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Traffic volume growth, pricing gains and more efficient operations added up to record-setting financial performance for Union Pacific Corp. in the third quarter. So much so, the Class I registered its most profitable quarter ever, said UP Chairman, President and Chief Executive Officer Jim Young during this morning’s earnings webcast and teleconference.

Diluted earnings per share soared 54 percent to $1.56, operating income jumped 46 percent to a record $1.4 billion, net income skyrocketed 51 percent to a quarterly best $778 million, volume rose 14 percent to 2.3 million units — the highest level in two years — and the operating ratio improved 5.6 points to a record 68.2 compared with third-quarter 2009 figures.

“It was our second consecutive quarter with an operating ratio under 70,” said Young, adding that the third-quarter ratio improved 1.2 points from the previous record of 69.4 set in the second quarter.

In addition, operating revenue rose 20 percent to $4.4 billion — the first time UP cracked the $4 billion mark since fourth-quarter 2008, said Executive Vice President of Marketing and Sales Jack Koraleski. Revenue increased in all six business groups:
• agricultural products, up 16 percent to $750 million (with volume up 7 percent to 229,000 units);
• automotive, up 36 percent to $309 million (with volume up 18 percent to 146,000 units);
• chemicals, up 14 percent to $629 million (with volume up 9 percent to 221,000 units);
• energy, up 11 percent to $922 million (with volume up 1 percent to 535,000 units);
• industrial products, up 25 percent to $697 million (with volume up 20 percent to 282,000 units); and
• intermodal, up 34 percent to $880 million (with volume up 24 percent to 903,000 units).

Strong global demand for U.S. grain and steadily increasing ethanol traffic helped push up agricultural products revenue; increased vehicle production and repriced contracts helped drive up automotive revenue; strong fertilizer, petroleum and domestic plastics demand helped boost chemical revenue; stronger Southern Powder River Basin coal demand helped propel energy revenue; growth markets tied to drilling industries and higher waste shipments helped increase industrial products revenue; and strength in both international and domestic volumes helped elevate intermodal revenue, said Koraleski.

However, significant increases in compensation/benefit and fuel costs played major roles in driving up operating expenses 11 percent year over year to $3 billion. Compensation/benefit costs rose 9 percent to $1.1 billion primarily because of wage and benefit inflation, which accounted for half the year-over-year increase, said EVP and Chief Financial Officer Rob Knight. Fuel expenses jumped 30 percent to $608 million — accounting for one-third of the total increase in operating costs — primarily because the average diesel price rose 20 percent to $2.24 per gallon, he said.

In terms of UP’s efforts to continually drive down its operating ratio, volume leverage, operating efficiency and better service, pricing gains and fuel surcharge recovery have helped the Class I maintain a sub-70 ratio, said Knight. The ratio has dropped from 78.1 at the end of 2009 to 76.1 in the first quarter to below 70 in each of the past two quarters.

Continuing to leverage capital investments, deliver on customer commitments and realize the UP franchise’s potential will keep the Class I on track for future growth, said Young.

“We’re on pace for the best-ever year for the railroad,” he said.

— Jeff Stagl