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 and service.
"By a number of measures, it's evident that we have not made the kind of progress in improving our service and productivity performance in recent months," Union Pacific Chief Executive Lance Fritz said Wednesday.
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 so-called hump yards and blend different types of cargo on one train.
The strategy being implemented at Union Pacific was espoused by Mr. Harrison, who was running rival CSX Corp. when he died last December. He honed the so-called precision scheduled railroading model over a five-decade career that included turning around 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.
As executives detailed the plan Wednesday, they said that they haven't decided to close any rail yards yet and that specifics on idling locomotives, laying off workers and other changes typically associated with Mr. Harrison's strategy haven't been finalized. But as the plan is rolled out with more precise train schedules, the company expects costs to drop, and to avoid some of the service hiccups of the past.
"There are periods when we have fantastic service product and then periods where that fades," Mr. Fritz said.
The plan will start to unfold next month along the Union Pacific corridor between Wisconsin and Texas, and be put in place across the network by 2020.
Union Pacific has been working closely with customers to communicate the changes, although the revamped operations may result in some shippers being dropped. "There may be some customers where we may have to decide that it does not fit in the network," said Kenny Rocker, Union Pacific's head of marketing and sales.
Executives have long said that Union Pacific would borrow ideas from other railroads to improve its performance. In the lead-up to the plan, the company has tested some precision-scheduled railroading concepts on parts of its network. Some executives 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 3% slower than a year earlier, while average time spent at terminals rose 4%. 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.
The railroad isn't currently planning to tap outside help from other railroads that have undergone a transformation. Mr. Fritz said that while this is the first time Union Pacific is implementing Mr. Harrison's principles on a large scale, "they are not a mystery."
Write to Paul Ziobro at Paul.Ziobro@wsj.com
(END) Dow Jones Newswires
September 19, 2018 10:34 ET (14:34 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.