Updated version 2 - Union Pacific exceeds market expectations thanks to strong pricing power, but notes that high fuel costs have impacted the company.

Supplemented stock price information in the second paragraph, and added analyst forecasts and background information throughout the article.

Reuters, October 22 - On Thursday, Union Pacific Railroad Company (UNP.N) reported third-quarter profits that exceeded Wall Street expectations, thanks to improved core pricing. However, the company also pointed out that rising fuel prices have taken a toll.

The railroad company's stock price fell about 1.1% in pre-market trading.

The Middle East conflict has pushed up fuel prices, increasing costs for transportation companies and putting pressure on profit margins across sectors including trucking, logistics, and airlines. According to the American Automobile Association (AAA), diesel prices, one of the main costs for freight companies, soared in September (link), reaching a record high of $6.53 per gallon.

Union Pacific said that higher fuel costs worsened its operating ratio(OR) by 140 basis points this quarter, although the ratio still improved by 10 basis points to 59.1%.

Driven by increased fuel surcharges, higher freight volumes, and improved core pricing, operating revenue jumped 15% year-over-year. Excluding fuel surcharges, freight revenues grew by 6%.

“It’s not surprising that UNP once again delivered quarterly results above expectations, especially considering relatively strong freight volumes and service performance throughout the third quarter. Fuel costs may still pose a superficial drag on operating income,” said Evercore ISI analyst Jonathan Chappell.

Meanwhile, the Omaha, Nebraska-based company is seeking an $85 billion acquisition of Norfolk Southern Railroad, a move that would create the nation's first coast-to-coast freight railroad.

According to data compiled by London Stock Exchange Group (LSEG), based on adjusted figures, Union Pacific earned $3.53 per share this quarter, beating analyst expectations of $3.47.

The railroad operator posted total operating revenue of $7.2 billion for the quarter ended September 30, up from $6.24 billion a year earlier, and beating analyst estimates of $7.13 billion.

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