(The following story by Stacie Hamel appeared on the Omaha World-Herald website on April 17.)
SALT LAKE CITY, Utah — A year ago, Dick Davidson stood before shareholders and warned that Union Pacific Corp. faced an uncertain 2003 because of spiking fuel prices and a faltering economy.
In the 12 months since then, both the economy and fuel prices have surged beyond expectations, giving Davidson’s presentation at this year’s annual meeting here a good news-bad news quality.
Or, as Davidson, U.P.’s chairman and chief executive, put it, “We’ve seen our share of both challenges and opportunities.”
The challenges: crude oil selling at about $37 dollars a barrel, compared with about $31 last year; slowed service because of train crew shortages and a foul winter; and an announcement that the company would not meet its first-quarter earnings target because an Arkansas jury verdict resulted in a $35 million charge.
The opportunities: record volumes in 2003; sale of its Overnite trucking subsidiary through an initial public offering that raised $620 million in cash and improved U.P.’s debt-to-capital ratio; and demand that continued to grow each month in the first three months of 2004.
“Clearly, the recent issues have been disheartening to all of us, but I want you to know that they don’t, in any way, diminish our enthusiasm for the opportunities we see ahead for this great company,” Davidson told the approximately 50 people who attended the meeting at the Little America Hotel.
Despite service slowdowns, customers are sticking with the nation’s largest railroad, Davidson said.
“Customers want – and need – to do business with us,” he said. “They’re rooting for us to get beyond the current issues so that we can find new and better ways to work together in the future.”
Demand grew 4 percent in the first quarter of this year, Davidson said, with the strongest growth on the West Coast among the intermodal and industrial products divisions. The west, however, also is where some of the most critical service problems have occurred.
“We’ve been working with some of our customers to try to manage that strong volume increase,” Davidson said. “The goal is to ease the congestion and create some ‘breathing room’ in our crowded terminals out west to enable us to bring our resources back into balance.”
More than 500 locomotives will be added this year, including 121 being purchased this year instead of in 2005, plus several hundred that are being leased temporarily “to get us over the hump,” he said.
In the first quarter, 961 new employees graduated from training, and another 1,360 will begin working during the second quarter, he said.
The company will learn from the difficulties it experienced in the last year, Davidson said. Changes will include:
— Investing to improve capacity in key growth corridors such as the Sunset route between Los Angeles and El Paso, Texas.
— Improving manpower planning, hiring and training.
— Focusing on improving returns.
The extra locomotives will help the service slowdown, Davidson said in an interview before the meeting.
“As your railroad slows down, it consumes resources. Each 1-mile-an-hour slowdown is equivalent to 250 locomotives,” he said. “We’re running a couple miles an hour slower this year than we were last year at this time. . . . But as we get employees hired and trained, that situation should be improved.”
Fuel price increases continue to be a major concern not just for the company, but also for customers, he said.
“It’s quite a substantial uptick. Every penny (of fuel price increase) equates to $13 million (a year), because we burn 1 billion, 300 million gallons a year.”
Fuel cost the company $255 million more in 2003 than in 2002, though 44 percent of that was recovered through fuel surcharges. This year, the company hopes to recoup more than 50 percent, he said.
U.P. also is emphasizing fuel conservation, Davidson said, and benefits from its new locomotives that are more fuel efficient than older models.
Hedging the cost of fuel has been difficult, he said.
“Prices are so high today that we’ve had some concern that we might be locking in high prices. That’s why we’re focusing on recovery programs to recover through fuel surcharges because we have not been able to do an effective job at hedging,” he said.
Davidson said Union Pacific is not in a buying mood, having shed its Overnite trucking subsidiary in 2003 through an initial public offering.
“The only acquisitions we’re looking at is a few locomotives and some ties and rail and diesel fuel and a lot of people.”