Greetings. Welcome to the Union Pacific Third Quarter Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded It is now my pleasure to introduce your host, Mr.
Lance Fritz, Chairman, President and CEO for Union Pacific. Thank you, Mr. Fritz. You may now begin.
Thank you, and good morning, everybody. Welcome to Union Pacific's 3rd quarter earnings conference call. With me here today in Omaha are Eric Butler, Executive Vice President of Marketing and Sales Cameron Scott, Executive Vice President of Operations and Rob Knight, our Chief Financial Officer. This morning, Union Pacific is reporting net income of $1,300,000,000 for the Q3 2015. This equates to $1.50 per share, which is down 2% compared to the Q3 of 2014.
Total volumes decreased about 6% in the quarter, more than offsetting another quarter of solid core pricing gains. Carload volume declined in 5 of our 6 commodity groups with coal down the most at 15%. Automotive was the 1 commodity group with a year over year increase in the quarter with carloads up 5% versus 2014. On the cost side, we've made significant progress aligning our resources to current demand, and I'm pleased to report a quarterly record operating ratio of 60.3%. Going forward, we'll be intently focused on generating further productivity improvements.
In addition, developing new business remains an important part of our strategy. Whether we grow existing markets, develop new business with existing customers or find new market opportunities, our commercial team is constantly filling the business development pipeline. I'm encouraged with the progress we've made as the men and women of Union Pacific work tirelessly and safely to serve our customers and deliver value to our shareholders. With that, I'll turn it over to Eric.
Thanks, Lance, and good morning. In the Q3, our volume was down 6.5% with gains in automotive more than offset by declines in the other business groups. We generated core pricing gains of 3.5%, but it was not enough to offset decreased fuel surcharge and mix headwinds as average revenue per car declined 4% in the quarter. Overall, the declines in volume and lower average revenue per car drove a 10% reduction in freight revenue. Let's take a closer look at each of the 6 business groups.
Ag Products revenue was down 4% on a 3% volume reduction and a 1% decrease in average revenue per car. Grain volume was down 11% in the 3rd quarter. The strong U. S. Dollar and high worldwide inventories reduced grain exports by 32 percent.
Slightly stronger domestic grain shipments partially offset the export decline. Grain products volume increased 1% for the quarter. July August saw the largest domestic soybean meal crush on record, resulting in a 17% increase in soybean meal shipments. Partially offsetting this was a 4% decline in ethanol shipments driven by strong 2014 comps of higher production and shipments. Food and refrigerated product volumes were flat for the quarter as strength in import sugar and barley were offset by declines in frozen meat and potato shipments.
Automotive revenue was flat in the 3rd quarter as a 5% increase in volume was offset by 5% reduction in average revenue per car. Finished vehicle shipments were up 5% this quarter, driven by continued strength in consumer demand. Seasonally adjusted annual rate for North American automotive sales was 17,800,000 vehicles in the 3rd quarter, up 6% from last year. In auto parts, volume grew 5%, driven primarily by increased vehicle production. Chemicals revenue was down 6% for the quarter on a 3% reduction in both volume and average revenue per car.
We continue to see strength in plastic shipments, which were up 7% in the 3rd quarter due to stable resin pricing and strong export volume. However, our volume gains were more than offset by declines in shipments of both fertilizer and crude oil. Lower grain commodity prices and market uncertainty resulted in farmers delaying fertilizer purchases. This resulted in a 10% decline in our fertilizer volume. Crude oil volume, which was down 40% in the quarter, continues to be impacted by low crude oil prices and unfavorable price spreads.
Coal revenue declined 18% in the 3rd quarter on a 15% volume decline and a 4% decrease in average revenue per car. Southern Powder River Basin tonnage was down 12% in the quarter. Low natural gas prices continued to put downward pressure on coal demand as coal share of electricity generated from 30 generation declined from 38% in the Q3 of last year to 35% this year. Coal inventories, which are currently 20 days above the 5 year average, contributed to the sluggish demand. Colorado, Utah tonnage was down 32%, driven again by soft domestic demand and reduced export shipments.
Industrial Products revenue was down 16% on a 12% decline in volume and a 4% decrease in average revenue per car during the quarter. A reduction in shale drilling resulted in a 31% decline in minerals volume, primarily driven by a 36% increase in frac sand carloadings. Metals volume was down 26% as lower crude oil prices suppressed drilling related shipments and the strong U. S. Dollar drove increased imports.
Demand for construction products resulted in a 1% volume increase in the 3rd quarter, driven by continued demand in road and construction projects in our Texas Rock region. Intermodal revenue was down 11% in the 3rd quarter on a 4% lower volume and a 7% decrease in average revenue per unit. Domestic intermodal volume was up 1% in the 3rd quarter. Even though retail sales were down slightly year over year, we still achieved a best ever Q3 of domestic intermodal volume. International intermodal volume was down 9% in the quarter as compared to a strong Q3 2014 when cargo owners advanced peak season shipments in anticipation of port labor strikes.
With relatively high retail inventories, some international intermodal customers have reduced orders and not all East Coast diversions have migrated back to the West Coast. I'll update you on peak season in just a minute. To wrap up, let's take a look at our outlook for the rest of the year. In Ag Products, although we've had another strong crop year, low commodity prices and abundant global supply create uncertainty in our volume outlook for grain. In Food and Refrigerated, we expect continued strength in beer, though we're facing headwinds in other markets from increased truck availability year over year.
We expect automotive sales to remain strong for the rest of the year, driving growth in finished vehicles and parts shipments. We continue to expect coal demand to remain below year ago levels due to low natural gas prices, higher than average coal inventories and headwinds in the export coal market. As always, a key factor in demand will be weather conditions. Most chemical markets should remain steady for the remainder of the year with strength expected in LPG. We continue to expect that weak oil prices, reduced production and unfavorable spreads will remain a significant headwind for crude by rail shipments.
In Industrial Products, lower crude oil prices will also continue to challenge our minerals and minerals volume through the rest of 2015. While the housing market is slowly strengthening, the strong dollar and relatively weak China lumber import market are driving more imports of Canadian lumber to the U. S. We continue to expect demand for construction products to remain strong, particularly in the southern part of our franchise. Finally, in Intermodal, we continue to see highway conversions and we expect this to be the 7th consecutive year of record domestic Intermodal volumes.
We expect that relatively soft retail sales will cause headwinds in our international intermodal volumes. Overall, we will continue to focus on solid core pricing gains, strengthening our customer value proposition and developing new business across our diverse
performance, our year to date reportable personal injury rate improved 12% versus 2014 to a record low of 0.92. While we continue to make significant improvement, we won't be satisfied until we reach our goal of 0 incidents, getting every one of our employees home safely at the end of each day. With respect to rail equipment incidents or derailments, our reportable rate increased 17% to 3.56 driven by an increase in yard and industry reportables. While our reportable rate has taken a step back this year, we are confident that our strategy aimed at eliminating human factor incidents and hardening our infrastructure will put us back on a path of long term improvement. In public safety, our grade crossing incident rate increased slightly versus 2014 to 2.25.
