Union Pacific Corp Q1 FY2026 Earnings Call

Greetings, and welcome to Union Pacific's First Quarter 2026 Earnings Conference Call. As a reminder, this conference is being recorded, and slides for today's presentation are available on Union Pacific's website. It is now my pleasure to introduce your host, Mr. Jim Vena, Chief Executive Officer for Union Pacific. Thank you, Mr. Vena. You may now begin.

Well, good morning, everyone. Thanks for joining us. It's a wonderful morning here in Omaha; a little bit of rain coming down, but nothing that would stop the men and women of Union Pacific from going out and delivering. So really excited to be here and excited to review our first quarter and then take your questions. I'm joined by the regular crew. We have the Chief Financial Officer with me, Jennifer Hamann. We've got Eric. The railroad looks pretty good this morning, so excellent job to our Executive Vice President of Operations. And of course, our Executive Vice President of Marketing and Sales, Kenny Rocker. Now let's go through the highlights real quick before I turn it over to Jennifer. If you go over to Slide 4, 2026 started strong as we delivered record first quarter results. Again, we showed who we are, executing on new opportunities and raising the bar on what's possible for ourselves and the industry. It's really important that we see that strength reflected in our bottom line as we reported first quarter records in operating income and net income. For the quarter, reported net income of $1.7 billion grew 5%, earnings per share of $2.87 increased 6%, and we've improved our operating ratio. Excluding merger costs, our adjusted net income was up 7%, EPS of $2.93 increased 9%, and our operating ratio improved 80 basis points to 59.9%. These are strong results that reflect what's possible when the team consistently executes at a high level. I'll let the team walk you through the quarter in more detail and then come back and wrap up before we go to Q&A. Jennifer, why don't you do the first quarter financials, please?

All right. Thank you, Jim, and good morning, everyone. Let me begin with the walk down of our first quarter income statement on Slide 6, where our operating revenue of $6.2 billion increased 3% versus last year as freight revenue of $5.9 billion grew 4% on 1% lower volume. Digging into the drivers, lower volume reduced freight revenue 75 basis points. Fuel surcharge revenue of $608 million increased $43 million, reflecting the impact of higher year-over-year fuel prices and contributed 100 basis points to freight revenue. Core pricing combined with business mix drove a 325 basis point improvement to freight revenue. As we committed, our quarterly pricing dollars exceeded inflation dollars. Specifically, coal pricing remained positive but at a lower rate than last year given the business index to natural gas prices. And as we noted in January, we continue to see impacts from the competitive and global environment in select agricultural markets. Fortunately, we are well positioned to compete as our strong operating performance and productivity initiatives enable us to continue to win new business at good margins. Our first quarter business mix was positive, although not as favorable as we might have expected, due to higher volume in our lower average revenue per car businesses, such as coal and rock, combined with lower volume in some of the higher average revenue per car businesses, such as food and refrigerated and forest products. Other revenue declined 4% to $324 million, driven by lower subsidiary revenue as we have now lapped the metro transfer completed in the first quarter of 2025. Turning to expenses, our appendix slides provide more detail, but the key drivers: total operating expense increased 3% to $3.8 billion. Compensation and benefits expense increased 1% as we almost entirely offset the impact of inflation with record first quarter workforce productivity that enabled a 5% smaller workforce. First quarter cost per employee increased 6.5%, driven by higher wages and benefits, along with increased incentive compensation. We continue to expect full year compensation per employee to increase between 4% and 5% as we work to offset cost inflation with process and technology improvements. Fuel expense grew 7% on a 7% increase in average fuel price from $2.51 to $2.69 per gallon. Purchased services and materials expense increased 7% as a result of merger-related costs, while equipment and other rents declined 9% with record first quarter cycle times. Reported first quarter 2026 net income totaled $1.7 billion and was a first quarter record with earnings per share of $2.87. Adjusted for the merger costs, our earnings per share totaled $2.93 and the operating ratio came in at 59.9%. Overall, we delivered strong quarterly results to start the year, and we are confident in the ability to continue delivering for all of our stakeholders by successfully executing on the fundamentals of our business. Turning then to cash returns on the balance sheet on Slide 7: first quarter cash from operations totaled $2.4 billion, up 10% versus last year, and we generated free cash flow of $630 million after making significant investments in the network and returning an industry-leading dividend to our shareholders. Net debt decreased $1.2 billion as we repaid long-term debt. We ended the quarter with an adjusted debt-to-EBITDA ratio of 2.5x, while we continue to be A-rated by the three credit rating agencies. Looking ahead, we are affirming our 2026 outlook. This includes our expectations for reported earnings per share of mid-single-digit growth and operating ratio improvement. Our original diesel fuel estimate of $2.35 per gallon established in January is now much harder to predict as we have seen quite a bit of volatility recently. While fuel prices seem to be coming down for the month of April, we will likely average over $4 per gallon. Beyond 2026, we remain committed to attaining our 3-year CAGR target of high single-digit to low double-digit EPS growth into 2027. I'll now turn it over to Kenny to provide an update on business demand. Kenny?

