“We Are the Green Solution”

What's a few billion dollars spent on infrastructure when your vehicles get more than 700 mpg? An interview with Robert M. Knight Jr., EVP and CFO, Union Pacific Corp.

Rob Knight is one CFO who is still bullish on his business. And why not? His company — Omaha-based Union Pacific Corp., the country’s largest railroad — has managed to deliver earnings and dividend growth even in the teeth of recession. The railroad’s strong revenues from shipments of coal and agricultural products have offset falling demand for automotive and housing-related freight, while highway congestion and environmental concerns increasingly make rail transport seem like an efficient green alternative. That’s not to say Union Pacific, which operates 33,000 route miles of track in 23 Western and Central states, is immune to the downturn. Its overall freight volumes shrank in 2008, and it expects flat or falling volumes in 2009. But as the 51-year-old Knight explains, a diverse customer base and a dedication to efficiency have kept Union Pacific’s financial performance on track. The railroad’s Q3 2008 earnings per share ($1.38) and operating income ($1.2 billion) were up 38 percent and 21 percent, respectively, and at press time Knight was optimistic that the fourth quarter would produce comparably sunny results.

How much has the recession hurt Union Pacific?

Our volumes in the third quarter were down 5 percent, which is a pretty big swing in our business. But a point or so of that was related to the hurricanes [Gustav and Ike]. We estimate volumes will be down more than 5 percent in the fourth quarter. Having said that, business continues to be fairly good in the rail industry. We’re getting all-time levels of positive feedback on our service products, and productivity continues to improve. We’ve been able to move the pricing of our product up to market-level rates. We estimated for the entire year of 2008 we will get in the range of 5 to 6 percent core pricing [gains].

Does that same yin-and-yang effect pertain to fuel prices?

The increase in fuel prices last year did force us to incur a huge cost. We have fuel-surcharge mechanisms, but they don’t recover 100 percent of those costs. [On the other hand,] rail is the most efficient mode of transportation. We can move one ton 790 miles on one gallon of diesel fuel. We are three to four times more fuel-efficient than a truck. We also have two-thirds less of a carbon footprint than other modes of transportation, including trucks. So we are kind of the green solution, which favors us moving forward.

What do you forecast for 2009?

In our third-quarter earnings release we said we see volumes for 2009 being flat to negative 2 percent. That was an early look, however; we have not finalized our 2009 plan.

Did you take business from trucks when fuel prices were sky-high?

On the margin you might have seen a little shift. A lot of the product that moves by truck needs to get there now. Rail hasn’t been that kind of a service; it’s more of a 24-hour-window kind of commitment. But as the consistency and reliability of our service improve, we’ve been able to narrow that gap. We’re able to make commitments in a 4-to-8-hour time frame, and that opens more doors for us. We’ll never be in the market for just-in-time, but we are well positioned to continue to grow our market share in intermodal. We do offer a lot of advantages over trucks. Take Los Angeles: there’s only so much more room to put more trucks on highways there. So as its economy expands, railroads — and in particular Union Pacific, because Los Angeles is a major market for us — are well positioned to take advantage of that growth.

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