Contact John D. Boyd at jboyd@joc.com.