Thank you, Jennifer, and good morning. In the first quarter, freight revenue grew 4%. If you exclude the impact from fuel surcharge, freight revenue increased 3%, both first quarter records. Core pricing gains, higher fuel surcharge revenue and favorable business mix more than offset the 1% lower volume in the quarter. Starting with our bulk segment, revenue for the quarter was up 10% compared to last year, driven by a 12% increase in volume. Strength in coal was driven by sustained utility demand and favorable natural gas pricing, supported by strong service execution as well as new business with LCRA, which started in April of last year. In grain, the first quarter delivered record volume driven by strong export demand, including a rebound in shipments to China and continued expansion into Mexico, such as Bartlett's new facility in Monterrey. Grain products continue to benefit from business development tied to renewable fuels and associated feedstocks. Turning to Industrial, revenue was up 5% for the quarter on a 4% increase in volume, delivering a record first quarter and outperforming the market. Strong core pricing led to our best-ever quarterly average revenue per car. We continue to see strength in demand for construction projects driven by new LNG terminals and data centers, coupled with our intense focus on business development. Petrochemicals also performed well this quarter, reflecting new business wins and improved demand. Premium revenue for the quarter declined 5% on a 9% decrease in volume and a 4% increase in average revenue per car, reflecting business mix and higher fuel surcharges. As expected, lower West Coast imports and customer shifts had a drag on international intermodal volumes, which declined 28% versus last year. On a positive note, domestic intermodal delivered its third consecutive record quarter, driven by outstanding service and continued commercial momentum. Softening vehicle sales pressured automotive volumes, though one incremental volume with BMW offset some of the market softness. Looking ahead on Slide 11, we remain optimistic about coal's potential despite current natural gas pricing; we expect full year coal results to be positive. In grain, improving export demand to China, along with continued momentum into Mexico, positions the business well to support growth. For grain products, we expect continued strength driven by business development and expanding renewable fuels and feedstock markets with clearer renewable fuels policy, providing more stable demand. Moving to Industrial, despite a soft housing environment and tepid end market fundamentals, we remain firmly focused on outperforming industrial production. We expect the strong volume in construction and petrochemicals to continue based on our customer wins. A great example is the Golden Triangle Polymers Company joint venture with CPChem, where we are encouraged by the upcoming start-up of this new world-scale facility in the third quarter. Wrapping up with premium: international intermodal volumes will remain subdued, although we lapped some of the shifts we experienced last year as we moved through the quarter. Domestic intermodal continues to perform well, supported by over-the-road conversions enabled by our strong service product and diverse market reach. While softer vehicle sales are expected to pressure automotive volumes, we expect business development wins will offset some of the impact. Our first quarter results reflect the team's relentless focus on revenue growth, which is achieved through pricing to the service we provide, investing for growth and driving business development. With that, I'll turn it over to Eric.

