Michael W. Upchurch
Executive Vice President & Chief Financial Officer at Kansas City Southern
Thanks, John, and good morning everyone. I'm going to start my comments on Slide 10. I'll cover revenue and volumes and a little more detail on the next slide, but overall quarterly revenues grew 13% on a 3% volume decline. Our reported operating ratio of 66.1% includes $37 million of merger-related costs that we incurred during the quarter. Excluding those merger costs, our adjusted OR was 61.2%, a 240 basis point increase year-over-year and flat sequentially.
As Pat mentioned, we had several discreet commercial challenges and increased costs from network congestion that I'll discuss in more detail on the next few slides, but let me cover a few of the key expense items in the quarter that contributed to the adjusted OR. We incurred roughly $10 million or 130 basis points of incremental expense in the quarter from resources that we deployed to address the service challenges we were experiencing earlier in the year. You may remember that last quarter we referenced approximately 200 basis points of headwind from cost attributable to congestion. So the good news is these costs have come down as we've progressed through the third quarter and as John indicated, our network to running about is good as we've seen in a long time.
The improved trajectory along with significantly improved service gives us a level of confidence that we will be able to leverage our resources deployed going forward and achieve better productivity. We also incurred $6 million or an 80 basis point higher year-over-year derailment and casualty expense. And as we discussed on the 2Q call, we incurred $4 million in the quarter, roughly a 50 basis point impact from Mexico outsourcing reform, and I'll cover that in a little bit more detail on the following slides. Our overall reported diluted earnings per share were $1.71, adjusted for merger costs and foreign exchange. The adjusted diluted earnings per share was $2.2, up 3% from a year ago.
Continuing on Slide 11, this quarter we generated 13% revenue growth from a 3% decline in carloads. On a fuel FX constant basis, our revenue growth was 6%. As a reminder, fuel and foreign exchange impacts are generally operating income neutral over the long run, although we did experience a 50 basis point negative impact OR in the quarter, largely due to higher fuel prices. Our revenue per unit was up 16%. We had some mix issues with intermodal carloads down 13%, that ended up positively impacting overall RPU. We also benefited from positive pricing and length of haul increases in the U.S., that were primarily within our higher revenue per unit, chemical and petroleum and Industrial business units, in addition to seeing overall increases in revenue per unit from fuel and FX.
Regarding price, we are keeping an eye on the recent uptick in inflation. Our Q3 pricing results were consistent with what we've seen in previous quarters this year, but rising inflation is increasingly concerning. We are carefully monitoring inflation as we work with customers to manage their overall transportation costs and as we review contracts and head into a heavy renewal season in the first half of 2022, and specifically we have roughly two thirds of our business that will get repriced in 2022, with almost half of that being in the first quarter. We're certainly going to be mindful of the need to ensure pricing adequately covers inflationary costs.
Turning to volumes. As Pat mentioned earlier, the Q3 volume decline was primarily due to three key areas, segments, the auto plant shutdowns, driven by the global microchip shortage and obviously overall volume related to finished vehicles was down about 30%. We saw some additional pressure on the intermodal auto parts business that we move southbound into Mexico and other supply chain impacts, including plastics and metals that are inputs into auto production. Currently, it's unclear when these supply chains will normalize, but we are working closely with our customers to understand timing and we stand ready to support them as their production normalizes.
Service interruptions at Lazaro due to blockages resulting from the teachers' protest have impacted our volumes for more than 75 consecutive days now. In 3Q, we were essentially operating trains only in the month of July with no traffic in August or September. During the quarter, the blockage of our line resulted in approximately $25 million of lost revenue, a 100 basis point negative impact to operating ratio and about $0.13 negative impact to EPS. These blockages resulted in about 67% lower volumes for Lazaro Intermodal as well as negative impact or heavy fuel oil moves for Pemex along with some metals volumes.
As we discussed last quarter, our refined fuel product shipments have been negatively impacted by increased government regulation in Mexico, resulting in certain supply chain disruptions. These temporary regulatory impacts resulted in 18% lower energy reform volumes. However, we continue to expect that these impacts are temporary as we continue to help the government, ensure customer compliance with the new regulations. The underlying market dynamics remain unchanged, mainly the two thirds of Mexican gasoline and diesel demand is being supplied by the import market and KCS is obviously extremely well positioned to bring that product from the US Gulf Coast into Mexico to help cover the supply shortfall. While there is some evidence that there has been a shift in fuel importation from rail to truck, we continue to believe rail is far more efficient mode of transportation and that we will see volumes rebound.
