(The following story by Stacie Hamel appeared on the Omaha World-Herald website on February 6.)
OMAHA — Union Pacific Railroad, the nation’s largest, describes its vast rail network as “the premier rail franchise in North America,” stretching from all the major West Coast ports to the six major gateways to Mexico and on to Chicago and other eastern destinations.
Not premier, though, were Union Pacific’s earnings for 2004. The company’s net income placed it third among the nation’s four largest freight railroads, behind systems with fewer miles of track and fewer employees.
Omaha-based U.P. managed to wring just $605 million profit out of $12.2 billion of revenue. The much smaller Norfolk Southern, by comparison, earned $923 million on revenue of $7.3 billion.
The results reflect issues U.P. has battled since fall 2003: slowed service, congestion, high fuel prices and record demand coinciding with a shortage of train-service workers. One-time events contributed, too, such as a charge for future asbestos claims.
Union Pacific’s 2004 performance illustrates the hill the company must climb to regain a position of dominance.
The nation’s second-largest railroad, BNSF Railway Co., operates in the same western U.S. territory as U.P. on a slightly smaller system, but overtook U.P. in 2004 in some comparisons.
BNSF moved 9.54 million carloads of freight compared with U.P.’s 9.45 million.
BNSF reported $187 million more earnings on $1.5 billion less revenue than U.P., despite BNSF recording a larger asbestos charge – $288 million, compared with U.P.’s $154 million.
Overcoming the struggles U.P. has faced the last 18 months is “all a matter of having the right resources in the right place,” economist Terry Clower says.
Clower had a front-row seat for U.P.’s last service crisis, which began after its merger with Southern Pacific in 1997. As associate director of the Center for Economic Development and Research at the University of North Texas in Denton, he prepared reports on the effect of U.P.’s congestion for the Texas Department of Transportation.
If the railroad’s current problems were to worsen, he said, they could have widespread economic impact.
“We only have to look a couple of years back to the longshoremen’s strike in Southern California,” he said. “Any kind of significant disruption in our ability to move goods is going to affect the economy.”
U.P.’s challenge, he said, is to achieve the gains that the merger promised while maintaining efficient service.
Clower said recovery from the kinds of service delays and congestion U.P. has experienced requires several steps:
o Expanding critical infrastructure capacity.
o Investing wisely in equipment.
o Using existing labor efficiently and quickly hiring and training new people.
o Changing rapidly as hot spots and problems occur.
In fall 2003, as freight demand soared, U.P. stepped up its hiring of train service workers and began adding more locomotives.
In 2004, U.P. hired 5,500 workers for train service and trained 5,000 conductors and switchmen, as well as 744 engineers, said spokesman Mark Davis.
In the first half of 2005, U.P. plans to hire 700 others to cover attrition among train service ranks, Davis said. Also in 2005, more than 1,400 conductors and switchmen and 2,024 engineers will complete training.
The railroad plans to acquire 315 locomotives this year and to renew expiring leases on another 230.
U.P. will spend $85 million this year to add 60 more miles of a second mainline track on its busy Sunset Route between Los Angeles and El Paso, Texas, Davis said. With the addition, the Sunset Route, part of the railroad’s all-important corridor to Chicago, will be about one-third doubletracked.
Other capital projects planned throughout the system for this year are aimed at improving capacity and fluidity of the network, Davis said.
“It takes all three of our resources . . . train crews, locomotives and track capacity or infrastructure and the maintenance of that to move rail cars. That’s why it’s so important year in and year out to maintain infrastructure,” he said.
BNSF plans to add another 60 miles of doubletrack this year on its Transcontinental Route between Chicago and Los Angeles. With that, the corridor will be more than 90 percent doubletracked, spokesman Steve Forsberg said.
The Fort Worth, Texas-based railroad plans to hire 1,400 more train service workers this year after adding more than 2,000 in 2004.
In mid-2004, BNSF began a network operating plan designed to improve network fluidity by reducing both train miles and how many cars are handled at terminals.
The plan improves how the railroad uses its resources, said BNSF spokesman Pat Hiatte.
“We’ve made an effort to run larger trains, in terms of units per train,” he said. “There are a number of things we have done to run more efficiently . . . that improve capacity and help you control costs, as well as keeping the network fluid.”
Union Pacific announced an overhaul of its network management during its Jan. 24 earnings presentation to stock analysts.
The “Unified Plan” is designed to reduce the network’s workload, increase overall train speed and cut the time trains spend waiting at terminals, said Dennis Duffy, executive vice president of operations.
The plan first will be implemented on the Sunset Route by the end of this month or early March, Duffy said.
An operations overhaul is what some stock analysts have been calling for.
Analysts at Credit Suisse First Boston downgraded its rating on U.P. days before the earnings announcement, writing:
“We do not believe that the company’s service or carload levels will turn around until at least (the second quarter), as the company continues to throw more assets and human resources at the network trying to apply a ‘Band-Aid’ approach to operations versus a wholesale operational overhaul.
“. . . We believe (Union Pacific) needs to step back and address its operational issues, working to improve velocity and terminal dwell time through better network planning, thus creating additional capacity and allowing more volumes to pass through the system.”
The same analysts report raised BNSF’s rating and lauded that railroad as a best-in-class operator for “pushing through the largest volume increases among its peers while maintaining industry-leading service metrics.”
BNSF stands to capture more market share and revenue from U.P. in the near term, the analysts wrote, adding that BNSF is positioned “to capitalize on the best pricing environment that the rails have experienced since industry deregulation.”
While telling analysts during the conference call that U.P. “clearly left a lot of opportunity on the table” in 2004, chairman and chief executive Dick Davidson said the challenges facing the railroad will help it improve.
“Demand for rail service continues to exceed supply. Our challenge will be to reach an equilibrium.”