We continue to focus on driving improvement by reinforcing public awareness through channels including public safety campaigns and community partnerships. Moving on to network performance, our operating metrics showed a step function improvement in the 3rd quarter with network velocity reaching levels not achieved since 2013. While weather conditions in the quarter were more favorable from an operating standpoint, year over year volume swings and business mix shifts continue to create a dynamic operating environment. However, the men and women of Union Pacific proved up to the challenge, diligently leveraging the strength of our franchise to serve our customers proudly. In regards to service, one of the key metrics we use to track our performance is our service delivery index.
The measure which gauges how well we are meeting overall customer commitments improved 8% versus the Q3 of last year. We also generated improvement in our local service product to customers with a 95.3% industry spot and pull, which measures the delivery or pulling of a car to or from a customer. But we know there is still more work to do and we are working hard every day to further improve service and reduce cost. Adjusting resources to current demand continued to be a key focus area for us in the Q3. While we noted back in July that we had our locomotive fleet close to being right sized, we have made meaningful progress adjusting our TE and Y workforce over the past couple of months.
By the end of September, we had around 2,700 TEOI employees either furloughed or an alternative work status compared with 1200 at the end of the second quarter. In addition to adjusting the lower volumes, our improvement in network performance has translated into fewer re crews, lessening the resource demands of our network. Overall, our total T and Y workforce was down 10% in September versus June, around half of this decrease driven by fewer employees in the training pipeline. Our active locomotive fleet is down 140 units from the end of the second quarter. As we currently sit, we still have some work left to do, but our resources at the end of the third quarter were more closely in line with current demand.
While resource alignment has been a key focus throughout the year, we have not lost sight of other initiatives which also drive productivity. We ran record train links in nearly all major categories, remaining agile and adapting our transportation plan to current demand. We were also able to generate efficiency gains within terminals as productivity initiatives led to record terminal productivity even with the 4% decline in the number of cars switched. Growth capacity investments alongside process improvements have enhanced our ability to generate productivity and have increased the fluid capabilities of our network. In addition, our progress in adjusting resources demand has helped enable gains in asset utilization, including locomotive productivity.
While a mix headwind from running largely drove the 1% decline versus the Q3 of 2014, this fleet productivity metric has improved 6% sequentially from 2nd quarter levels. To wrap up, as we move forward, we expect our safety strategy will yield record results on a way to an incident free environment. And while we gained significant traction throughout the quarter, we continue making operational improvements by leveraging the strength of our diverse franchise to deliver a service product our customers have come to expect. With our resources now closer and aligned with demand, we will continue our focus on other productivity initiatives to further reduce cost. Ultimately, running a safe, reliable and efficient railroad creates value for our customers and increases returns for our shareholders.
With that, I will turn it over to Rob.
Thanks, and good morning. Let's start with a recap of our 3rd quarter results. Operating revenue was just under 5 $600,000,000 in the quarter, down 10% versus last year. A decline in volume and lower fuel surcharge revenue, along with negative business mix, more than offset another quarter of solid core pricing. Operating expenses totaled just under $3,400,000,000 decreasing 13% when compared to last year.
Drivers of this expense decline were significantly lower fuel expense, along with volume related reductions and productivity improvements. The net result was a 5% decrease in operating income to $2,200,000,000 Below the line, other income totaled $30,000,000 up from $20,000,000 in 2014. Interest expense of $157,000,000 was up 9% compared to the previous year, driven by increased debt issuance during the last 12 months. Income tax expense decreased about 7% to $781,000,000 driven primarily by reduced pretax earnings. Net income decreased 5% versus last year, while the outstanding share balance declined 3% as a result of our continued share repurchase activity.
These results combined to produce quarterly earnings of $1.50 per share, down 2% versus last year. Now turning to our top line. Freight revenue of $5,200,000,000 was down 10% versus last year. Volume declined about 6% and fuel surcharge revenue was down $407,000,000 when compared to 2014. All in, we estimate the net impact of lower fuel price was a $0.05 headwind to earnings in the Q3 versus last year, and this includes the net impact from both the fuel surcharges and lower diesel fuel costs.
And as we expected on our last earnings call, business mix was a negative contributor to freight revenue for the Q3. The primary drivers of this mix shift were significant declines in frac sand, steel shipments and bulk grains, partially offset by a decline in international intermodal volumes. Looking ahead, business mix will continue to be a headwind to freight revenue for the remainder of the year. A 3.5% core price increase was a positive contributor to freight revenue in the quarter. Slide 21 provides more detail on our core pricing trends.
While down slightly from the first half levels, core pricing continued at levels that are above inflation and reflects the value proposition that we offer in the marketplace. Of the 3.5% this quarter, about 0.5% can be attributed to the benefit of the legacy business that we renewed earlier this year, and this includes both the 2015 2016 legacy contract renewals. Moving on to the expense side, Slide 22 provides a summary of our compensation and benefits expense, which decreased 2% versus 2014. The decrease was primarily driven by lower volumes and improved labor efficiencies as we continued to realign our workforce. Labor inflation was about 4% for the 3rd quarter, driven by agreement wage inflation as well as higher pension and other benefit expense.
For the Q4, we expect labor inflation to also be about 4%. Looking at our total workforce levels, our employee count was flat when compared to 2014. And excluding our capital related employees, however, our workforce level declined about 3%. And as Cam just mentioned, we made significant TE and Y reductions in the Q3, and we are more closely in line with current demand. For the Q4, we now expect our total force levels to be down 1% or so when compared with the Q4 of 2014.
Turning to the next slide, fuel expense totaled $484,000,000 down 45% when compared to 2014. Lower diesel fuel prices, along with an 8% decline in gross ton miles drove the decrease in fuel expense for the quarter. Compared to the Q3 of last year, our fuel consumption rate increased 1%, driven by negative mix, while our average fuel price declined 40% to $1.81 per gallon. Moving on to our other expense categories, purchased services and materials expense decreased 9% to $589,000,000 The reduction was primarily driven by lower volume related expense and reduced repair costs associated with our locomotive and car fleets. Depreciation expense was $507,000,000 up 5% compared to 2014.
We still expect depreciation to increase about 6% for the full year. Slide 25 summarizes the remaining 2 expense categories. Equipment and other rents expense totaled $302,000,000 which is down 3% when compared to 2014. Lower locomotive lease and volume related expenses were the primary drivers. Other expenses came in at 2 0 $5,000,000 down 15% versus last year.
Decreased freight, equipment and property damage costs, along with a reduction in general expenses, were the primary drivers. We now expect other expense to be close to flat on a full year basis, excluding any large unusual items. Turning now to our operating ratio performance. The 3rd quarter operating ratio came in at a record 60.3%, an improvement of 2 points when compared to the Q3 of 2014. The operating ratio did benefit about 1.5 from the net impact of lower fuel prices in the quarter.
Early in the year, we challenged the organization to safely and efficiently right size our resources and I'm pleased with the results that we've been able to achieve. Ongoing productivity initiatives, along with pricing above inflation, have been key drivers improving our overall margins. Turning now to our cash flow. Year to date cash from operations increased to just over $5,600,000,000 and we invested around $3,300,000,000 in cash capital investments through the 1st 3 quarters. Taking a look at the balance sheet.
