October 23, 2014 / 1:58 PM / 3 years ago

UPDATE 4-Union Pacific CEO: Major rail mergers 'don't make sense'

(Adds comments on pricing, updates stock price)

By Nick Carey

CHICAGO, Oct 23 (Reuters) - The chief executive of No. 1 U.S. railroad Union Pacific Corp said on Thursday that he does not think mergers of major railroads “make sense” because of the regulatory hurdles they face and the service issues they create.

“The (service and regulatory challenges) add a whole layer of concerns for me,” the CEO, Jack Koraleski, told analysts in a conference call after Union Pacific reported a higher-than-expected third-quarter profit and said it expected a solid fourth quarter.

“I‘m really not a fan (of mergers), I don’t think it’s a good solution,” Koraleski said.

Canada’s No. 2 railroad, Canadian Pacific Railway Ltd, recently made a failed bid for CSX Corp, the No. 3 U.S. railroad. The CEOs of CSX and Norfolk Southern Corp have made comments in the past week stressing that past mergers between large railroads have led to significant service disruptions.

The major U.S. railroads have struggled to cope with demand this year thanks to a growing economy, a boom in the transport of oil by rail, plus a record harvest. Against a backdrop of customer complaints, earlier this month the U.S. Surface Transportation Board, the top rail regulator, ordered the largest railroads to provide more detailed weekly reports on their performance.

Union Pacific on Thursday reported a 23 percent rise in third quarter earnings per share, of $1.53, from $1.24 in the same quarter last year. Analysts had expected earnings of $1.52.

Freight revenue rose in all of the railroad’s key commodity groups, with agricultural and industrial products both up 19 percent on the year.

Revenue rose to $6.2 billion, up 11 percent from $5.6 billion in the third quarter of 2013 and beating analyst expectations of $6.09 billion.

Core pricing at the railroad was up 2.5 percent in the quarter.

Koraleski told Reuters that the company plans to “stay ahead of inflation” with pricing moving forward.

He also that in order to catch up with the spike in rail demand, the railroad will continue to spend 16 percent to 17 percent of its revenue annually on capital investments.

“As revenue rises one can assume that spending will rise too,” Koraleski said. “Our price of entry is reinvestability.”

Union Pacific plans to invest $3.9 billion this year in its network, including on capacity expansion, new locomotives and crews.

“The reaction to the results should be mildly positive because the company modestly beat expectations,” Cowen & Co. analyst Jason Seidl wrote in a note to clients. “Additionally, while investors tend to hold (Union Pacific) to very high standards, most other carriers reported results in line or just below consensus.”

Union Pacific stock was up 4.1 percent near midday on Thursday, at $111.29. (Reporting by Nick Carey; Editing by W Simon, Chizu Nomiyama, Andrea Ricci and Leslie Adler)

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