Thank you, Kenny, and good morning. Moving to Slide 13. Our first quarter operating results highlight our focus on safety, service and operational excellence. Last year, we led the industry in employee safety. We carried that momentum into the first quarter as we improved both employee safety and derailments versus their respective 3-year rolling averages. We set first quarter records in all six of our key performance and efficiency metrics on Slides 13 and 14. Freight car velocity increased 9% to 235 miles per day. This performance was driven by best-ever terminal dwell of 19.7 hours, 11% better than last year and our second quarter below 20 hours. Every day, we continue to challenge ourselves to find new and innovative opportunities to reduce car touches, leverage existing technology in our terminals and implement new technologies. For service, both intermodal and manifest SPI finished at 98%, a 4 and 5-point improvement, respectively. These results compare to our best service levels, which were achieved in 2025, as we continue to raise the bar for success. We also demonstrated that maintaining a buffer of resources is critical to recovering from weather and incidents, as customers trust us to provide consistent, reliable service. Moving to Slide 14. Locomotive productivity improved 6% and was a best-ever quarter. Notably, our average active locomotive decreased 4% with higher gross ton miles, highlighting efficiency gains from our combined efforts related to locomotive dwell, train length and capital investments that increased locomotive pulling power. Workforce productivity, which includes all employees, increased 7%. Our active train, engine and yard workforce decreased 4% on a 1% reduction in car load levels, demonstrating our discipline as we remain more than volume variable. Looking ahead, we continue to hire for attrition and to support our service. Train length grew 3% compared to last year. Proprietary technologies such as Physics Train Builder combined with mainline investments and solid execution of the fundamentals enable us to safely grow train length. In closing, we had a very successful first quarter. We operated safely, efficiently managed our resources and consistently served our customers. As we progress throughout the year, we will remain nimble and continue to build on our strong momentum. With that, I'll turn it back over to Jim.

Thank you very much, Eric. Fantastic results. Before we get to your questions, I'd like to quickly summarize what you've heard so far. We had a strong first quarter and start to the year. Our network is running well and we are delivering on commitments to our customers. When you put it all together, we are doing what we said we would: leading the industry in safety, service and operational excellence, and that further translates into affirming our long-term guidance of high single-digit to low double-digit CAGR through 2027 with best-in-class operating ratio and return on invested capital. Before we turn to your questions, just a quick merger update. We are 100% on track with filing a revised application on April 30. We are confident the additional information we are providing meets the STB's expectations and we look forward to moving toward approval and the really exciting part of operating as America's first Continental Railroad. With that, we're now ready to take your questions. Rob?

And the first question is from the line of Scott Group of Wolfe Research.

So Jim, I wanted to ask on the merger. We were supposed to be six months or whatever into this process and I guess we're about to restart the clock. Does the fact that we are taking this long give you any more or less confidence in your ability to get this approved? I guess that's the crux of the question.

Listen, Scott, great question, and I appreciate it. It's a good way to start off. I thought for sure you'd start with Jim and the team—it's a pretty good quarter—but I think the merger is top of mind for a lot of people. We were disappointed but not surprised given historical events about how the process works to put railroads together that we would get some delays relative to the timeline we'd like. We knew this would not be a process that happens as quickly as I'd hoped. I was hoping it would be done for my birthday this year, so we're going to miss that date in August. But when we look at the fundamentals, we look at the facts of what this combination will deliver for the country and being able to expedite moving trucks off the highway, moving products in a much more seamless way, opening up new markets for customers, and being able to provide service to some underserved markets that today, optionally, end up going by truck instead of rail, we are more convicted now than we ever have been when you take a look at what's in the merger application and all the detail we're putting forward. The experts we've hired are clearly going to show where the opportunities are. On a service level, a seamless railroad is able to move products at less cost. Therefore, pricing will be beneficial for our customers because of lower cost. We'll be able to serve customers with a product that allows them to save on their own costs internally, whether it's railcar inventory or moving their end product to end users faster. For our employees, we have been very clear and have been clear from the start that our unionized employees should be part of the win of a new railroad that goes across the country, and we've guaranteed a job for everyone. That commitment is strong, and we're very happy to make that promise with agreements or without agreements, even though we have a number of agreements. So service is going to be better, we provide more opportunity, we take trucks off the highway, and our employees are guaranteed jobs. I think we're more convicted now that this is good for the country and good for Union Pacific. Financially, it is good for our shareholders. We see a lot of growth opportunity there—lower cost movements and much more fluidity. I'm more convicted today than I was when we first put the application in, Scott.

