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Despite efforts to boost productivity and cut costs, Union Pacific Railroad couldn’t overcome the recession’s effects in the fourth quarter. Lower traffic volume led to less revenue, earnings and income.

However, UP’s ongoing mission to provide an optimal “value proposition” paid off in several operational performance and service milestones, and a highest-ever customer satisfaction rating of 88 percent, said Chairman, President and Chief Executive Officer Jim Young during UP’s earnings Webcast and teleconference held this morning.

“We’re raising the bar in the eyes of our customers,” he said.

In addition, cost-control and efficiency initiatives led to record-low quarterly and annual operating ratios, and traffic volumes began to increase during the quarter, especially in the intermodal, agricultural products and automotive sectors.

Although the outlook for volume remains unclear, the slight uptick in 4Q “points to stability,” said Young.

For the quarter, UP reported diluted earnings per share of $1.08, down 18 percent, and operating revenue of $3.75 billion, down 12 percent compared with fourth-quarter 2008 figures. Analysts had expected earnings of $1.04 and revenue of $3.78 billion, according to Thomson Reuters. Operating income dropped 12 percent to $1 billion, net income decreased 17 percent to $551 million and volume fell 5 percent to 2 million units.

Automotive revenue dipped 1 percent to $302 million, but traffic rose 1 percent; intermodal revenue dropped 3 percent to $684 million although traffic increased 5 percent; agricultural revenue fell 7 percent to $738 million, but traffic rose 3 percent; chemical revenue also declined 7 percent to $539 million as traffic dropped 2 percent; energy revenue tumbled 22 percent to $765 million as traffic fell 15 percent; and industrial products revenue plummeted 28 percent to $513 million as traffic plunged 21 percent.

Highlights and lowlights among the commodity groups include: a 13 percent gain in ethanol traffic; a rise in auto inventory replenishment; a 28 percent jump in domestic intermodal traffic, helping domestic revenue surpass international revenue for the first time; a 16 percent decline in Powder River Basin coal traffic; and a 23 percent drop in lumber shipments.

In terms of costs, fourth-quarter operating expenses fell 12 percent to $2.8 billion. Fuel costs plunged 26 percent to $541 million as the average price per gallon dropped from $2.46 in 4Q ’08 to $2.05 in 4Q ’09 and fuel consumption declined year-over-year from 289 million gallons to 256 million gallons; compensation and benefit costs decreased 8 percent to $1 billion as UP reduced its workforce 10 percent to about 42,000 and cut overtime; and purchased services/material costs declined 8 percent to $421 million as crew transportation/lodging and facility costs decreased, said Executive Vice President and Chief Financial Officer Rob Knight.

UP registered a record quarterly operating ratio of 73.3 vs. a previous record of 73.4 in 4Q ’08. The full-year ratio also dropped to a record-setting 76 compared with 77.3 in 2008. UP continues to post progress on reaching its goal of a low-70s operating ratio by 2012, said Young.

Other full-year results show operating revenue tumbled 21 percent to $14.1 billion, operating income fell 17 percent to $3.4 billion, net income dropped 19 percent to $1.9 billion, diluted earnings per share declined 17 percent to $3.75 and operating expenses plummeted 23 percent to $10.8 billion compared with 2008 figures.

Knight also announced that UP has budgeted $2.5 billion for 2010 capital spending, the same amount as last year but down from $3.1 billion in 2007. The Class I expects to spend $150 million to complete an intermodal terminal in Joliet, Ill., and $200 million on positive train control (PTC).

UP will spend about $1.4 billion to install PTC by the federally mandated deadline of Dec. 31, 2015, and millions more to maintain the system, said Young.

“The PTC mandate is an example of well-intended legislation with negative unintended consequences,” he said.

— Jeff Stagl