What happened

Union Pacific (UNP -0.13%) delivered disappointing quarterly results but announced a successor to embattled CEO Lance Fritz. Investors appear willing to overlook the quarter in favor of what lies ahead, sending shares of the railroad up by more than 11%.

So what

Union Pacific wasn't on the fast track in the most recent quarter. The railroad reported earnings of $2.57 per share on revenue of $5.96 billion, missing expectations by $0.20 per share and $160 million in sales. Operating revenue was down 5% year over year on lower fuel surcharges and lower volumes.

The company's operating ratio, a measure of how much it costs to generate $1 worth of revenue, was 63% in the quarter, up 280 basis points from last year. A lower number is better.

But the stock is up, in part because the railroad is bringing in a new CEO with a reputation for pushing down costs. The company appointed one-time Chief Operating Officer Jim Vena as its new CEO. He succeeds Lance Fritz, who said earlier this year he intended to step down after pressure from shareholder Soroban Capital Partners for leadership changes.

Vena has more than 40 years of industry experience, including a three-year stint at Union Pacific as COO and senior advisor to the chairman. He spent most of his career at Canadian National, where he worked for Hunter Harrison, who's credited with reinventing how North American railroads operate and bringing down costs.

Now what

Union Pacific also provided tepid guidance for the remainder of the year, saying 2023 was likely to be "pressured by challenging demand and cost environment." Union Pacific is forecasting $50 million to $70 million in additional labor expenses due to new agreements. It also said its dividend will be maintained, but there are no further share repurchases planned for the year.

Some of the year-over-year comparisons are one-time events, including the impact of the new labor deals. But Union Pacific and other railroads are faced with an environment where the business that's out there looking for transportation is not the highest-margin parts of their operations. The threat of a U.S. slowdown due to rising rates and inflation also looms.

Investors are understandably drawn to Vena's reputation but need to understand it could take time for the company to show a real turnaround in this environment.