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Union Pacific Corp.’s second-quarter performance could best be described as the good, the bad and the ugly. The good: a 30 percent drop in operating expenses, 5 percent average increase in rates, record operating ratio, and all-time-best safety and service metrics. The bad: double-digit declines in earnings and income. The ugly: more than 20 percent decreases in carloads and revenue.

Overall, UP produced “solid” results despite a business environment that continued to be extremely challenging, said Chairman, President and Chief Executive Officer Jim Young during an earnings Webcast/teleconference held this morning.

“Usually, volumes increase from the first to the second quarter, but that was noticeably absent this year,” he said.

A 22 percent drop in traffic volume to 1.9 million units was the primary reason operating revenue plunged 28 percent to $3.3 billion compared with second-quarter 2008’s total. In addition, fuel surcharge revenue decreased by more than $500 million.

Automotive revenue plummeted 54 percent to $163 million as carloads fell 47 percent; industrial products revenue plunged 39 percent to $531 million as carloads tumbled 34 percent; chemicals revenue dropped 24 percent to $499 million as carloads decreased 22 percent; intermodal revenue fell 23 percent to $595 million as carloads dropped 18 percent; energy revenue decreased 22 percent to $715 million as carloads dipped 16 percent; and agricultural revenue tumbled 21 percent to $618 million as carloads fell 14 percent.

Operating income totaling $751 million dropped 19 percent and net income totaling $468 million, or 92 cents per share, decreased 12 percent compared with second-quarter 2008 levels. Analysts had expected earnings of 76 cents per share on revenue of $3.5 billion, according to Thomson Reuters.

However, UP’s operating ratio dropped 2.3 points to a record 77.3 primarily because of efficiency and pricing gains, and cost controls — operating expenses of $2.6 billion dropped 30 percent year over year.

The Class I cut fuel costs by 68 percent to $370 million; purchased services/materials expenses by 21 percent to $391 million; and compensation/benefits costs by 11 percent to $976 million. UP has reduced its workforce 10 percent to its lowest level since the Southern Pacific Railroad merger in 1996, said Executive Vice President and Chief Financial Officer Rob Knight.

During the quarter, the railroad also reached an average train speed of 27.4 mph, up about 5 mph, or 20 percent, compared with second-quarter 2008’s average velocity, and registered a customer satisfaction index of 87, bettering the year-ago index by 4 points and matching the best-ever quarterly mark.

“We are fully positioned to handle more business when volumes return,” said Young.

— Jeff Stagl