This is Dom Cooke and today we are breaking down the freight railroad business, Union Pacific. Union Pacific is interesting for a number of reasons. Its first tracks were laid in a time of horsepower, over 150 years ago. It operates a duopoly in the West of the US with Burlington Northern Santa Fe, a rail owned by Berkshire Hathaway. And despite being capital intensive, it earns higher operating margins than Microsoft. But above all, it is a crucial link in the global supply chain, moving much of what the US economy is built on. 

To break down this $140 billion railroad operator, I’m joined by Matt Reustle, the CEO of Colossus and a former transport analyst. Please enjoy this Business Breakdown of Union Pacific Railroad Company.

For the full show notes, transcript, and links to the best content to learn more, check out the episode page here.

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Show Notes

[00:03:01] - [First question] - A general overview of the transportation sector

[00:05:38] - What a Class 1 railway is and what the railway industry looks like

[00:07:40] - Is there cartel-like behavior and collusion between railway companies?

[00:12:24] - What a rail network consists of at the unit and asset level

[00:17:48] - Whether or not consumer railroads are independent from freight railroads 

[00:18:57] - Interchange when goods are transferred from the east coast to the west coast 

[00:20:17] - Who Union Pacific’s customers are, what they move, and their business writ large 

[00:25:35] - The Box; Whether or not all transport volume in 50 years will be intermodal

[00:26:37] - How they determine the rate they charge customers  

[00:28:41] - Ways that geography impacts what is being transported 

[00:31:28] - The income statement and economics of rails through the lens of UNP

[00:36:11] - Improving efficiency and ROI while not having to submit to customers 

[00:40:12] - How different policies affect railway margin profiles 

[00:41:56] - Operating ratios and why they’re the metric most referenced for performance

[00:44:38] - The nature of cyclicality and its driving forces 

[00:48:15] - Thoughts about capital allocation given being high CapEx and their free cash flow

[00:52:27] - How inflation and current events lately positively and negatively affect UNP

[00:54:16] - What would make him nervous as an analyst looking at UNP in the years ahead

[00:56:33] - Talk or plans to electrify and migrate away from fossil fuels 

[00:58:22] - Lessons learned from UNP that could be applied to other industries and investing