Railroads, Packing
Pricing Power,
Deliver Big Profits

If the U.S. economy is deteriorating, could someone please tell the railroad industry?

Profits for several railroad companies are surging as they exercise their power to raise prices, in part because they remain a cheaper alternative to trucks and other less fuel-efficient modes of transportation. Union Pacific Corp., the largest U.S. freight railroad operator by revenue, reported a 19% jump in second-quarter net income, despite a 3% drop in carloads, a 54% jump in fuel costs and a variety of logistical issues associated with recent Midwest flooding.

Last week, CSX Corp. also reported a 19% profit increase for the second quarter, while Norfolk Southern Corp. said Tuesday that second-quarter profits rose 15%. Burlington Northern Sante Fe Corp. said Thursday that net income fell 19%, but the results included charges mostly related to an environmental cleanup in Montana. Without the charges, Burlington Northern said profits rose 25%.

The railroad companies are far more fuel-efficient than trucks and relatively cheaper as fuel prices soar. Even more, some railroad customers, for logistical reasons, can't ship their freight any other way.

As a result, beyond fuel surcharges, the railroads have been able to raise their rates "even in this tough economy," said Anthony Hatch, an independent transportation analyst -- a fact that has rankled customers but delighted shareholders.

Mr. Hatch also cited the industry's "very diverse traffic base" as a reason for its successes. While volumes of auto parts, lumber and other materials connected to the automotive and housing industries have sagged, demand for coal, metals and agricultural products remains robust, in part because of surging exports. While revenue in Union Pacific's automotive segment fell 9%, agricultural freight revenue rose 29%.

Union Pacific, CSX and a smaller railroad, Kansas City Southern Corp., have also improved efficiency in the past five years, according to analyst Rick Paterson of UBS Investment Research, calling their financial results in part "an internal productivity story."

Union Pacific's results handily beat Wall Street's expectations. Net income rose to $531 million, or $1.02 a share, from $446 million, or 82 cents a share, a year ago. The Omaha, Neb., company warned last month that earnings would be reduced by about five cents a share and come in at the low end of its estimate range of 90 cents to 98 cents due to severe weather. The mean forecast by analysts surveyed by Thomson Reuters was for 92 cents a share.

Revenue rose 13% to $4.57 billion.

Burlington Northern, the second-largest freight operator after Union Pacific, said net income dropped to $350 million, or $1 a share, from $433 million, or $1.20 a share, in the year-earlier quarter. The results included charges of 34 cents a share for the environmental cleanup and personal-injury accruals. Burlington Northern lowered its earnings projection to $1.30 a share last month due to the severe weather.

Associated Press

Union Pacific Chief Executive Jim Young said that while customers aren't happy with the higher prices, they also continually urge expanding capacity. "If you believe that railroads are going to be part of the solution moving forward, we need to keep adding capital and these returns need to move up," he said, adding that the company plans to spend $1 billion in the next year on expansion-related projects.

In 4 p.m. composite trading on the New York Stock Exchange, Union Pacific was down 15 cents to $77.18. Burlington Northern, which released results after 4 p.m., was up $1.23 to $100 in after-hours trading, also on NYSE.

Write to Alex Roth at alex.roth@wsj.com