(Reuters circulated the following article by Nick Carey on March 14.)
OMAHA, Nebraska — Union Pacific Corp., the largest U.S. railroad, will target higher returns on investment in the years to come through a combination of higher prices, tackling choke points and improving the mix of business on its network, the company’s top executive said on Tuesday.
“We have only just turned the corner in terms of pricing,” Chief Executive Officer Jim Young told Reuters in an interview at the company’s headquarters in Omaha, Nebraska. “Our top line growth will be driven by rising volumes and pricing, which will lead to better returns for our shareholders.”
He acknowledged customer complaints about price increases – U.S. railroads raised rates by up to 15 percent in 2005 – but added “our customers want additional rail capacity and someone has to pay for it.”
“I never met a customer who was happy about a price increase, but what matters more to them is whether we can carry their goods,” Young said.
He did not say how much Union Pacific would raise prices.
Union Pacific’s return on investments in 2005 reached 5.7 percent, compared with the 10.1 percent return recorded by the second largest U.S. railroad, Burlington Northern Santa Fe Corp.,
Union Pacific’s return on investments lags its cost of capital, which is 8 percent to 10 percent. Young said he wanted returns to match cost of capital and then exceed it. He declined to say when the company expects returns to exceed cost of capital.
“We will see improvements in returns on investments every year,” Young said.
He added that the company aims to reduce its operating ratio to the mid-70 percent range, from 86.7 percent in 2005.
“We should see an improvement in that figure this year,” he said. Young has been CEO since January 1 this year.
In the two decades following deregulation of the U.S. railroads in 1980, Union Pacific scaled back capacity and reduced its workforce as the company had an excess of both.
In the past three years that situation has reversed, as U.S. imports have seen annual growth in the double digits and the U.S. trucking industry – which the railroads see as their biggest rival – has been hit hard by rising fuel costs and a shortage of drivers.
This has left the railroads’ capacity falling short of demand, with customers complaining of congestion and delays.
Young said Union Pacific is focusing on “dealing with the main choke points” (bottlenecks) on its network to deal with the company’s capacity problems.
Some of the biggest choke points are on lines bringing goods from the U.S. West Coast eastward. As more U.S. manufacturing capacity is sourced to countries like China and India, the flow of goods into ports like Los Angeles – Long Beach, the largest port in the United States, has also increased.
“If we can deal with the main choke points on our network then most of our capacity problems will be solved,” Young said. Union Pacific is investing $2.75 billion in its network this year compared with $2.7 billion in 2005. Young said the company’s choke points would be a priority for additional rail capacity.
He said the company’s automotive business – Union Pacific moves around 80 percent of finished vehicles in the United States – should not be too adversely affected by the restructuring plans at two of its U.S. customers, General Motors Corp.
“We want GM and Ford to do well,” he said. “But we don’t see overall production falling much.”
Young said moving forward Union Pacific will focus more on logistics and planning for capacity as its U.S. customers place increasing emphasis on transportation and keeping inventories low.
“Ten years ago we dealt with middle managers on transportation issues,” he said. “Now we deal directly with CEOs and presidents because transportation is key to everyone’s business like it wasn’t a decade ago.”
“We have to look forward to anticipate future movements of goods so we can handle the capacity,” he said.
Earlier on Tuesday the company raised its first-quarter outlook to $1 to $1.10 per share from 80 cents to 90 cents a share. Wall Street analysts have forecasted 89 cents per share.
Union Pacific operates more than 34,000 miles of track and employs 50,000 people, with a fleet of 8,000 locomotives. In 2005 the company recorded revenue of $13.6 billion, compared with $12.2 billion in 2004.