Union Pacific Increases Focus on Intermodal To Capitalize On Growing Demand

Union Pacific Corporation (NYSE: UNP) recently announced that it has increased the frequency of two of its intermodal services running to and from Chicago in order to meet the demand for truck-competitive services. ^[1] One of the services, the Portland premium, has a terminal at Portland and the other service, the NorCal, has terminals in Oakland and Lathrop. Both these services are part of Union Pacific’s top tier “premium” intermodal service with four-day delivery in the morning. The increase in frequency of these services will help boost Union Pacific’s intermodal volume.

In the past two years, intermodal has been the highest contributing segment towards Union Pacific’s revenues. With continued investments and service frequency increase, we believe that the segment will consistently generate high revenues for the company.

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Increase in intermodal services frequency will help boost volume and cater to growing demand

Union Pacific is likely to see a high demand for its intermodal services due to the declining trucking capacity and higher cost efficiency of railroads for long haul shipments. The Hours-of-Service safety regulation for commercial vehicle drivers has put a cap on the number of working hours for truck drivers leading to capacity constraints for the trucking industry. ^[2] Additionally, transporting freight by trucks is ten times expensive compared to railroads making it a less preferable means of long haul transport. ^[3] The price difference is expected to increase in the future driven by the price increase by trucks to counter the rising fuel prices and the declining trucking capacity.

The Lathrop intermodal Terminal is one of Union Pacific’s top 10 terminals with highest intermodal car traffic. The Oakland and Portland terminals also see high intermodal traffic. An increase in frequency of the services between these terminals and the Chicago terminal will help cater to the growing demand and boost Union Pacific’s intermodal volume. In order to attract customers, Union Pacific will also offer door-to-door transportation services via its subsidiary, Streamline.

Union Pacific’s Santa Teresa facility will also contribute to intermodal growth

In March 2014, Union Pacific announced the completion of its intermodal facility at Santa Teresa, New Mexico. This facility is strategically located to take advantage of the U.S. trade with Mexico. The facility is positioned near the Port of Santa Teresa where the annual truck crossings have increased 13% from 72,166 in 2011 to 81,339 in 2013. ^[4] The Santa Teresa facility became operational in May.

The facility will not only cater to intermodal carloads but also automotive shipments. IHS Automotive expects that Mexican auto exports will grow to 1.69 million this year, surpassing Japan as the number two auto exporter to the US in 2014. ^[5] Union Pacific already caters to 90% of the automotive shipments in and out of Mexico and will benefit from the growth in Mexican auto exports with significant help from the Santa Teresa facility.

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1. Union Pacific Railroad Adds Premium Intermodal Service, June 17 2014, www.uprr.com [↩]
2. 2014 Trucking Outlook – Q2 Update, April 30 2014, www.spendmatters.com [↩]
3. Cost Per Ton Mile for Four Shipping Modes, January 6 2012, richardtorian.blogspot.in [↩]
4. Port of Entry Data, www.nmbia.org [↩]
5. Mexico Surpassing Japan as No. 2 Auto Exporter to U.S., January 31 2014, www. bloomberg.com [↩]