Union Pacific turns fuel surcharges into profits as rivals lag

By Lisa Baertlein and Tim McLaughlin

LOS ANGELES/BOSTON, Nov 12 (Reuters) - US railroad operator Union Pacific's fuel surcharges boosted profits for a second straight period in the third quarter, easily outpacing chief rival BNSF, whose fuel-related deficit could exceed $1 billion this year, according to the latest disclosures to federal regulators.

Omaha-based Union Pacific UNP.N collected $131.8 million more in surcharges than it paid for fuel during the third quarter, boosting earnings by 15 cents per share. That windfall came after the railroad collected $91.1 million in excess fuel surcharges in the prior quarter, adding 14 cents per share to earnings, according to filings with the Surface Transportation Board (STB) and financial disclosures.

Diesel markets tightened by the wars in Iran and Ukraine have boosted transportation costs to record levels and stoked criticism that some companies' surcharges are unnecessarily driving up consumers' costs. Railroads are the only US transportation companies that report both fuel costs and fuel surcharge revenue ​to regulators, offering rare insight into how surcharges affect company finances.

From January through September, UP collected $2.81 billion in levies meant to cover fuel price increases. That outpaced its fuel costs by $188.1 million, according to STB filings.

"Due to high fuel prices, fuel surcharge revenues across the rail industry increased substantially," UP said in a statement, adding that its year-over-year percentage increase is in line with the industry. UP's network spans the western two-thirds of the US and has links to Mexico. Customers paying surcharges include retailers, construction companies and manufacturers, and food and energy producers.

The excess surcharges are being imposed as UP and Berkshire Hathaway-owned BNSF battle over UP's proposed $85 billion acquisition of Norfolk Southern, which would create the first US continental railroad operation.

By contrast, BNSF's surcharge collections have lagged fuel costs by $922.4 million during the first three quarters of 2026, according to STB filings.

The STB is weighing UP's proposed purchase of Norfolk Southern. A decision is believed to be months away.

CSX and Norfolk Southern have also reported quarterly surcharge surpluses this year. Executives from those railroads said those revenues blunted rising fuel costs in their second and third quarters. They did not disclose the impact on profits. Of the two, CSX had the largest excess quarterly surcharge collection at $61.4 million in the third quarter.

The difference between UP and BNSF surcharge rates is partly explained by how they apply them, according to the US Department of Agriculture.

UP begins recovering fuel costs via surcharges when prices hit $2.30 per gallon. BNSF waits until the fuel price tops $3.25, USDA analysis showed.

UP's November 2026 fuel surcharge is 84 cents per mile, versus 61 cents for BNSF, according to that analysis.

UP did not immediately comment on the USDA analysis.

'REVENUE GENERATOR'

Fuel surcharges are a broadly accepted tool for transportation companies to cover unexpected price increases in fuel, said Ann Warner, a spokesperson for the Freight Rail Customer Alliance.

But utility company members, many of which are captive to one railroad for coal deliveries, raise concerns "when it becomes excessive and it turns into a revenue generator exercise rather than a cost recoup," Warner said.

FRCA is a member of the Stop the Rail Merger Coalition opposing the potential UP-Norfolk Southern combination.

"The proposed merger puts so much scrutiny on what UP is doing or not doing. You don't want to overreact too much to it, but at the same time, something's not right," Warner said.

BNSF says the merger would undermine competition. At the same time, it has opposed UP's attempts to subpoena the testimony of investor Warren Buffett, the 96-year-old chairman emeritus of Berkshire BRKa.N.

UP is seeking more information about a meeting Buffett and Berkshire CEO Greg Abel had with the CEO of CSX Corp CSX.O in August, regulatory disclosures show. UP did not immediately comment on that action.

Earlier this year, UP's CEO Jim Vena stirred controversy, saying at a conference that the railroad would increase rates on merger opponents by 3-4% "to teach you a lesson." The company has previously called Vena's comments a joke.