We continue our efforts to rebalance our capital structure, while maintaining a strong investment grade credit rating. Our adjusted debt balance grew about $1,600,000,000 through the 1st 3 quarters of this year, taking our adjusted debt to cap ratio to 44.5%, up from 41.3% at year end 2014. Our adjusted debt to EBITDA has increased from 1.4x@yearendto1.6x at September 30 on a trailing 12 month basis. This is consistent with our target ratio of 1.5 plus. Longer term, we define that to mean less than 2x.
Our profitability and cash generation enable us to continue to fund both our capital program and cash returns to shareholders. Year to date, we've repurchased more than 28,000,000 Almost half of these shares were repurchased in the 3rd quarter. Year to date spending totaled $2,900,000,000 The 3rd quarter alone was up 45% versus last year to over $1,200,000,000 This demonstrates our opportunistic approach in the marketplace and should not be considered a new quarterly run rate. Adding our dividend payments and our share repurchases, we returned $4,300,000,000 to our shareholders through the 1st 3 quarters of 2015. This represents roughly a 22% increase over 2014.
While we've made good progress in the Q3, we do expect to see some difficult year over year comparisons as we close out 2015. In the current demand environment, continued lower volumes versus last year and an even more challenging business mix will both negatively impact 4th quarter results. And when we compare $5 positive fuel benefit in the Q4 of last year, making the fuel comparison more challenging year over year. On the plus side, we will continue to focus on achieving solid core pricing gains and building on the progress that we've made with our cost reduction and productivity initiatives. And when you add it all up, we will fall short of last year's Q4 and full year earnings per share records.
As for next year, we're still early in the planning process. It looks like we may have opportunities in many of our business segments, but it also appears that our energy related volumes will continue to be challenged. Given the uncertain environment, we're taking a hard look at our capital spending for next year. We haven't finalized our plans, so it's too early to tell how it will relate to our longer term guidance of 16% to 17% of revenue. But from an absolute dollar perspective, we do currently expect that it will be somewhat less than this year's $4,200,000,000 and the plan does include the acquisition of around 200 locomotives as part of the long term purchase commitment.
Overall, we will remain intently focused on running a safe, cost efficient and productive operation, and we remain committed to providing our customers with excellent service and our shareholders with strong financial returns. So with that, I'll turn it back over to Lance.
Thanks, Rob. As you've heard from the team, we've made great progress in meeting this year's challenges. Our operating metrics have improved to more efficient levels and our resources are now more closely in line with demand. We'll continue our unrelenting focus on operating safely and providing a quality service product for our customers. We will also continue to grow existing business and to establish new markets.
Even so, as Rob said, there are some question marks as we finish 2015 and head toward next year. One uncertainty, of course, is the extension of the positive train control deadline. We continue to believe that Congress will do the right thing for our country and our customers and will vote to extend the deadline. Beyond that, energy prices, the consumer economy, grain markets, the strength of U. S.
Dollar, all will be key to future demand. Over the long term, we are well positioned to safely provide our customers with excellent service while delivering strong value to our shareholders. So with that, let's open up the line for your questions.
Thank you. We'll now be conducting a question and answer Due to the number of analysts joining us on the call today, we'll be limiting everyone to one primary question and one follow-up question to accommodate as many participants as possible. Thank you. Our first question is from the line of David Vernon with Bernstein Research. Please go ahead with your question.
Hey, good morning and thanks for taking the question. Robert or Eric, could you help us frame how challenging coal could be next year from a volume outlook if we were to assume kind of normal demand patterns, gas prices kind of staying where they are? We looking at similar declines as we saw this year or something smaller than that?
As we said, David, coal demand really depends on a couple of major factors. 1, the competitiveness against natural gas and so what the outlook for natural gas pricing is and certainly the weather and certainly export markets will have an impact on the coal markets. Now at this point, if you look at natural gas futures, there's no discernible improvement in that natural gas pricing. So you would assume natural gas will remain very competitive versus coal. I don't think you would project any improvement of coal market share against natural gas pricing and the weather is always an open factor.
But deterioration, would you expect are there things that you know about your retirements on your fleet or new builds anywhere in the network that would give you some cause for saying that there's going to be a material deterioration assuming the competitiveness remains unchanged?
So again, the key driver is kind of the competitiveness of coal. I think you should also look at the current inventories. The inventories, as we mentioned, are about 20 days above historical 5 year average levels. They're actually about 30 days above last year Q3 levels. So you could assume that there would be some desire of utilities to manage those inventories down to a more normal level.
Okay, great. And then maybe just one quick follow-up thing on the pricing. Obviously, we heard a little bit from one of your interchange partners down in the South Central South making some concessions on rates to maybe incentivize some coal burn. How do you guys think about that? Are you guys changing or thinking about that given the changing competitiveness right now with coal and natural gas?
We don't as you know, we don't talk about specific customer issues or specific commercial issues with customers. Our strategy has not changed, we think we have a strong value proposition. We're going to price to the value proposition to generate a return for our company. Our strategy has not changed.
Thank you.
Our next question is from the line of Ken Hoexter with Merrill Lynch. Please go ahead with your question.
Great. Good morning. Lance and team, great job on the operating ratio. But now that you're kind of at this 60 level, can you maybe talk a little bit about what projects you still have that can improve? Obviously, we saw a tremendous improvement in the velocity during the quarter.
Is that something that you still see can return to even a a couple of year ago levels and there's more room to get that into the 50s? And maybe just talk about what projects you have underway that can keep improving that into the next few years?
Sure, Ken. Before I turn it over to Cameron for a little more Technicolor, like we've answered historically, there are just almost limitless opportunity for us to continue to improve the business. What you saw in the quarter and what we've reported for an average quarterly fluidity reflected in velocity has been accelerating through the quarter. So as we're stepping into the Q4, we feel pretty bullish about the ability to continue to make gains. And the other thing to think about from a service perspective is while the fluidity network at this moment in time looks like it has at any previous period from the standpoint of very good, there are still opportunities in specific service products that we can continue to make strides on.
So Cameron, I'll give it to you to talk a
little bit more specifically about projects for productivity. We continue to see opportunities in a number areas including variable cost control, train length growth, terminal productivity, C rate or fuel efficiency and engineering and mechanical efficiency initiatives to help squeeze out as much productivity as possible. Rob mentioned.
Great. I appreciate the insight. If I could just have a quick follow-up on the pure pricing, you mentioned that it decelerated to 3.5% from 4%. Is that due to more truck competition? I don't know, Eric, if you mentioned it, I don't know if they're pricing contracts down or what's driving that, but maybe you can delve into that a little bit.
Ken, this is Rob. Let me jump on that. A couple of points. One, you know how we calculate price at Union Pacific and I'm very proud of it and that is we only count what actually moves. So when we calculate the yield from price, so the point being volume has an impact clearly on our reported price.