Our next question is from the line of Chris Wetherbee with Wells Fargo.

I hope everyone is doing well. Maybe to think about the guidance: that was helpful on the merger. As you think about the outlook for this year, particularly the operating ratio improvement, obviously a good first quarter, but fuel is going to be a headwind here as fuel surcharges will be a headwind from an operating ratio perspective. Could you give us a little color—are there incremental productivity opportunities that are becoming more apparent to you as you operate through the year? There is a headwind, but maybe there are incremental positive offsets?

Jennifer, why don't you talk about the fuel and everything we're doing on that piece?

Thanks for the question, Chris. Fuel will definitely be a headwind, particularly here in the second quarter. As I mentioned in the prepared remarks, we're paying a little north of $4 a gallon right now in April, so that will pressure margins, especially in Q2. But we have many opportunities to drive efficiency in our railroad. Kenny and his team are driving business development, and with the great service product, we are also very consistent in terms of pricing for the value of that service. When you put all those things together, we are still confident for the full year that we will be able to improve our operating ratio, and we reiterated that to make sure everyone understands we have that confidence and line of sight to do that. Fuel is a pressure in Q2, and we feel good about the rest of the year.

Our next question comes from the line of Jonathan Chappell with Evercore.

Jim and team, a pretty good quarter. My question is for Kenny or Eric. We look at the numbers Eric's team is putting up on Slides 13 and 14, and then we understand there are macro headwinds across different end markets. Is there an estimate for spare capacity, or another way to ask is what kind of volume growth can the current system handle without needing to add extra resources—if some of those macro headwinds turn to tailwinds?

Thanks, Jonathan. Certainly a topic we review consistently. There are five critical resources in railroading: mainline capacity, terminal capacity, crews, locomotives and cars. When we look at the railroad today, we have latent capacity driven by a couple of things. One, train length: we reported this morning a 3% improvement, which generates lane capacity. In addition, we still invest between $500 million and $700 million a year in capacity projects—siding extensions, construction, expansion of terminals. Union Pacific is positioned and will remain positioned with that capacity to bring the growth that Kenny and the team are working on every day.

Two tangible ways to see that capacity bearing fruit: one is on the equipment side, where we're able to insert more equipment into a facility or spot at 100% of order fulfillment, which allows us to capture more business. More importantly is the ability to shift lanes or geographic areas—moving from the Gulf to the Southeast or shifting from the Midwest down to the Gulf of Mexico. Those capacity benefits are the kind we take advantage of.

That's a good example with grain this year. Last year we talked about shifting grain into Mexico. We've seen some shift back to the Pacific Northwest as China has become more open to receiving American commodities, and we didn't have to build five new sidings. We used the capacity we had and delivered successfully.

And that shift wasn't clearly forecasted, so we had to be agile.

We build the railroad with a buffer in capacity and assets. Today, with the business level we have, I look at it in detail every morning. We're operating with over 100 locomotives on the mainline less than before because of speed improvements and other efficiencies, so we've parked them and they give us a nice buffer. On the people side, via technology, investments and operating the yards differently, we've been able to get more cars switched per employee. We see line of sight to be even better. On the railroad's capacity to add 10% more business: we've invested hundreds of millions, especially in our terminals, to make them more resilient and able to recover faster with higher throughput and fewer touches. If you turn the clock back to 2019, if we were operating like early 2019, we'd have about 25% more trains out there running this morning than we are today. We did not remove capacity; the railroad is operating at a higher volume with 24% fewer trains to move that volume. The touches are faster and fewer. So I'm very comfortable we have capacity to add a lot of business without huge incremental capital and operating cost. We don't sleep until the railroad is running with the system it has. There's lots of opportunity left to improve in the next few years.

Next question is from the line of Jason Seidl with TD Cowen.

