(The following article by Stacie Hamel was posted on the Omaha World-Herald website on January 15.)
OMAHA, Neb. — Union Pacific did not meet its 2005 goals and will continue to raise prices, its chief executive says, but the Omaha-based railroad at least is moving in the right financial direction.
The Omaha-based railroad is focused on improving customer service and increasing its return on capital, James R. Young said in an interview last week.
“Union Pacific will earn five, five and a half percent return on capital in 2005. That is a going-out-of-business scenario,” said Young. “You can’t justify putting capital in at that kind of a level.”
U.P. will report fourth-quarter and 2005 earnings Thursday. Young spoke generally about the company’s performance before the official release.
“We made progress on financials. Earnings increased, our operating margin improved, we grew revenue. We had record loadings. We set a lot of records, but we just had some setbacks that we couldn’t fully overcome,” he said.
One factor contributing to U.P.’s difficulties, he said, is the strain that high volumes are placing on the country’s already overloaded transportation system.
The railroad has struggled since 2003 with slowed service, congestion, high fuel prices and record demand coinciding with a shortage of train-service workers. U.P. implemented a network-management plan, targeting train speed and increasing the number of nonstop trains, while it also began raising prices and rejecting less-profitable freight.
“I’ve looked my customers in the eyes and said, ‘We have to improve the returns. That may mean prices have to go up. If we work together, we can improve the value. My commitment to you, if we can continue to move the returns up, is we’ll be there for your growth,'” he said.
Young has been president for two years and became chief executive Jan. 1. Richard K. Davidson remains chairman.
About five years ago, U.P. boasted the industry’s top financial performance, Young said.
“We have a long ways to go before I’m going to declare we’re back on top,” he said. “We’re at the bottom this year, but we’ve got this thing moving the right way. That’s the way I need to look at it. We’ve got a lot of opportunity.”
Return on capital is an important issue, he said, because rapidly increasing demand is straining the nation’s transportation system. Calling it the most efficient in the world, Young said the system also is staggering under the weight of increased volume.
“The ports are strained. The rail network is strained. It is so critical to the U.S. economy, we’ve got to figure out how we handle more growth.”
Railroads build and maintain their own networks, as opposed to publicly funded highways, Young noted, making it essential that railroads be able to justify investment in expanding their systems.
“A new mile of railroad is two to three million dollars to build. We’re all faced with, ‘How do you put that capital in to grow our transportation infrastructure and get the right kind of returns?'” he said. “This country has a problem with its transportation infrastructure.”
In 2005, U.S. railroads moved 2.4 percent more total volume, according to the Association of American Railroads. Intermodal shipments – much of it imports moving from ship to rail – were up 6.4 percent over 2004’s record number. Intermodal volume is projected to increase between 8 percent and 10 percent this year, Young said.
For the second consecutive year, BNSF Railway surpassed U.P. in total intermodal and carload shipments in 2005. U.P. moved more than 9.5 million shipments, up 1 percent from 2004. BNSF handled more than 10 million, an increase of 5.4 percent over 2004.
“They had a great year. Our franchises are different. They did a great job growing their intermodal business,” Young said. “I look at that for maybe one minute because I’ve got to deal in the world I have, with my markets, the types of business we have and our customers.”
U.P. has made progress, he said, and has built momentum for 2006.
“We came out of the fourth quarter with financial strength. No one is going to get complacent. In ’06 we’re going to make very good progress, but it’s nowhere close to what the potential is for this franchise,” he said. “There is no reason U.P. can’t be back on top again.”
In 2005, the railroad suffered significant hits from hurricanes and other storms, while still moving a record amount of volume, Young said. Train speed has been increasing.
“That tells me there’s resiliency in our network. We’re working on the right things,” he said.
A railroad always must be prepared for bad weather, Young said, but 2005 was unusual.
“We fought a battle all year with the weather,” he said. “I give our employees credit. This is what I really respect in this culture. We had men and women out working in some of the most terrible conditions you can imagine for weeks at a time.”
The railroad is recovering from storms and other setbacks more quickly, he said.
“We’re more healthy.”