The other thing I would say is our attitude and our focus has not changed at all in terms of our commitment and understanding to drive price. It's a key contributor to what we've been able to achieve up to this point and it will be a key contributor as we move forward continuing to get that solid core pricing. And I wouldn't read too much frankly into the change from the Q2 to Q3 because is volume issues, there is the legacy that we called out and there is some round here. We always round the numbers in terms of what we report here. So there is not as big of a gap, if you will, from the second to third as you might otherwise think.
So again, our commitment and our focus on pricing is unchanged.
Appreciate the time and insight. Thanks, guys.
Thanks, Ken. Thank you. Our next question is from the line of Jason Seidl with Cowen and Company.
You guys talked a little bit about some of the East Coast business not flowing back to not all of it, at least, flowing back to
the West Coast ports. Do you
think it's now permanently based
on the East now?
Do you think people have changed their supply chains?
This is Eric, Jason. No, we do not. Frankly, as we said last quarter and I think the previous quarter, we do think that ultimately the cheapest, best, fastest supply chain will win and that still is West Coast ports. There's still probably a couple of 3 percentage points of share that migrated over to the East Coast ports during the port strike that has not migrated back. We think some of that is just some short term risk management, some hedging for the market and retail inventories, but we fully expect that the shortest, quickest, most economic supply chain wins in the end and that's the West Coast.
Okay. That's great color. And Rob, just a quick question on pricing. I think you mentioned that about 0.5 point was due to the legacy mix pull forward that you had. So as we start looking out to 2016, should we start just basing our assumptions on about 3% core pricing?
Nice try. You can't blame the guy.
No, I get it. I mean clearly we are saying that you can assume that the legacy is not going to core real core pricing gains above inflation. And we're not changing our attitude or our focus there. What the number actually ends up being, stay tuned.
Sounds good. Guys, I appreciate the time as always.
Thank you. Thank you. Our next question comes from the line of Tom Wadewitz with UBS. Please proceed with your question.
Yes, good
morning. You've been obviously been asked a couple of questions on price. And I guess as I understand it, you're saying you're not changing your approach, but the market can change. And so I'm wondering whether you perceive that what we heard about from KSU and presumably another competitor taking a rate down on coal. Do you think that the market is changing in terms of more broadly than that?
Or would you say, look, there are targeted actions that you really shouldn't read into broadly? Because I think you're clear on what you're doing, but the market matters as well. I'm just wondering what you think on whether the market is really going to change or not?
Tom, this is Lance. Historically, we've always focused on providing an excellent product and then charging for the value that that product represents to our customer base. We've faced markets that are very difficult, different headwinds and we faced very robust markets and that philosophy doesn't change. So we are in a very competitive business. We compete aggressively for the business that we enjoy.
And at the same time, we expect to receive a price that represents the value that we provide and it has to be reinvestable. All that's real and all that continues to be real as we look into the future.
Is it fair, I mean, I guess if we look at you versus the market or a competitor, however you want to characterize that, over the last several years, it's probably you've been a little bit willing to give up some volume. I think there were some contracts that moved away from you and coal in 20, I think 2013 2014. And so you'd say, well, that's an example of being firm on price and being willing to give up a little volume. Is it fair to say that that's been your behavior and that willingness to give up a little volume to keep prices? Is that way we should view you're saying we're continuing with the same thing?
Tom, I wouldn't change my answer to you at all. We expect to be paid for the value that we represent and we expect to be able to reinvest in our business.
Our next question is coming from the line of Rob Salmon with Deutsche Bank. Please go ahead with your question.
Hey, thanks. To piggyback off
of Ken's earlier question on the productivity front, it was very impressive that you guys were able to pretty much extend train length across the network in an environment where volumes were down about 6%. Can you give us a sense of what sort of siding constraints you guys have across the network and the opportunity to expand that further?
Most of the train sizes you saw there equate to about 6,000 feet and almost 90% of our network is 7,200 feet capable. So we really don't have any siding constraints and it sits up to us to maximize train length and meet customer commitments. So we have a lot of opportunity in that category going forward.
I would add, it's very dependent on the lanes around the network. We still do have targeted capital investment that's oriented towards siding length extensions and being able to increase maximum train length on a particular route over and above what you see as average train lengths here. So there are always or right now there are opportunities for us to continue to invest targeted capital to make that happen. But we're a far way away from being at our average train length threatening our current siding length.
Thanks, really appreciate that color. With regard to PTC, Lance, you had briefly alluded to it in the prepared comments. Can you give us a sense of what the impact across the network would be if Congress doesn't extend it? And any lessons that you learned from the massive uptick in volume we saw in 2014 that you could deploy? Because to me, reading the announcement, the press release you guys had put out on the topic, it would be it would impact a substantial amount of the network?
Yes. So Rob, what we've announced, what we've said that we would do if there is not an before we have to take any action. But what we've said is around Thanksgiving, in order to remove TIH from our railroad, we would have to start imposing an embargo. And that would be impactful. That means we'd have to stop allowing interchange product onto us of those commodities as well as start working with customers to try to figure out a way for them to ship it in alternative lines.
Also, we said as we approach the end of the year, we would start working with our Amtrak as well as the commuter agencies that we host to stop passenger traffic. Both of them would be very bad for the U. S. Economy and for commuters. The TIH includes commodities like chlorine that's used to clean drinking water.
It includes products that go into fertilizer and other manufacturing processes. So that would all have an impact on the U. S. Economy. And then you can imagine in a place like Chicago, if the commuter lines were to stop running January 1, what commutes would be like for the 300,000 people a day that rely on those commuter lines.
Thanks so much for the time.
Our next question is coming from the line of Tom Kim with Goldman Sachs. Please go ahead with your question.
Hi, good morning guys. Nice quarter. With regard to the cost side, obviously we're seeing them come down year on year, but also on year, but also importantly sequentially. I'm trying to get a sense of like the pace of declines we should be anticipating for the Q4.
Do you
think the run rate we've seen in Q3 is sort of reasonable Q on
Q? Rob? Yes. Tom, yes, I wouldn't take the run rate, because we're satisfied that we've made great progress, but that was a pretty steep successful decline from the Q2, which we're very proud of. And all I would say to you is we're going to control the things that we can control.
And as Cam has mentioned, we've got continuing opportunities while we've made great progress rightsizing and realigning the organization. We're not done yet. We're going to continue to take initiatives to squeeze that out and be as effective as we possibly can. So, the run rate probably will be different, but the success of our continue to be realigned and look for every opportunity we can to further that productivity initiative will continue.
Okay. That's helpful. Thank you. And then I wanted to and that's that truckers are increasingly competitive with the rails and there's sort of comments suggesting with pricing down for the TLs that they're potentially conceding less share. Now obviously, that's more of a threat on intermodal, but I'm just wondering with regard to the rest of your book of business, how much could you sort of size up would be potentially at risk of diversion to trucking?
I mean, my sense is that'd be relatively limited, but I just would love to hear your thoughts on that.
