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Although BNSF Railway Co. generated more freight revenue in the second quarter, a strong fuel headwind was too much to overcome in the earnings and income departments.

Quarterly operating income decreased 3 percent to $841 million and earnings fell 6 percent to $1.27 per diluted share compared with second-quarter 2006 primarily because fuel costs rose $93 million as a fuel hedge benefit declined $122 million.

In addition, operating expenses rose 6 percent to $3 billion because of rising diesel costs and the declining hedge position, and BNSF’s second-quarter operating ratio worsened 1.6 points to 77.5.

The fuel headwind and softer-than-expected traffic volumes — total carloads dropped 3 percent year over year to 2.6 million units — added up to a less-than-stellar quarter, BNSF Chairman, President and Chief Executive Officer Matt Rose and other top executives told attendees during an earnings conference held this morning.

“But this is still a very busy railroad,” said Rose. “We’re seeing a soft spot in the economy that’s a temporary patch. We’re going to keep expenses tight. In six to eight months, things will look better than they do today.”

The lone bright spot in the quarter: revenue, which increased 4 percent to $3.7 billion compared with last year. Coal revenue rose 9 percent to a record $776 million, industrial products revenue increased 4 percent to $950 million and agricultural products revenue went up 9 percent to $610 million. Consumer products revenue remained flat at $1.4 billion because volumes fell 7 percent year over year.

In the first half, BNSF’s freight revenue totaled $7.5 billion, a 5 percent increase compared with first-half 2006. But operating income decreased 8 percent to $1.5 billion, net income declined 11 percent to $782 million, operating expenses increased 8 percent to $6 billion and the railroad’s operating ratio worsened 2.7 points to 78.9.

For the remainder of 2007, BNSF execs expect revenue growth in the low single digits and traffic volume to remain about 3 percent lower than last year.