Obviously a good quarter, and it's nice to see the railroad operating strongly. This is probably to Kenny. I wanted to dive deeper into your commentary on business development. One of your peers talked about success, seeing new projects grow in excess of 15%, and we're discussing adding maybe 1% to 2% in car loading growth next year. Could you give more color on UP's efforts and where you think that could go and add to car loadings in the future?

I won't give guidance on volume, but we are bullish and optimistic about new pieces of business coming online. We closed about 20 new construction projects in the first quarter and feel good about second quarter. We have a strong pipeline of construction projects coming on, most of which are carload opportunities. We've focused on adding new customers at origin and destination and expanding capacity. We're excited about where we are.

The next question comes from the line of Ken Hoexter with Bank of America.

Great job on expenses. I thought that was an impressive stat. Looking at the way the stock is trading, I want to return to M&A. It seems the market is building in maybe larger concessions that might be somewhat destructive to market value. Given where you're trading and peers, does that make sense? Is there anything in the detailed request for deal terms or discussions through the process on where you'll come out on concessions? And Jen, any reason you switched the language to reported outlook from adjusted when calling out merger costs—does that mean your long-term target still includes some merger cost? I want clarification.

Ken, we added reported language as a clarification from last time because we didn't have reported and that generated questions. We wanted to be clear that when we talk about EPS growth, that's on a reported basis. That includes the headwind from the merger costs that we didn't originally anticipate and the fact that we're not buying back shares right now. So it is on a reported basis.

The market is the market; we can't control it. Fundamentally, we see growth opportunities with customers—new products, customer investments, exports and domestic moves. On concessions: this is an end-to-end merger with a small portion of overlap we'll handle in the application to ensure no customer is harmed. The number of customers going from two to one is a handful out of thousands. It's hard to come up with concessions that make sense. Competitors are loudly commenting and will compete hard—CSX reported great results yesterday and will continue to compete in the East; BNSF, owned by Berkshire Hathaway, has significant resources and will be a strong competitor in the West. We're comfortable they'll compete hard. We're not prepared to give concessions that effectively open our railroad for no reason. If a combination were truly detrimental to customers, action should be taken. But when you speed up movements and open markets, it's hard to see a need for major concessions.

The next question comes from the line of Brandon Oglenski with Barclays.

Some skeptics say this combination will drive more than 40% market share to your network relative to now, squeezing smaller competitors and regionals. How do you push back on that criticism of a transaction of this size?

You have to look at the entire market. People talk about combined market share, but it's not a simple picture. The combined gross ton miles will be around 38% to 39%, but we're not dramatically bigger than our Western competitor on gross tons. Short lines do a great job handling first and last mile; strengthening them will drive more business to them with this combination. Some will be affected in the short run where routing changes, but overall the opportunity in the market is huge. Railroads today capture a low double-digit share of land and water shipments in the U.S., so there's significant opportunity for all of us. That broader view is what matters.

Your next question comes from the line of Stephanie Moore with Jefferies.

Jim, how do you think about the value of Union Pacific's physical network at a time when investors are focused on AI-driven disruption? What is the market missing about the intrinsic value of the network, especially post-deal? And what are you doing with AI-enabled efficiencies in yards and operations to drive better results?

When we talk about AI and equivalent tools, it's about solving real problems and delivering value: removing car touches, dropping dollars to the bottom line, improving service. We're not doing tech for tech's sake. For example, in dispatching we have an automated movement planner informed by AI that looks 12 hours ahead to lay out the railroad and provides real-time support to dispatchers. That helps manage maintenance windows and variability events. Inside terminals, tools like Mobile NX and Terminal Command Center provide intelligence to teams on the ground, letting them forecast what's coming and see problems ahead of time—for instance, identifying a wrong car in a cut so they can plan two hours ahead and avoid big productivity hits. Across the company there are at least eight to ten major projects using AI that improve service and drive efficiency.

Technology and AI move fast and help in many ways—from customer communication to finance. We're working on embedding the latest information tools and automating where we can. We're also developing capabilities for locomotives to operate smarter and more fuel-efficiently; those tools are technology-driven and getting closer to roll-out. We use these tools to react faster to weather and network changes and aim to move from weeks to days in responsiveness. Rahul leads these efforts and is doing a spectacular job. So, stay tuned.

