(The following article by Dan Piller was posted on the Fort Worth Star-Telegram website on April 30.)
FORT WORTH, Texas — Union Pacific Corp. said Thursday that first-quarter earnings were down 62 percent, primarily because of service problems caused by shortages of crews and locomotives.
“This was disappointing and frustrating to us all,” said Chairman Dick Davidson, who promised that the railroad, based in Omaha, Neb., would add more than 4,000 new train crew members by the end of the year and purchase or lease 570 new locomotives.
Union Pacific reported first-quarter net income of $165 million, or 63 cents per share, down from $429 million, or $1.67 per share, in the first quarter of 2003. The year-earlier numbers were boosted by a $343 million gain from the sale of Overnite Transport, a trucking subsidiary.
UP had warned investors last month that first-quarter earnings would be down because of service problems, which have been centered in the railroad’s busy Los Angeles-area system that serves California ports.
“Frankly, business grew much faster in the fourth quarter of last year and the first quarter of this year than we had anticipated,” Davidson said. “We are responding, but it takes time to train people and get them on the system.”
Union Pacific’s problems have presented an opportunity to other carriers, such as Fort Worth-based Burlington Northern Santa Fe Railway, which has picked up business as UP has slumped.
The Association of American Railroads, the industry’s trade group, said Thursday that the industry is expected to hire more than 80,000 workers in the next six years. The industry employed 221,000 workers last year. Of that total, about 47,000 were at Union Pacific and 37,000 worked at BNSF. BNSF has announced plans to add 1,700 new train crew members this year.
Locally, BNSF employs about 3,000 workers, most at its headquarters in north Fort Worth. UP employs about 1,100 local workers, primarily at its Centennial Yard west of downtown Fort Worth.
Many of the new workers will be needed to replace the high attrition expected since laws were enacted in 2002 making workers eligible for full retirement benefits at age 60. But railroads have also been experiencing record levels of traffic, generated by strong agricultural exports, imports from Asia to Pacific ports and the diversion of traffic from truckers whose operations have been hampered by higher diesel fuel prices.
Shipments were up 7 percent on the Union Pacific system during the quarter, but service delays cut the overall average train speed from 24 mph at the end of 2003 to 21 mph by March 30. That 13 percent average slowdown has caused UP to give up an unspecified amount of business and added other costs, which cut into operating profit.
The average time that cars spend in yards waiting for trains to be made up, a key indicator, has also risen across the board on the UP system.
At Los Angeles, the average time rose from 28 hours last year to more than 50 hours during the first quarter. In Houston, the average time climbed from 28 hours to 48 hours. Fort Worth’s Centennial Yard was more stable, its first-quarter waiting time rising one hour above its historical average of 35 hours.
The service problems brought back memories of UP’s service meltdown in 1997-98, shortly after it bought the Southern Pacific Railroad. Although the earlier troubles were centered in Houston, Davidson said UP’s current service problems are heaviest in Southern California. Analyst Scott Flower of Smith Barney suggested that UP is still struggling with upgrading what had been a downtrodden SP system.
“We have spent a lot of money upgrading old SP track and yards,” Davidson said. “The ex-SP lines from Los Angeles to El Paso are the jewel of the system, and capacity needs to be expanded.”
BNSF has thus far avoided much of the effect of the service delays, according to the presentation by its chief executive, Matt Rose, this week. Rose told analysts that BNSF’s gains in traffic have come mostly from higher volumes from its shipper base, although it is getting some Union Pacific falloff.
According to industry statistics, BNSF’s average train speeds have also slowed slightly, from 25 mph to 23.4 mph in the first quarter. BNSF reduced the rail car idle time at its Alliance intermodal yard from an average of 29 hours to 22 hours in the first quarter.