(The following story by Paul Davidson appeared on the USA Today website on October 6, 2010.)
Perhaps no industry has a better feel for the nation’s economic pulse than freight railroads, which transport much of the country’s grains, metals, chemicals, cars and lumber. Union Pacific (UNP), which is the nation’s No. 1 freight railroad and serves the western U.S., is benefiting handsomely from the recovery, posting record second-quarter profits.
But the company faces legislation in Congress to toughen regulations on the industry and an Obama administration proposal to use the freight rail network for a planned high-speed passenger rail system.
USA TODAY reporter Paul Davidson spoke with Union Pacific CEO Jim Young about these and other issues.
Q: How is the economy doing?
A: Things are better today than they were a year ago. We’re running about 14%, 15% (more carloads) in the third quarter vs. a year ago. Clearly, the economy is stronger. At the peak, we were handling 200,000 (carloads) a week; at the bottom, we were running 130,000; and we’re running 180,000 right now. We’ve had a nice pick-up, but we’re still a ways from where (we) were 21/2 to three years ago.
Q: How strong will the recovery be?
A: I believe the slope of the line will be positive, but it’s going to be a pretty shallow slope. Slow growth at best. But my confidence is not real high with that. I’ve got to be prepared, if things turn down, to take action. I’ve got to be prepared if it were to turn up stronger than that.
Q: You had record second-quarter profits even though carload volume has not returned to pre-recession levels. Why is that?
A: We spent a lot of time on efficiency. Our capital investment over the years has started to pay off in (increased) velocity and (better) service. We’ve been able to get the pricing up. Price is a function of the value provided to the market.
Q: You’re also being more productive with fewer employees after cutting staff in the downturn.
A: Our company went from 52,000 (employees) to 41,000 and (recently) back up to 43,000. We had no choice. You had to take significant action to reduce costs. The competition is going to continue to be there. If you read this industry doesn’t have any competition, it’s baloney. I have (competition) that’s all water to the Panama Canal, that moves (by rail) over Canada. We lost business to truckers several years ago.
Q: Is there anything you can do to increase railroad’s market share vs. trucking, which moves a majority of freight in the U.S.?
A: Trucking has always been the majority, and I guess it’s always going to be the case. We need to continue to invest in new infrastructure. It’s only recently that this industry has earned the kind of financial return that can justify these investments.
Q: How cost-competitive is rail compared with trucking?
A: At 700 miles distance-plus is where we get more efficient. One double-deck train is equivalent to 300 trucks. The fuel efficiency of moving a ton of rail vs. highway is about three or four to one.
Q: Many shippers have complained that big freight railroads impose large rate increases and provide poor service in so-called captive communities where they face no competition.
A: Captive shippers today are protected by the STB (Surface Transportation Board). There’s a formula limit on rate increases, and if the customer believes rates are too high, they can go to the STB, file a complaint and let the STB work through it.
Q: Some say STB standards make it very difficult to prove rates are too high.
A: They have simplified (rate challenges) and made it more timely. I’m fine with making certain that works.
Q: What do you think of legislation in Congress that would require railroads to provide captive shippers access to competition?
A: The private-sector model has worked, hands down. I guarantee you if we see regulation starting to go negative in this industry, if they get it wrong, I will cut capital investment in this business, because you have very little room on the margin to reduce our profitability.
Q: Union Pacific, along with other railroad companies, has opposed an Obama administration proposal to use the nation’s freight railroad network to create a new high-speed passenger rail system. What are UP’s concerns?
A: Limiting our growth opportunities has far-reaching effects, including impact on our ability to meet our customers’ and this nation’s increasing freight rail needs. We are committed to working through the issues (related to) this new high-speed rail service. We may not be able to get there on every project, but we will work toward that goal.