The next question is from the line of Brian Ossenbeck with JPMorgan.

We're up to 65 pounds and climbing. Just two quick follow-ups on the integration and technology. Are you still assuming first half of 2027 approval? It doesn't sound like it, but confirm whether you expect to address competitors' concerns just by addressing what the STB asked for and the new application next week. Also, would love to hear more about how you're planning for integration differently this time given prior industry issues that were long ago. Things have changed; what are new processes and tools to mitigate risks?

We're working off the STB's timeline, so we expect approval in the second quarter of next year if the process goes as planned; it's not finalized but that's the expectation. We made sure the STB's specific information requests are addressed in the filing, whether it's the ERP, market share, or how we'll handle overlaps. Competitors have asked for more than is necessary and some requests are not fact-based. We are prepared to answer questions, share information as appropriate, and are confident in our filing. Regarding competition, there's significant global and modal competition—ports in Canada are expanding to compete with U.S. ports, and that broader context matters too. We're willing to talk and negotiate commercially where sensible, but concessions that harm the railroad simply to appease competitors are not something we believe are required.

On integration learnings: three important items. One, technology in prior mergers created challenges when the pace of integration was too fast. We have an advantage: Union Pacific has demonstrated the ability to change systems successfully, such as our transportation system NetControl less than two years ago with no customer impact. Two, timing: we will operate the two railroads largely independently at the start and then implement changes thoughtfully—one action at a time, validate it, and then move to the next. Three, in the past, some mergers involved acquiring a poorly operated railroad, which made integration harder. That's not the case here. Norfolk Southern is a good railroad. We're combining two strong railroads, and we are doing the most comprehensive integration planning this country has seen for railroads.

Thanks, Brian. I appreciate the questions.

The next question is from the line of Walter Spracklin with RBC.

Looking at Kenny's Slide 11 compared to the previous quarter, it looks like you've added three positives: construction as positive, forestry no longer negative, and auto improved from negative to neutral. Trucking peers say the freight recession might be over. Given Q1 results and volumes are pretty good and operations strong, if volume is improving, why wouldn't your EPS guidance be higher as well? It seems like you could get operating leverage.

First, lumber is still challenged but it's a smaller volume. On autos, we have won incremental pieces of volume. SAAR for lumber is still negative around 3% and SAAR for auto is still negative around 2% to 3%, so we're winning our way to fill those markets better. On intermodal and truck competition, we've seen a jump in fuel in mid-March and we'd like to see that sustain; we want sustained tightening in the truck market and sustained pricing. If those sustain, we should see uplift in volume. It begins with the service product: Eric and his team have done a fabulous job, and you're seeing us win. Our goal is to increase the size of the pie with over-the-road conversions, and we're accomplishing that.

If you have a railroad running at a high service level and the economy isn't as impacted as some think, it's our job to sell that service and find opportunities to grow. I'm comfortable with the positive notes on the slide. Thanks for the question, Walter.

Our next question comes from the line of David Vernon with Bernstein.

Jim or Kenny, how are you thinking about proving the merger enhances competition? You've been out with the concept of committed gateway pricing. What feedback have you gotten from customers, and how do you think that idea helps meet the notion that the merger enhances competition?

We are not ambiguous: we will enhance competition by moving products across the country faster with fewer touches. If competitors want to compete, they'll need to enhance their service or compete on price. We're enhancing capability so products that are consumed mostly in the East can move across the country in a more seamless manner and open up more markets. This also gives customers optionality between rail and truck. Committed gateway pricing gives railroads the option to offer set prices to customers for certain movements. We'll keep every gateway open; if the fastest road in some markets is via CSX at New Orleans, we'll keep that option available. The base network remains open and this improves service.

Customers see the value in transit improvement and the benefits of eliminating an interchange. We have 520 customers that signed letters of support, 700 commercial partners, and 2,000 in total that signed letters of support. Customers see value in transit improvements and benefits to supply chains that invest in equipment—equipment cycle times will become more valuable. I've spent a lot of time with customers: they want to see the filing and the process but they are engaged and supportive. Domestic intermodal has had three consecutive record quarters for us, driven by first-rate service and the commercial opportunity of single-line service. A lower cost structure helps open new markets; customers see improved margins for new business and appreciate that.