Strengths, we're seeing energy, industrial and consumer and Ag and Min. Energy carloads were up 43%, driven by low coal stockpiles, steady demand, which has obviously been helped by high natural gas prices that have been hovering between $5 and $6, along with the start up of the DRUbit Port Arthur Terminal. Industrial and consumer carloads were up 7%. This business unit benefited somewhat from easy comps a year ago, but also healthy industrial demand and new steel production facilities that we've talked about for a while that have come online and we still have a few new plants that'll open up later this year and into 2022. And then finally, our Ag and Min carloads were up 5% on steady demand in the improved cycle times that John mentioned earlier. As Pat mentioned, we withdrew our guidance due to certain uncertainty related to the microchip issue, the Lazaro blockages and the refined fuel supply chain disruptions. However, we do believe that these are transitory in nature and our medium to long-term outlook for those business units remains unchanged.
Moving to Slide 12, given that the expense we incurred to recover from our service challenges and other drivers in the quarter, such as fuel price FX, Mexico outsourcing reform and higher derailment and casualty expenses, we saw an overall 18% increase in operating expense. Fuel increased $20 million from price and $3 million from consumption, primarily driven by fuel price increases in both countries and higher GTMs in the U.S. from increased bulk shipments. We also saw an $11 million increase in expense from foreign exchange, but that was more than offset by a $12 million increase in revenue from FX.
We experienced a $9 million increase from headcount and hours worked, which I'll talk a little bit more on about the next slide, along with a $4 million increase from wage and benefit inflation, which was partially offset by a $7 million reduction in incentive compensation. Additionally, as we signaled on our second quarter call, we incurred incremental expense in Q3, related to Mexican outsourcing reform and specifically we saw comp and benefits increase $5 million, but that was partially offset by $1 million in lower purchase services from the in-sourcing activities for a $4 million net year-over-year increase. Looking forward, we would expect to incur an additional $3 million expense increase due to the outsourcing reform, but believe the impact will be immaterial in 2022 as we fully realize the savings of insourcing of vendor services.
We also incurred a $6 million increase in materials and supplies, primarily from the increased locomotive fleet that John referenced. However, as we go into the fourth quarter, we should fully expect to see those cost decline given the decrease in the active locomotive fleet. Primarily due to higher derailments, we saw a $6 million increase in casualties. We also saw a $4 million increase in property tax, but that's a negative year-over-year comp because of a $3 million credit we recorded in 3Q of 2020. We had a $4 million increase in employee expenses as we incurred higher lodging and taxi cost for our T&E crews, resulting from higher crew starts. And finally, a $4 million year-over-year reduction in car hire, driven by supplier incentives and improved cycle times from the improvement in velocity.
And then finally on Slide 13, let me cover comp and ben and fuel expenses real quickly. Comp and benefits expense increased 14% or $16 million in Q3, $9 million from the head count and work hours, driven by a 3% increase in head count, which does exclude the impact of insourcing that we've provided more information on the slide. The increase in head count and crew starts were almost entirely in the U.S., as we brought on resources to improve service and address a 6% volume growth that we saw in carloads in the U.S., which would have led the industry. As discussed on the prior slide, we did incur incremental expense in the quarter in comp and benefits on Mexico outsourcing. But as I indicated earlier, we saw some benefits in purchase services and expect that impact going into 2022 to be immaterial.
We also had a $4 million impact from foreign exchange, $4 million from wage and benefits and then those increases were offset by a $7 million decline in incentive comp, as we lowered our accrual for annual incentives compared to 3Q of 2020. And then finally, fuel expense increased 53% in the quarter, driven by a 42% increase in fuel price, foreign exchange, and the increase in consumption. As I've done in prior quarters, maybe just a quick summary of the quarter. Obviously, a very tough quarter from a demand perspective, largely transitory type issues. We did have some cost creep, but we think we're getting much better there, particularly on the equipment side as we execute here in 4Q, and some negative fuel price impact and Mexican labor law impacts. And then from a sequential perspective despite a decline of 4% in volumes, we saw a slightly improved operating ratio in 3Q, so we think the setup for 4Q and going into 2022 will be better than what we saw in Q2 and Q3.
So with that, I'll turn the call back to Pat.