Yes. I think if you look at what's going on currently in the trucking environment, the lower fuel cost is allowing trucks to be more competitive visavis rail just by virtue of that fact. Long term trucks still have the same systemic long term issues that they've always had in terms of driver shortages, some of the productivity headwinds that they have with some of the CSA regulations, the road congestion, etcetera. So we are still very confident of our ability to drive truck conversions, which we demonstrated even in the Q3 in our intermodal business. Certainly, trucks are a great competitor and there's some competitive impact that we always are cognizant of, but we're still positive about the position that we are in as a rail and driving conversions from truck to
rail. And case in point, you grew domestic intermodal in the 3rd quarter by 1%.
Outside of intermodal, is it much of a threat or something we should be thinking about?
Trucks are always a competitor. We feel very good about our value proposition and our ability to compete.
Our next question comes from the line of Scott Group with Wolfe Research. Please go ahead with your questions.
Hey, thanks. Good morning, guys.
Good morning.
So, Rob, why don't you just follow-up your comment about headcount in the 4th quarter being down about 1%. Could that implies a slight sequential increase from the 3rd quarter average even though you ended the 3rd quarter a lot lower than the average. I guess I'm just not sure I follow the down 1%. Are you adding headcount back in the 4th quarter?
No. Scott, just kind of take you back. Remember, we had previously guided that we thought we would finish the year flattish with 20 fourteen's I think it was roughly 48,000 number. And what we're saying now given the confidence we have and the progress we've made to date is we expect to end the year with the number being down 1% or so. So, I think compared to where we are now, it's flattish, but of course volume and other initiatives will dictate exactly where that number lands.
But that's the math.
Yes. Our job going forward, Scott, is Cameron continue to stay focused on getting the house in order from an operating craft headcount. We're also in the process of getting our house in order on a non agreement perspective. We talked about that in an announcement late in Q3. And we've got an opportunity in capital headcount, particularly in light of Rob's discussion that capital is likely to be down next year.
As we exit this year, we've got an opportunity to make adjustments there.
Okay. And then Rob, you said a couple of times I think 4% labor inflation. What does next year look like?
We haven't finished our planning for next year, Scott, on a number of initiatives, but I think it's safe to say that the labor inflation will be lower than it was this year. Remember this year we had the double wage, we had other issues that pushed the labor inflation full year up closer to that we had 5%, 6% in the first half of the year. So I think it's confident I'm confident to say it's going to be lower than that. Exactly where that number lands at this point in time, again, stay tuned.
Okay, great. And just last just quick thing on the CapEx. Is your comment that it's going to come down, but we may not be able to get it down all the way to 16% of revenue or a lot is on the table, we could get it even lower than 16%, we just don't know?
Yes. What I'm saying there is the absolute number we would expect to come down, but it may not be in that 16% to 17% guidance range yet. Because remember this year because of the fall off in revenue and driven largely by the falloff in the fuel surcharge revenue. And as you know and others know, we don't set our capital plan based on revenue. It's just a kind of a guiding marker that we provide to you.
So it's possible that it won't quite make it all the way down to that 16 to 17 depending on how the revenue number looks as we work through our planning process and that's what I'm suggesting.
Okay, great. Thank you guys.
Thank you. Our next question comes from the line of Allison Landry with Suisse Group. Please go ahead with your question.
Good morning. So I know there's been a lot of questions on price, but thinking about core price above inflation, I was wondering if you could give us a sense of what overall rail inflation is currently running at?
Allison, this is Rob. I mean this year overall inflation again largely driven by that discussion I just had with the labor line is probably in the 3 ish, maybe slightly higher than 3 full year this year. Again, Allison, as you know, we don't set again, that's another marker similar to my discussion on capital. We don't set our pricing based on any one particular period's inflation expectation. That's just a marker that we expect to continue to achieve above.
That could be lumpy from 1 quarter to the next or one period to the next. But to answer your question, inflation overall was 3 plus ish this year.
Okay. That's helpful. And then thinking about intermodal, how much of the decline in the segment stems from your main competitor taking some share back as its network recovers? And do you expect a further bleed in the Q4 given that BN has opened up its northern region and added some new expedited intermodal service from Chicago to the PNW? Sure.
So Allison, as we mentioned, the decline in our intermodal space was really in the international intermodal space. And there's really a number of different dynamics that are going on in that. One is not the complete remigration, if you will, from East Coast to West Coast, so that is progressing. One is, as you know, in the liner steamship business, there's a number of different dynamics going on there with the different alliances and different entities deciding what lanes they're going to put their ships in and certainly kind of the suggested softness in China and other parts of the Asia rim are all having an impact on that. So those are really the drivers.
In terms of our domestic intermodal franchise, as we mentioned, we grew. This will be the 7th consecutive year of record volumes. We feel great about our franchise, the position of our franchise and the strength of our franchise.
Okay. So just to be clear on your answer, BN has not taken any of the share back that you may have gained last year or that's just not a significant factor?
So as we talked at earlier earnings releases, we did have, I think Rob said, 1% to 2% share benefit last year from business with the difficulties of our competitors. We fully expected that to migrate back and those were in a couple of areas. Those were in intermodal, those were in grain, those were in coal and we have and are seeing those migrate back and that was aligned with our expectations.
Okay, great. Thank you very much.
Our next question comes from the line of Justin Long with Stephens.
Maybe to just follow-up on intermodal again. I know right now you're facing headwinds from tough international comps. There's uncertainty in the retail space. So I was just wondering, bigger picture, when do you feel this business can get back to more of a GDP or a GDP plus growth environment versus the declines we've seen year to date?
Eric, let me take a stab at that. So longer term, we feel very strong, very bullish on the intermodal product in general. That in the long run is going to be driven in large part by U. S. Consumers and consuming both international product as well as domestic product.
It's also predicated on our ability to have a service product that can penetrate against a truck. And all of those secular dynamics are set up positively for the long run. In terms of dislocations that are happening in the short term, it's hard to time things out. It is very dependent on what happens in the U. S.
Economy, what the jobs picture looks like, what the earnings picture for consumers look like, what the US dollar is doing. Absent all that, we're focused on controlling what we can control, which is an excellent service product. We've got the best franchise from a domestic and international intermodal perspective in the U. S. And that will serve us well over the long run.
Okay, great. And maybe to just follow-up on that. Looking at your intermodal business today, I know it varies by lane, but what's the average discount for intermodal versus truck in your network today? And longer term, where do you think that percentage could go without causing a significant slowdown in intermodal volume growth?
We said historically 15%, 20% is a rough rule of thumb. It would be part of our core strategy, of course, to minimize that as we increase our value proposition.
Our next question is from the line of Alex Fekia with Morgan Stanley. Please proceed with your questions.
Hi, good morning. Thanks for taking my questions. So you guys have obviously made a lot of progress on aligning the resources in light of the softer volumes. And I know the volume outlook is uncertain in a lot of areas right now and it's tough to actually point to where and what might drive an acceleration. But should volumes actually start beginning to surprise to the upside in 2016 for whatever reason, how do we think about your ability to kind of leverage the resources you have right now?
And do you feel like there's a lot of operating leverage in the business in where your resources are currently? Or would you anticipate you'd have to kind of add back pretty aggressively? I know it kind of depends on what the volumes actually translate, but how do we just sort of think about the operating leverage in the model if volumes actually do surprise the upside?
