Key facts
- Union Pacific expects diesel fuel costs to average about $4.25 a gallon in the third quarter.
- The railroad is currently paying about $5.25 to $5.30 a gallon for diesel fuel.
- Higher diesel prices are prompting some shippers to move freight from trucks to rail.
- Union Pacific's underlying business remained robust with broad-based strength in industrial shipments and intermodal traffic.
- The company has not seen significant demand destruction from higher energy costs.
Union Pacific said soaring diesel prices were prompting some shippers to move freight from trucks to rail, boosting demand for the railroad as customers seek lower transportation costs.
Speaking at the Morgan Stanley Laguna Conference, Chief Financial Officer Jennifer Hamann said the railroad was beginning to see customers make the shift because of the fuel-efficiency advantage, providing an additional boost beyond broader cyclical improvements in freight demand.
Union Pacific expects diesel fuel costs to average about $4.25 a gallon in the third quarter, but is currently paying about $5.25 to $5.30 a gallon, creating pressure on its operating ratio, Hamann said.
Despite higher fuel costs, Union Pacific said its underlying business remained robust, with broad-based strength in industrial shipments and intermodal traffic continuing to drive volume growth during the quarter.
The company is yet to see significant demand destruction from higher energy costs, with customers still "pretty bullish," Hamann said, citing healthy order books and inventory trends that point to continued freight demand.
CEO Jim Vena said elevated fuel prices were not ideal for the broader economy, but noted the railroad has not seen a slowdown in shipments so far.
Separately, Norfolk Southern anticipates that rising fuel prices will create a significant headwind for its third-quarter financial performance, despite ongoing efforts to capture freight market share from trucking. CFO Jason Zampi stated that fuel prices, which were expected to peak earlier, now present a roughly 250-basis-point negative impact on the company's operating ratio compared to expectations from two months prior. The company projects its third-quarter performance to be slightly below typical seasonal trends. Executives view the conflict in the Middle East as a greater concern than tariffs due to its impact on fuel prices and shipping routes. Regarding the proposed merger with Union Pacific, executives indicated that the regulatory review process is progressing as anticipated.