Union Pacific (NYSE:UNP)
Historical Stock Chart
1 Year : From May 2018 to May 2019
By Paul Ziobro
Union Pacific Corp. never hired Hunter Harrison to run its sprawling network. But with congestion clogging its system, the company is now adopting the late railroad maverick's strategy to speed its freight trains.
The railroad, which until recently had been adding locomotives and crew, plans to use less equipment in a bid to improve its financial performance. The strategy was espoused by Mr. Harrison, who was running CSX Corp. when he died last December.
Union Pacific will shift its focus from moving trains to moving the individual railcars, with the end goal of providing a tighter delivery window for customers. It also will try to minimize downtime for railcars, reduce the number of times cars are sorted at facilities called hump yards and blend different types of cargo on one train.
Such changes are part of Mr. Harrison's so-called precision scheduled railroading model, which he honed at two large Canadian railroads before he took the helm of Jacksonville, Fla.-based CSX last year. During a nine-month stint at CSX where he battled undisclosed health issues, Mr. Harrison quickly idled hundreds of locomotives, eliminated thousands of jobs, closed facilities and overhauled train schedules.
Mr. Harrison's plan was disruptive at each stop, resulting in thousands of layoffs and jolting changes to railroad schedules that led to complaints from shippers. But the strategy drastically cut costs, resulted in faster train times and lifted stock prices.
Union Pacific executives hope the changes will ease congestion that has lingered on the 32,000-mile railroad for nearly a year. "We are not currently meeting customer expectations," Chief Executive Lance Fritz said earlier this week. The plan, to be detailed on Wednesday, will start to unfold along the Union Pacific corridor between Wisconsin and Texas, and be put in place across the network by 2020.
Executives have long said that Union Pacific would borrow ideas from other railroads to improve its performance. Some of them recently adopted an informal name for weekly meetings aimed at helping trains run more smoothly: "WWHHD," or "What would Hunter Harrison do?," two people familiar with the matter said.
Union Pacific's service problems have stemmed from a number of issues. New technology called positive train control that is meant to prevent accidents has caused slowdowns, including inadvertent stops, as it has been rolled out.
The strength in the economy has pushed additional volume onto Union Pacific's rails, especially in the Southern region of a network that spans the Western two-thirds of the U.S. Crew shortages exacerbated the issues. Union Pacific has responded by bringing locomotives out of storage, adding railcars to handle the additional cargo and enticing new hires with bonuses of $25,000 or more.
The network is still facing gridlock. In its second quarter, Union Pacific's average train speed was 24.7 miles an hour, down 3% from a year earlier, while average time spent at terminals rose 4% to 29.5 hours. The company has spent tens of millions of dollars on extra equipment, labor hours and fuel to unclog the network.
The problems have pushed up Union Pacific's operating ratio to 64% in the second-quarter from 61.9% a year earlier. An operating ratio represents the percentage of revenue consumed by operating costs, so a decline is an improvement. Investors have demanded more.
The Omaha, Neb.-based company has faced questions from analysts as to whether it should follow CSX's strategy to operate with fewer workers and equipment. It has already made changes, including a shake-up of its management team last month that included the retirement of its chief operating officer and the addition of a chief strategy officer.
The company said the changes being implemented will help its operating ratio hit 60% by 2020 and 55% longer-term.
Analysts wondered if Union Pacific would need outside help to implement the changes, or if there is someone capable of overhauling the company's operations and culture. "That's going to be critical in order to implement this," Credit Suisse analyst Allison Landry said.
A Union Pacific spokeswoman said the new strategy will be implemented using the company's "best practices and expertise from every layer of the organization."
Write to Paul Ziobro at Paul.Ziobro@wsj.com
(END) Dow Jones Newswires
September 19, 2018 06:44 ET (10:44 GMT)
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