Committed gateway pricing extends merger benefits to customers who otherwise wouldn't be impacted, and that absolutely enhances competition.

Our next question is from the line of Tom Wadewitz with UBS.

How do you think about key things you need to execute on as you look toward approval timing potentially in 2Q '27? Is delivering volume growth important to build the case that you can handle integration? And how do you balance volume versus price given your efficient operation and low cost structure—do you intentionally seek more volume in some markets?

We absolutely want to increase volume and revenue by winning more business, moving more products, and pricing appropriately for the value we provide. We separate what we're doing for the merger from operating Union Pacific today. The railroad today's job is to run at a high level—Eric and the operating team are doing a great job. We see runway to be more efficient and to move products better, which allows us to sell our service. There are certain markets where we must react to market shifts—grain is an example—but our key goals are to increase volume and revenue, drive to the bottom line, provide a high level of service for customers and operate efficiently.

That's an excellent summary. Even with increased truck competition that has compressed markets, truck pricing is still generally more expensive than rail. Our efficiency improvements and ability to reach new markets position us well to grow.

The next question is from the line of Richa Talwar with Deutsche Bank.

You mentioned record workforce productivity and historically low headcount while growing the top line. Is this the new normal or could it get better? Jim said there's line of sight to improve more—how are you achieving these productivity initiatives and are they transferable to a combined UP/NS network?

We look at management and operations continuously and have done a good job of becoming more efficient through attrition while sizing appropriately. On the combination, absolutely those productivity gains are transferable. There are straightforward efficiencies—fewer corporate functions are needed across a combined railroad—but importantly, we also see growth opportunities that can bring more work to the railroad. Our attrition assumptions and growth expectations gave us confidence when we made our commitments about employees.

The gains are absolutely transferable. The way we improved workforce productivity—7% improvement—comes from a mindset that productivity drives growth, plus relentless focus on fundamentals. We examine scorecards daily, find variation across terminals, and grind until we close the gap. Layering technology on top multiplies the benefit. There's no finish line on productivity; it's continuous improvement to position the company to win in the marketplace.

The next question is from the line of Ariel Rosa with Citigroup.

Nice quarter. Jim, you've committed to the unions that all union jobs will be protected. Given the productivity gains, do you worry that this commitment might slow progress? How are you thinking about that balance? And more broadly, is there anything you'd do differently in operating the railroad if the merger process were not ongoing?

We operate the railroad to the best of our ability today and continuously look for improvements—everything we do in operations remains focused regardless of the merger. The commitment to guarantee unionized employees' jobs was made after careful analysis of attrition and the pace of integration and we are comfortable it will not limit our ability to be productive. We made the commitment thoughtfully, and we believe attrition plus new business growth will allow us to honor that promise without hampering productivity.

Our final question is from the line of Madison Pasterchick on for Ravi Shanker with Morgan Stanley.

Given current network utilization, service levels and inflation, what does operating leverage and incremental margins look like in the up cycle?

We like the up cycle. Higher natural gas is generally positive for the railroad; while it may be painful for consumers in some respects, it's beneficial for certain freight flows. If the economy settles and grows, it would help us because we grow with America and American businesses. We're in a good place operationally to benefit from an up cycle.

Thank you, Mr. Vena. There are no additional questions at this time. I'd like to turn it back to you for closing comments.

Thank you very much. I know there's a lot going on across many companies reporting today, and I appreciate you joining us. To our shareholders: rest assured we look at this railroad every day to make sure we operate in the best way possible. I'm very comfortable with the team—Kenny and his commercial team, Eric and the operations team, Jennifer and her finance team—doing the right things. We're looking forward to filing the revised application on the 30th, getting it accepted and moving ahead with this transaction that will build on Union Pacific's results and make us a stronger railroad and competitive mover of products Americans use every day. Thank you very much. Appreciate everybody joining us.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines at this time, and have a wonderful day.