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Year-long service woes are taking a big bite out of Union Pacific Corp.'s earnings. Today, the railroad reported second-quarter income from continuing operations of $158 million, a 43 percent decline compared with second-quarter 2003's $275 million.

Quarterly operating income of $359 million dropped 38 percent, net income of $158 million fell 45 percent, total operating expenses of $2.7 billion rose 16 percent and the railroad's operating ratio of 88.1 worsened 8.2 points compared with second-quarter 2003 data.

However, UP continued to build traffic during the quarter. Revenue carloads totaling 2.4 million increased 2 percent and gross ton-miles of 260.6 billion rose 3 percent compared with last year, helping the railroad increase quarterly operating revenue 5 percent to a little more than $3 billion.

"Our quarterly operating revenue topped the $3 billion mark for the first time ever in the history of the railroad," said UP Chairman and Chief Executive Officer Dick Davidson in a prepared statement. "[But] revenues could have been even stronger given this unprecedented level of demand. Although our service metrics have stabilized, we have not yet seen the operating improvement necessary to reduce costs or drive stronger revenue growth."

UP's financial statement for the year's first half isn't much better. Income from continuing operations of $323 million fell 24 percent, operating income of $673 million dropped 29 percent, net income of $323 million declined 55 percent, operating expenses of $5.2 billion rose 12 percent and the railroad's operating ratio of 88.6 worsened 5.5 points compared with first-half 2003 data.

"We know we aren't living up to the potential of this great company, but we remain absolutely focused on resolving the operational issues that have temporarily limited profitability," said Davidson. "By year end, we will have graduated 5,000 trainmen, acquired nearly 750 locomotives on short- and long-term leases, and taken steps to manage our business volumes. We believe these efforts will eventually allow us to catch up with the strong demand, improve network fluidity and operate more efficiently so that we can translate this demand into bottom-line results."