Alex, we would welcome nothing more than a surprise on the upside in terms of volume next year. And we are well positioned to be able to absorb that into the existing network. Cameron's got adequate locomotives and crews ready all around the network to be able to handle an uptick. The fluidity of the network would be able to absorb it rapidly. He and the operating team have done a great job in terms of getting the terminal and yard productivity up and we'd be able to bring in cars readily into that environment and handle it fluidly.
And between Eric and Cameron and the rest of the team, they've done a stupendous job on stabilizing our train plan and making sure that it's robust enough to be able to handle some incremental growth. So that's a that would have significant leverage for us and we'd welcome it.
Okay. That makes sense. And then just my second question here on you suggested that there were some headwinds in the 4th quarter and that earnings per share would probably be down on a year over year basis. Can we kind of can you help us think directionally relative to the kind of 2% decline you saw in the Q3? Can we expect another similar low single digit decline in the Q4 or probably a bit of a worse year over year move there given some of the puts and takes?
Ellis, this is Rob. What I'm calling out there, I mean, we'll see how the world actually plays out in terms of volume. But as we look at this point, without giving precise earnings guidance, it does look like we're going to have a bigger headwind in the Q4 on mix year over year. And the reason for that is last year's mix actually was quite favorable. And if you look at the business, we were running sand fairly strong, coal was relatively strong, ag was a pretty positive mix player and those are things that we just don't see repeating in the Q4.
In addition, as I called out, we see a headwind year over year in fuel because last year's Q4, we got the benefit of about a nickel of the timing of fuel in the 4th quarter last year, which we don't see that reporting repeating again this year. So I am calling out that year over year, it does look to us like the 4th quarter does have some bigger challenges than frankly the Q3 did.
Okay. That makes sense. Thanks very much for the time.
Our next question comes from the line of Chris Wetherbee with Citigroup. Please proceed with your question.
Hey, thanks. Good morning. Wanted to talk a little bit about the coal network and the outlook for next year. Obviously, still some challenges, particularly market share relative to natural gas. When you think about the network, one of your Eastern competitors has started to make some changes in terms of the network that's a little bit more structural in nature.
I guess I'm just curious from your perspective how you think about that as you look out to 2016 and maybe beyond given the coal outlook. Are there things that need to be done there or things you could do to potentially improve that the value proposition there?
Chris, before I hand it over to Cameron for a little more Technicolor, the thing to note about our coal network is it's largely run on a shared network. So there are we have made fundamental adjustments in resources that reflect coal being down. You see that in our adjustments to the T and Y craft, to locomotives. It's also embedded in some of the cars that we've stored. And we're constantly looking at our assets as they're currently deployed to make sure they fit the demand profile for a commodity like coal.
Cameron?
You're exactly right, Lance. Our coal network is truly built out. So for us, it's really more of how we manage the fungible assets around locomotives and crews and we'll continue to do that. Having said that, we'll continue to study the assets around our whole network and react appropriately.
Okay. That's helpful color. I appreciate it. And then Rob, just coming back to you on the buyback just for a second. Obviously, you talked about it not being a run rate in the 3rd quarter and that makes complete sense to me.
I guess if you could help us maybe think about how you might be opportunistic going forward, I guess I just want to get maybe a rough sense of maybe how you view that proposition as you think about this quarter and next is in terms of the buyback and the run rate we should be expecting?
Yes. I mean, Chris, I mean, you probably should write my answer here, if you want to say, I mean, without giving precise guidance in terms of what we're in buyback because we don't do that. I mean, we certainly value and understand the value of a continued buyback program and we've kind of walked our talk there. And as we've always said, we will be opportunistic in the marketplace based on factors like the price of the stock. So all those are factors in terms of how it will look as we play out into the next several quarters.
We're going to continue to take the same mindset if you will in terms of how we approach the opportunity and approach how many shares we actually do buyback.
Okay. That makes sense.
Thanks very much guys. Appreciate it.
Our next question comes from the line of Pascal Majors with Susquehanna. Please proceed with your question.
Yes, good morning guys. I want to ask another one on the coal here. How much of the mid teens volume decline that you're tracking toward for this year would you attribute to the year over year decline in natural gas prices?
Vasquez, this is Eric. It varies. I would say the vast majority of the decline is in some way or the other attributable to natural gas prices. As you know, there are different ISO regions that we operate in and the impact of natural gas is different in those regions. But I would say the vast majority is attributable at the end of the day to the competitiveness of coal with natural gas with one other factor, and that's being our export coal market, just the world wide export coal prices.
That's also a factor.
Understood. I appreciate that. And just to follow-up, I know there's a lot of significant moving parts here, but say natural gas prices are flat next year, so you don't have that magnitude of a year over year headwind on that front and winter is normal. Just roughly speaking, what kind of 20 16 coal volume outcome are we looking at here? I mean, is this a situation where you could be down double digits again?
Or is kind of mid single digits more of what you guys are planning for?
Hey, Bascome. As I mentioned earlier, one of the other factors that is a factor is the current level of coal inventories that at the end of the Q3, there is 30 days higher than where they were last year and 20 days higher than an average 5 year average. So, I would say it's a fair expectation to assume utilities would work those down, not only maybe even to the averages or below the averages if they're trying to be in inventory management mode.
Understood. Well, appreciate the time this morning. Thank you.
Thank you.
Our next question comes from the line of Brandon Oglenski with Barclays. Please go ahead.
Yes. Good morning, everyone, and congrats on a good quarter here. I know cutting budgets can be pretty difficult. So Lance, by my calculation, it's been about 12 minutes since you got the question on pricing. So I'm going to come back to it because I honestly think that's probably the biggest concern for your shareholders right now.
But I just want to ask a more general question about the industry right now because it's kind of 2 parts here. If you look across the industrial landscape, we're definitely seeing deflationary pressure for a lot of your companies. Energy CapEx is likely to be down again next year and obviously commodity prices are a lot lower. So there's just less value to extract from that supply chain when you think about it holistically. But then secondly, I mean, the industry obviously has an issue here with PTC, we're late relative to a law that was probably poorly written.
But nonetheless, in this environment where your customers are facing a lot challenges and we do have regulatory issues, how do we balance the reinvestment, the service and the price equation such that we try to keep all the constituents happy?
That's an excellent question, Brandon, one that we are constantly working on. Our primary focus, 1st and foremost, is a robust, reliable, excellent service product. And in that context, it's making that service product better than the alternatives. That puts us in a position to be able to secure a price premium and that represents the value of that service product. So long as we're in that position, then we can handle the rest of the pressure points appropriately.
And when it comes to regulation, our best defense in a regulatory environment is happy customers and customers that are getting an excellent service product. That won't stop the conflict around the pricing discussions that we have. It won't stop regulators from wanting to find ways to regulate us, but it will stop some of the pressure and that's our biggest defense. It's the one we focus on
most. Well, I appreciate that. And is there a risk here though that if we face further declines, which it feels like we are in the Q4, that this whole process just takes a little bit slower pace in terms of railroad margin improvement, return improvement, just understanding that we have a lot of other pressures across the industrial landscape?
