(The following story by Stacie Hamel appeared on the Omaha World-Herald website on June 18.)
OMAHA — Union Pacific still is contending with a service crisis that has forced the railroad to “leave business on the table,” but its chairman and chief executive said this week that the company also is preparing for better days through an efficiency process.
While North America’s largest railroad is focused on shoring up its primary resources – train crews and locomotives – it also is putting in place a quality improvement process called “Lean,” Chief Executive Dick Davidson said.
A newly hired “world-class expert” will lead the effort, Davidson told analysts at a Thursday conference in New York City.
The railroad has struggled with service delays after a larger-than-expected number of conductors and engineers retired last year and freight demand rebounded more quickly and more strongly than predicted.
In the short term, U.P. again has increased goals for adding train conductors. The new hiring goal has increased by 800 to nearly 5,000 this year, Davidson said.
Accounting for attrition, the train service work force will increase by about 8 percent this year, a spokesman said Friday.
Thirty of the 125 locomotives moved up from the 2005 budget will arrive in August and September, in time to help with the peak shipping season, Davidson said.
The railroad also has taken three steps to regulate volume: aggressively increasing prices where possible; scaling back business development until hiring catches up with demand; and asking some customers to ship freight by other means.
“We all know we’re leaving business on the table that we could have moved if our service had been better,” Davidson said.
The Lean principle is intended to improve efficiency through better work processes. U.P. first hired a consulting firm to test the process in an intermodal facility, and the number of containers the facility could handle improved by about 50 percent and is expected to nearly double.
The effort will be replicated in intermodal facilities and railyards across U.P.’s 23-state system, Davidson said.
The company has hired Richard R. McClish to the newly created position of vice president of continuous improvement. The former chief process officer and interim chief information officer for R.R. Donnelly & Sons in Chicago will be responsible for the Lean initiative. McClish also held senior management positions at General Electric Plastics.
“We are quite optimistic that we will get more capacity quite cheaply,” Davidson said.
More expensive ways of increasing capacity involve laying new track, building facilities or adding equipment and employees.
Capacity should continue to be a front-burner issue for U.P. beyond the current service crisis. Long-term projections indicate freight volume could double over the next 10 years.
Already roughly 25 percent of U.P.’s volume begins or ends in Los Angeles, Davidson said, where the busy Los Angeles and Long Beach ports are side by side.
U.P. has been adding a second track to its 760-mile-long Sunset Corridor route between Los Angeles and El Paso, Texas, since it merged with the Southern Pacific in 1997, said spokesman John Bromley.
After the merger, 173 miles had two tracks. By the end of this year, 262 miles will have the second track, with another 30 miles of double track under construction in Southern California and New Mexico.
Stock analyst Gregory Burns, who covers U.P. for J.P. Morgan Chase, said U.P.’s increase in projected new hires is another indication of strong freight demand.
“My concern with Union Pacific is that it’s shaping up to be a really strong peak season. Third quarter looks like it will be a barn burner,” Burns said.
Had the economy not rebounded so quickly and so strongly, U.P.’s cost-cutting in staying short on train crews wouldn’t have looked like such a bad decision, he said.
“It’s important to keep in mind that while U.P. clearly cut too much and were caught flat-footed, they did that during what appeared to be a down period,” Burns said. “Now, in addition to having to restore what they cut, they have to contend with a really robust freight market.”
Davidson said intermodal freight demand already is above last year’s peak season, and this year’s peak season might have already started.