Union Pacific Sees Stubborn Inflation, From Rails to Lawn Mowing

(Bloomberg) -- Union Pacific Corp. is coping with inflation on everything from steel for tracks to cleaning its offices and sees no signs of relief soon.

“From service providers who do things for us as mundane as cutting our grass or providing janitorial services, to running our intermodal ramps: All of them are showing to us inflation pressure and it doesn’t look like it’s temporary,” said Chief Executive Officer Lance Fritz.

While Union Pacific is protected to some degree because union wages are locked by multiyear contracts, costs for most materials and services are rising, Fritz said Thursday in a video interview with Bloomberg News reporters and editors. The Omaha, Nebraska-based railroad plans to increase prices to offset its own rising costs.

Inflation in the U.S. is expected to accelerate to 4.2% this year from 1.2% in 2020, according to economists surveyed by Bloomberg, amid a tight labor market and as the pandemic fuels purchases of consumer goods. Freight costs have increased because of supply-chain disruptions and a shortage of truck drivers.

Congestion for cargo will likely continue well into next year, Fritz said, as Covid-19 continues to reduce the number of available truck drivers and warehouse workers. Union Pacific took the severe step of halting some international freight movements for a week in July, holding shipments in Los Angeles instead of moving them on to Chicago.

“I anticipate these issues are going to last all through this year and into next year, and the question is how deep into next year,” Fritz said. “We’ve got to get truck capacity back, and we’ve got to get process capacity back in the form of labor in distribution warehouses before that really returns to normal.”

Rail Merger

In the hour-long interview, Fritz also addressed such issues as the takeover battle for Kansas City Southern between Canadian Pacific Railway Ltd. and Canadian National Railway Co., as well as the effects of severe weather on Union Pacific’s operations. Some highlights:

• The railroad has grappled with flooding and California wildfires that destroyed a rail bridge. “We experience the increased volatility of weather, whether it’s drought that prompts more fire, or catastrophic rain that creates flooding or severe windstorms, we see it all,” Fritz said. The railroad’s response includes equipping tank cars with water cannons.
• Union Pacific wants to ensure that any buyer of Kansas City Southern doesn’t change agreements for switching rail cars and using international bridges at the Mexican border. “We’re really, really clear with both the CN and the CP that that’s a concern of ours and we expect to be able to have a remedy negotiated,” he said.
• A Kansas City Southern takeover wouldn’t affect Union Pacific’s plans for its 26%, two-decade-old stake in Ferromex, a big Mexican railroad, Fritz said. “We don’t have any plans right now to acquire more or purchase them outright.”
• While the Biden administration presses freight railroads to give more right-of-way to Amtrak, Fritz wants to ensure that doesn’t hurt Union Pacific’s core business. “We don’t say, ‘Hell no.’ But we say, ‘Let’s get into a negotiation, let’s be thoughtful and make sure that we don’t disrupt and retard our ability to be a great freight railroad.’”

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