We are keenly focused on making sure we generate a really attractive return on our invested capital. Embedded in that is trying to make sure we continue to improve our margins. I think we've outlined today that there are ample opportunities to continue to make that happen. One of them is price, but it's only one of the mechanisms and that's what we're focused on.
Appreciate it.
Our next question is from the line of Cherilyn Radbourne with TD Securities. Please proceed with your questions.
Thanks very much and good morning. So you've cited high retail inventory levels as a volume impediment for the last couple of quarters. And I'm just curious how far along you think we are in drawing down those inventories and putting the inventory correction behind us.
Yes. We've actually only mentioned it this quarter and a little bit last quarter. So it really depends on the consumer. Consumer confidence does appear to be strong. There does appear to be a trend where consumers are paying down debt and spending on non product things like data, Internet, healthcare services, etcetera.
I do think if you talk to a lot of the BCOs and the retailers, they do have an expectation that with consumer confidence remaining strong, there should be a pickup during the holiday season of sales, but time will determine whether or not that happens.
Okay, that's helpful. And then just a very quick one on costs. You called out $50,000,000 of inefficiencies last
Cher Cherilyn, this is Rob. Yes, we made good progress on that. Remember that marker that I was sharing with you in the 1st and second quarter was against the previous year And we feel very good about as Cam walked through, feel very good about in the Q3 progress we made in better aligning our resources. Having said that, we're not done. I mean that's last year wasn't the end of the game.
So we are we still see opportunities for us to continue to squeeze out productivity initiatives on multiple fronts and we're going to continue to do that. But an answer to your direct question of compared to what I showed you last quarter on the year over year, we made very good progress in taking out those inefficiencies that we showed you in the Q2.
Okay. Thank you. That's my 2.
Thank you, Cherilyn.
Our next question is coming from the line of John Barnes with RBC Capital Markets. Please go ahead with your question. Hey,
thank you. Looking at a couple of the kind of carload outlooks on the positive side that you provided, I think the one that's starting to get a little bit of attention is the auto side. I know right now autos continues to be very strong, but with a SAAR that is at the
and
and especially given that the KSU mentioned you've got retooling going on at a couple of Mexican facilities for GM and Chrysler. Is there any concern that start to see maybe some of that growth in the auto sector slack off as we go into the New Year?
Yes, John, I think this is a great question. Certainly, as you mentioned, the SARs rate is kind of at a barn burner rate. The amount of debt associated with auto loans is at, I think, a historic high date rate. I think the auto manufacturers would still be pretty bullish because of the features that they think they're providing to the consumer and the average age of automobiles out there. But the sales rate is at a high number.
And so that by definition would indicate a little caution and concern. We don't have too much concern about model changeovers. There's always model changeovers. We see that year in, year out. We have the benefit of a very broad diverse autos franchise.
And somewhere there's always that happening. So we don't see that as too big an issue. But certainly, the sales rate, the amount of debt associated with sales, you could say, is something to watch out for.
John, regardless of what SAR is, what we really are pleased with is the UP Automotive franchise. It's outstanding. It gives us great access to Mexico. If products produced in Mexico gives us great access to the ports of products produced overseas and imported. And we have an excellent distribution system for finished vehicles on in the Western United States.
We're in a very good place when it comes to the automotive franchise.
Yes. No doubt. I'm glad to see you taking advantage of that now. I just with a couple of the other pressure points out there in auto having been kind of the one of the bright spots, I always get a little nervous about any time you see a trend line maybe begin to return to normalization. That's just the reason for the question.
And one follow-up on the buyback. Rob, you talked about opportunistic. And I'm just kind of curious, have you done buybacks over time? Have you ever gone back and done a look at the success of your buyback program as maybe a program done a little bit more ratable per quarter, a little bit kind of more consistent in terms of the absolute dollar spend or the absolute shares bought back versus maybe timing it a little bit and being more opportunistic? And have you ever looked at that and does that guide you at all in terms of how you approach your buyback effort?
John, this probably won't shock you, but we look at it every day and feel very comfortable that what we have done to date works for us and we're not changing our approach or how we look at it, but I understand the point of your question. But rest assured, we look at what's the right way to deal with this and we're confident that we're doing the right thing.
Very good. All right. Thanks for your time today.
The next question comes from the line of Matt Trewe with Nomura. Please go ahead with your questions.
Thank you. It's the housekeeping question. I noticed in your commentary about expenses, specifically on comp and benefits, you did not reference incentive comp and accrual. The other railroads, it's been a tailwind to $0.02 to $0.06 per quarter. I'm just trying to think about forward modeling in Q4.
Was there a positive impact that you just didn't call out or is there potentially a larger true up that we'd expect to see in the Q4 as we round the quarter into year end?
Matt, this is Rob. Yes, I mean, I don't see any comment not calling out that there would be any change in terms of the direction that we've been. We haven't changed our approach. And so I don't anticipate there being any big swing in that.
Okay. Thank you for that. And then just the second question would be on coal longer term. Obviously, the Eastern rails have had to are and will have to continue to live under the threat of environmental regulations, which basically call into question the viability of some of their sourcing basins as well as their customers. Some of the pushback we get from investors on Union Pacific is, hey, those guys are going to have to live through it through the next 5 years.
It's a long time ahead of us, but just want to get a sense, have you at a very high level looked at whether it's plants being decommissioned shutting down or new gas fired turbines coming online with your system? What potentially just could be vulnerable of your existing business as we look out over, let's call it, a 3 to 5 year basis in terms of just sourcing switches or just the viability of some of your certain customers? Thanks.
Yes, Matt, this is Eric. We look at that in-depth continuously as part of our strategic and tactical analysis of our markets. I would say that at a high level, coal continues to represent on going forward, probably a necessary minimum third of electrical generation in the U. S. Short of some new technology, I'll call it Star Trek technology just for shorthand purposes.
Coal of necessity is going to be a part of the electrical generation of this country for the foreseeable future. And so I think you could perhaps see coal get to a minimum of, call it, a 30% market share. But short of some really new generational technology, I think it'll right now for the foreseeable future, that's probably the minimum that it'll be.
Matt, this is Lance. So I want to provide a little editorial comment as well. I think the United States is blessed with the coal reserves that we are and our ability to generate electricity with coal relatively cleanly and it's never been as clean as it is today. It would be a mistake from the U. S.
Economy perspective, our competitiveness globally to continue to regulate that out artificially. I think we have to work on continuous improvement with the emissions from coal fuel generation, but it would be a mistake to artificially retard that too much.
The next question is from the line of Cleo Zagarin with Macquarie.
Please go
ahead with your question.
Good morning and thank you for your time. My first question also on price. Against very strong Yield ex fuel this quarter, the relative weakness in automotive and intermodal. Could you please comment on the drivers there, whether it is mainly mix or competitive dynamics and how you expect them to play out into next year? And specifically, do you expect domestic intermodal to grow more strongly than international with potentially positive impact on price?
Thank you.
Hey, Cleo, the numbers that you see in autos and intermodal from kind of an ARC yield standpoint is really hindered by the fuel first surcharge reduction. That's more than 100% of that impact.
