(Reuters circulated the following article on January 20.)
CHICAGO — U.S. railroad Union Pacific’s new president and chief executive officer said on Thursday that higher returns are needed to boost investment in capacity, but declined to say whether this means price increases for the railroad’s customers.
“Our customers want to give us more business and the key for us is to manage growing volumes properly,” James Young told Reuters.
“But that requires a great deal of capital,” he said. “The question is whether (returns) can justify major increases to capacity investments.”
After 20 years of stagnating or even falling real-term prices, 2005 saw significant price hikes by U.S. railroads — in places in excess of 10 percent. Analysts say more increases will come in 2006.
Rail freight prices are anywhere up to 25 percent lower than trucking company rates, providing significant leeway for further increases.
Young, speaking after Union Pacific posted fourth-quarter results well above Wall Street expectations on Thursday, said that the returns on investments at Union Pacific, the nation’s largest railroad, were “not good enough” and would need to go higher.
Railroads are highly capital intensive, with around 20 percent of revenues going back into the tracks.
Union Pacific, which recorded revenues of $13.6 billion in 2005, invested $2.7 billion on track maintenance and extension, with $2.8 billion earmarked for 2006.
Young also said that margins on coal shipments — regarded by analysts as one of the most lucrative businesses for U.S. railroads — “need to improve.”
The biggest criticisms leveled at U.S. railroads in recent years have been that they are slow and lack sufficient capacity.
The past few years have seen a resurgence of rail freight services as imports have risen, accompanied by rising domestic demand.
Rising fuel prices, plus a shortage of truckers — in particular for unpopular long-haul routes — have pushed more business toward the railroads, where labor shortages are much lower while trains hauling 200 to 250 containers tend to be two to three times more fuel-efficient than trucks.
The main challenges for companies like Union Pacific is to meet capacity and improve efficiency, a process that is still far from complete.
“We are only at the bottom of the third inning at the moment,” Young said.
He said problems on the line it shares with Burlington Northern Santa Fe in the massive coal fields in the Powder River Basin in Wyoming should be limited this year following washouts last May.
The two companies are laying triple track on the line and Young said that work on a fourth line could begin in 2007.
“This will have to be matched by extra track along our lines outside this shared length of track,” he said.
Young joined Union Pacific in 1978. He took over as CEO on January 1 from Richard Davidson, who served in the post from 1997. Davidson is now company chairman.
Investors have been curious to see what Young will do in his new role.
“This is a tough business to turn a company around in,” he said. “My role is to keep the momentum going on the changes we’ve made so far.”