(Adds share price, comments from Union Pacific executives)
By Eric M. Johnson
Jan 25 (Reuters) - Shares in No. 1 U.S. railroad Union Pacific Corp slid about 5 percent on Thursday as the company reported worsening operating and efficiency measures but said a strengthening economy should fuel stronger freight volumes in 2018.
The Omaha, Nebraska-based company said its quarterly operating ratio, a closely watched measure of operating expenses as a percentage of revenue, increased 0.6 points to 62.6 percent compared with the same period last year.
A lower operating ratio means more efficiency and higher profitability.
Union Pacific's operating ratio was hit by a $2.03 per gallon average quarterly diesel fuel price, 23 percent higher than in the year-ago period.
Higher fuel costs and wage and benefits inflation - despite a slight reduction in workforce - pushed quarterly operating expenses higher by 6 percent, the railroad said. Train velocity dropped 5 percent to 25.1 miles per hour versus 26.5 in the year-ago period.
Though Union Pacific reported a rise in quarterly profit, one analyst on its conference call pointed to underwhelming growth in freight volumes on its network, which spans the western two-thirds of the United States.
"We are not satisfied with this performance," Union Pacific Chief Operating Officer Cameron Scott said on the call.
Shares in the railroad fell about 5 percent in early trading.
The railroad said it would invest roughly $3.3 billion in 2018 on infrastructure upgrades and equipment purchases, including building a new railyard in Texas. Other railroads are cutting costs, with third-ranked CSX Corp shutting multiple yards in the eastern United States.
Chief Executive Officer Lance Fritz said a stronger economy and pricing would fuel freight volume growth in 2018.
Edward Jones analyst Daniel Sherman expressed confidence Union Pacific could deliver on its promise of reducing its operating ratio to 60 percent on a full-year basis by 2019.
"Union Pacific's underlying business performed fairly well in the fourth quarter, with solid pricing of its service and reasonably good control of its underlying costs," Sherman said.
Union Pacific, one of the biggest beneficiaries of the changes to U.S. tax law, should see its effective tax rate fall from 38 percent in 2017 to 21 percent in 2018, raising net income by roughly 20 percent per year, Sherman said.
Reporting by Eric M. Johnson in Seattle; Editing by Clive McKeef and Andrew Hay