And her second question was Mexico versus international on intermodal?
No, no, just to leave a lot of your states. So I simply added back an estimated 4%, 5% fuel impact to each of the price per ton mile numbers that we see there. And I appreciate that fuel impact would be different across freight categories. But so maybe then you could comment, is it are we missing something by seeing auto and intermodal as weakest in terms of yield per mile year on year? And then my second question was whether domestic should grow faster, domestic overall than international next year and thus get some help to pricing overall from a mix perspective?
Thank you.
Cleo, this is Rob. Let me take that first question. I would caution you not to just use straight line numbers on it, because I think the piece to answer your question, what are you missing? I think what you're missing in that analysis is mix. Mix has an impact within each of the commodity groups in terms of what ends up being reported as average revenue per car on top of each of their individual impacts from the fuel surcharge.
So I would just caution you that there are differences within each commodity group.
Yes. And as you know, we're not going to give guidance in terms of pricing in the future. We do think that the domestic intermodal market should continue to have strong pricing opportunities in 2000 and as we go into the future.
Okay. But faster or slower than international with all the noise we had this year?
There's a lot of input, a lot of ins and outs that happen. There are a lot of dynamics, as you know, going on in the international intermodal market that are dynamics being driven by other countries and steamship liner carriers. We feel good about our value proposition. We feel very good about our domestic intermodal franchise and our ability to get price in that.
Okay, appreciate that. And the second question relates to CapEx. Can you please remind us of the share that you consider discretionary versus maintenance or required additions given shifts in the geography of demand? And highlight for us those discretionary areas in which it appears prudent to step back at this time? Thank you very much.
Cleo, we've historically said and I don't think it's changed much to kind of maintain what we've currently got is about a $2,000,000,000 plus minus number. And after that, it's things like technology, PTC, capacity additions, commercial facilities, new equipment, etcetera.
Okay. And would you be willing to share any as if you're speaking to an engineer, what areas would you like to you see maybe prudent for as best candidates for retrenching next year?
As we're making our capital plans next year, we're just constantly evaluating both capital productivity in terms of dollar per unit that we put in the ground or buy and where exactly we're putting it. So I won't make any commentary on exactly what those plans look like.
Okay. Thank you.
The next question is coming from the line of Ben Hartford with Robert W. Baird. Please go ahead with your question.
Thanks. Good morning. Rob, quick question. Just wanted to get your perspective on the risks to continue return on asset improvement for the rail line. You've done a great job doubling it over the past 7 years.
We've talked a lot about pricing on this call. But if you think about just the 3 simple factors to drive that higher going forward pricing, volume growth and service improvement, In your mind, what is the biggest risk or point of concern from your perspective as it relates to inhibiting continued ROA improvement for the rail lines of those 3 kind of fundamental inputs?
Yes, I mean, you're exactly right, Ben, that the levers as you've heard us talk and as you fully understand, the levers that drove us from where we once were to where we are today are productivity, which is driven by the service. That service also enables us to get the right price in the marketplace and volume is always our friend in that calculus. We're going to control those that we can best control. So I would say frankly, the biggest risk I see at this point is that which we have less control on and that's the economy and what that then gives us in terms of volume to play with. But as I've said many times and you've heard us say, we're not going to use the lack thereof of volume to slow us down on our initiatives to continue to make progress on that, which we can control.
But that's what we're going to continue to do as we have over the last decade.
Okay. That's helpful. Thanks.
The next question is from the line of Jeff Kauffman with Buckingham Research. Please go ahead with your question.
Boy, you guys are popular. Congratulations. Question for Eric, kind of broader picture. As we look at the 4 areas that are kind of the biggest areas of the volume decline right now, so I'll throw coal in there, metals, crude and frac. When are
you hopeful
that you'll start to see positive year to year comparisons? And then I have a follow on related to that.
So I think as we've been saying throughout the call, we there's uncertainty about the going forward outlook in all of those. And I'm not sure our prediction ability to predict is any better than anyone else. Certainly, the strong dollar is impacting our metal steel business, our domestic metal steel business. Oil prices will be a direct factor in terms of the amount of drilling, the amount of crude by rail and the natural gas will be a direct driver in terms of the amount of coal. So at those points, an ability to predict those items, I'm not sure I have any better ability than anybody else in the marketplace to do that.
I was just curious your view.
All right, let
me just follow-up on that. The question was asked earlier, you're attacking the variable cost and you're getting a lot more momentum with that. And I think you mentioned we're not going to do much with the fixed costs in the coal network. But as you look at the railroad and how these business units have changed just over the last 12 months, where do you think there are opportunities to attack the fixed cost infrastructure beyond just taking down employees and taking down locomotives and assets dedicated to it?
Jeff, this is Lance. I don't think we said we're not going after fixed costs. We focus the commentary on some of the variable costs. But where we have opportunity to, for instance, reduce our CapEx or for instance, reduce the physical footprint of shops that maintain locomotives or other areas like that, we're going to take advantage of those as well. I think what we were trying to impart is that our coal network is not isolated and independent from our overall network.
And so it would be very hard to tease out individual physical assets, hard assets that are completely dedicated to coal and isolated on their own.
Okay. So hence the shared network comment. Lance, thank you.
Okay. Our next question is from the line of Don Broughton with Avondale Partners. Please go ahead with your questions.
Good morning, everyone. Real quick, I'm kind
of just trying to do some back of the envelope math here. And I look at what's been a 40% decline in fuel and it's translated into essentially what is a 7.9% headwind in pricing. If I look at your reduction in yield realized and the core pricing of 3.5% that you stated. Would that imply that you would even if fuel to go flat from current levels that at least in the early part of next year, you would have to I was looking at a 16% decline in fuel, you'd have to achieve essentially a 3.2 percent or higher core pricing in order for pricing realized to be flat?
Rob?
Don, you may have stumped me in terms of the actual numbers that you just worked through because I frankly wasn't flat. Relatively speaking. Yes, but I would just say that mix is clearly a factor in that. So just be careful in your analysis to factor that in. And again, all I would say about the pricing is we are going to continue to focus on driving value to our customers, continue to drive productivity and continue to drive price where we can in the marketplace.
And we know that the underlying value of our service product to our customers is a key component of that and it all kind of hangs together there. So we're going to continue to focus on driving as much as we can on it.
Well, so even with the best service available, are you going to be able to go to customers whose volumes are down in the high single digit, low double digit range and as far and receive better than 3% pricing?
Don, this is Lance. There is never a conversation that our commercial team enters into with a customer on price that's easy. It doesn't matter if their volume is up or their volume is down. So clearly, Eric and his team in the environment that we're in right now have secured what in the Q3 3.5% core price and in the previous quarters as much as 4% core price. None of that came easy or was a lay up and I expect them to continue that good hard work into next year securing an appropriate price for the value that we represent to our customers.
This concludes the question and answer session. I'll turn the floor back over to Mr. Lance Fritz for closing comments.
Thank you very much, Rob, and thank you all for your questions and interest in Union Pacific this morning. We look forward to talking with you again in January.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines.