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By Jeff Stagl, Managing Editor
From their 19th floor offices at Union Pacific Railroad’s headquarters, senior executives have a spectacular view of downtown Omaha, Nebraska. They can catch a glimpse of the nearby Creighton University campus or TD Ameritrade Park, where the College World Series returns in June.
But this isn’t the time for any diversions. UP’s braintrust needs to remain laser-focused on a major job at hand, from continuing to implement significant organizational changes prompted by a radical new operating philosophy to generating benefits from the transformation.
In October 2018, UP launched Unified Plan 2020, an operating strategy and transportation plan that incorporates precision scheduled railroading (PSR).
Designed to mold the Class I into a more reliable, efficient and safe railroad — and one that’s better positioned to spur business growth — the plan has shifted the operational focus from moving trains to moving individual rail cars.
Much like Amazon handles each package to meet customer commitments, UP tries to prioritize the delivery of each car by adhering to fixed point-to-point schedules and minimizing in-transit work events so shippers can better manage their freight movements.
Unified Plan 2020 targets reduced car dwell time, increased use of general purpose/manifest trains versus unit trains, balanced train movements and better asset utilization. UP now is employing one-third fewer locomotives and cars to move nearly the same amount of freight handled prior to the plan’s implementation.
That increased efficiency was apparent in year-end service metrics. On a year-over-year basis, fourth-quarter 2019 data shows freight-car velocity rose from 209 to 220 miles per car per day; car terminal dwell time dropped from 26.9 hours to 23.3 hours; average train speed inched up from 26 mph to 26.2 mph; locomotive productivity increased from 111 to 126 gross ton miles per horsepower per day; and workforce productivity improved from 840 to 874 daily car miles per full-time employee/equivalent.
Better yet, car trip plan compliance — a critical service-performance metric — climbed from 67 percent to 76 percent of cars delivered on time. But more progress is necessary to attain operational-improvement objectives, senior execs say. Car handlings can be further reduced, train flows can be more balanced and assets can still be utilized a bit better, they believe. The mantra they’re trying to perpetuate is if a car doesn’t need to be stopped along a journey, then don’t find reasons to delay it.
Even though it’s called Unified Plan 2020 — suggesting some sort of conclusion this year — it’s an ongoing effort that will take time to fully ingrain in the organization, says Chief Operating Officer Jim Vena. In terms of a baseball analogy, UP is only in the early innings.
“It’s called the Unified Plan, but it’s really just smart railroading,” says Vena, a PSR expert who retired from CN as COO in June 2016 after a 40-year career with that Class I, and became UP’s top operating officer in January 2019. “We want to be as nimble as possible and react quicker.”
Although the results gleaned from the plan so far are encouraging — the service product and cost structure are much better, and UP is much leaner — the company needs to maintain and exploit the positive momentum, says Chairman, President and Chief Executive Officer Lance Fritz.
“We’re on a continuous-improvement journey. We need to put more things in the flywheel, so there’s more that we can do,” he says. “Our service product now measures up with any mode, so I’d like to see that translate into top-line growth.”
The top line showed opposite results in 2019. Compared with 2018 figures, Q4 operating revenue dropped 9 percent to $5.2 billion and freight revenue fell 10 percent to $4.8 billion, while full-year operating revenue decreased 5 percent to $21.7 billion and freight revenue dipped 5 percent to $20.2 billion. In addition, revenue carloads tumbled 11 percent to nearly 2 million units and 6 percent to 8.3 million units in Q4 and 2019, respectively.
Those poor results aren’t a negative reflection of the marketing team, says Fritz, who calls the huge Unified Plan undertaking “a coordinated effort” that requires teamwork from top to bottom.
Plus, a number of economic factors haven’t been favorable of late. Although international trade is improving now that the United States-Mexico-Canada Agreement is in place and the nation has reached a phase one deal with China, the coronavirus outbreak is causing panic worldwide. The Dow Jones Industrial Average fell 1,031 points on Feb. 24, followed by 880 points on Feb. 25, 122 points on Feb. 26, 1,190 points on Feb. 27 and 357 points on Feb. 28 because that hysteria was negatively impacting major global markets. [Editor's note: The Dow also tumbled more than 2,000 points on March 9 after suffering more losses in March's first week.]
In addition, several sectors that UP serves — from coal to frac sand to autos — have been relatively weak because of sluggish demand.
“We want to see these markets get healthier. When these swings stop, there could be a big snap-back,” Fritz says. “Because of the Unified Plan, there are markets we think we can compete in where before we didn’t think they were attractive to us.”
To achieve desired results, UP in part needs to continue taking calculated risks, Fritz believes. Among them: curtailing or consolidating hump yard operations, trimming the workforce, rationalizing assets and operating fewer — but longer — trains.
The railroad is running one-third fewer run-through trains in its network than a year ago, with the total train count down 33 percent and train length up 12 percent, says Fritz.
“Perhaps there’s more we can do with train count going forward,” he says.
In terms of headcount, UP last year cut its workforce by 11 percent to about 37,500; this year, the Class I expects to reduce it another 8 percent — or by nearly 3,000 workers — as operations continue to target fewer, yet longer trains.
“All the changes have been tough on employees, who are the drivers of this. People have lost jobs because the work went away,” says Fritz.
But additional jobs will be created as business increases and operations continue to evolve, he adds.
“We have our minds on our people as we grow,” says Fritz.
Workers are key to plan implementation because UP is taking another measured risk: encouraging all employees — from HQ down to the field — to make decisions if doing so will help the common goal. Such trust can be empowering, senior execs say.
“We took layers out of decision-making, and decisions are being made more quickly,” says Fritz. “Agility is the watchword for us. We are willing to take risks as customers’ expectations continue to be accelerated.”
The effort essentially is a cultural transformation, trying to make people understand the company is providing them an opportunity to make decisions in the field, says COO Vena.
“If they make a mistake, so what, learn from it and move on. I don’t want to make all the decisions,” he says. “We all understand the need to provide superior service. We need to find more ways to be effective and efficient with the railroad.”
Vena helped CN achieve its best safety incident ratio and the North American rail industry’s best operating ratio during his tenure there. People continue to ask him why he didn’t stay retired in Florida instead of returning to railroading last year to take on another PSR challenge, he says.
“I saw the opportunity with the largest railroad, depending on how you measure it,” says Vena. “I want Union Pacific to be the most efficient and safest railroad in North America.”
To do that occasionally requires taking on some pain. For example, the senior team last year decided to idle construction work on the $550 million Brazos Yard in Robertson County, Texas — which had been slated for completion in 2020 — despite the millions of dollars that already were invested in the project over the past few years. It would have been one of the largest capacity yards in UP’s network, but its appointed function no longer was warranted.
“As a hump yard, I don’t see it,” says Vena, adding that at some point, it could become a storage-in-transit yard.
UP also has shut down or consolidated five hump yards so far, including hump operations at Davidson Yard in Fort Worth, Texas, and Neff Yard in Kansas City, Missouri. In addition, switching was reduced at Settegast Yard in Houston and shifted to nearby Englewood Yard.
The Class I now operates seven hump yards in Colton, Los Angeles and Roseville, California; Houston; North Platte, Nebraska; North Little Rock, Arkansas; and Livonia, Louisiana.
“The hump yards that are left are efficient and can handle peaks,” says Vena.
The railroad’s busiest yard is in Houston, where a majority of traffic originates, including petrochemicals. The railroad plans to build more trains in Houston to bypass other originating points — such as in Kansas City — so trains don’t need to stop as often.
“Each yard stop means [losing] 20 to 24 hours,” says Vena.
In terms of intermodal terminals, there’s some consolidation in the offing, as well. UP plans to reduce its roster of terminals in the Chicago area from six to three to reduce complexity in the region. Perhaps over time, the railroad will operate just two terminals there, one each on the north and south sides, says Vena.
“We want to find the right fit in the city,” he says.
For now, the right fit for train length is more than 8,000 feet. Train length averages about 8,200 feet compared with 7,000 feet a year ago, says Vena.
“What drives it is the amount of traffic in a lane,” he says.
To accommodate longer trains, the railroad needs longer sidings. To that end, UP this year has budgeted $150 million in addition to a $2.95 billion capital spending plan to extend 40 sidings between El Paso, Texas, and Chicago. Most of the 8,000-foot sidings will be lengthened to 14,000 feet.
“The new standard is 14,000 feet, but not all of the sidings will be extended to that. Some will be 12,000 feet,” says Vena.
The 2020 capital program is lower than the $3.2 billion budgeted in both 2019 and 2018. About 80 percent of this year’s budget is devoted to replacement spending to harden existing infrastructure, replace some older assets, and improve the network’s safety and resiliency, says Executive Vice President and Chief Financial Officer Jennifer Hamann.
Since UP had stored about 3,100 locomotives by 2019’s end, the budget also includes funds to continue modernizing parked units. The modernizations primarily involve upgrades to electronics to improve the locomotives’ reliability, says Hamann, who on Jan. 1 succeeded longtime CFO Rob Knight. After upgrading 15 locomotives in 2018 and 100 locomotives in 2019, the railroad expects to modernize nearly 100 more units in 2020.
The capital program also allocates dollars for the car fleet, such as to refurbish a number of autoracks and acquire an undisclosed number of refrigerated box cars.
Going forward, capital expenditures will be set at less than 15 percent of annual revenue, a ratio that’s lower versus other Class Is’ capex targets, says Hamann.
Another long-term target for UP: eventually attaining a 55 operating ratio (OR). The Class I set both fourth-quarter and full-year OR records in 2019 at 59.7 and 60.6, respectively. A 59 OR is the full-year goal in 2020 and the company remains on track to reach a 55 ratio, says Hamann.
“Continuing to improve the cost structure and productivity will help,” she says.
Better productivity already is generating cost savings. Last year, the railroad saved $590 million because of benefits associated with the Unified Plan, such as higher car velocity, reduced fuel usage, a smaller fleet size and rolling stock lease savings. Had the Class I not dealt with floods and other severe weather in 2019, the figure would have been about $80 million higher, says Hamann.
In 2020, savings are projected to reach at least $500 million. The key drivers are volume, pricing and productivity, says Hamann. Core pricing exceeded inflation last year and is expected to continue to do so, she adds.
“We had strong core pricing and a better service product last year, but not the benefit of [higher] volume,” says Hamann. “What the magnitude of productivity savings will be after 2020 remains to be seen.”
Volume is forecast to be slightly positive in 2020, up a percentage or two compared with 2019. The second half of the year will be better than the first as international trade and other economic factors eventually improve, says Hamann, citing plastics, grain, biofuels and construction materials as promising business-building commodities.
“We see the good we can do for customers, and we can see the growth happen,” says Hamann.
Better service performance is helping with marketing efforts. Different conversations can be held with customers since service issues or disruptions are mostly off the table, says EVP of Marketing and Sales Kenny Rocker.
“So, we’re not talking about how we can deliver, but what needs to take place to deliver for customers. It opens up more opportunities,” says Rocker. “We can talk about converting more of their business from trucks. The more miles we can travel daily helps us compete with trucks.”
Railroads traditionally have competed best with trucks for freight moving 500 to 600 miles. But because of improved service performance, UP now is competitive with moves in the 300- to 400-mile range, says Rocker.
“We’re not shying away from shorter distances,” he says.
Senior execs also aren’t shying away from reversing decisions to help with marketing efforts. On Feb. 1, the Class I reopened 58 interline domestic service lanes to eastern destinations with CSX and Norfolk Southern Railway that previously were deemed expendable because of the Unified Plan.
They continue to pursue operational improvements for other customers, as well. In the bulk group — which includes coal, fertilizers, petroleum coke products, and fresh and frozen foods and grain — the railroad is trying to help shippers who don’t have enough storage or infrastructure capacity to suit their transportation needs, says Rocker.
UP now offers daily service in manifest trains, which for example has been successful for ethanol shippers and is helping to increase volumes, he says.
“Before, customers spent three or four days on each end loading or unloading unit trains. That’s not an efficient way for them to use their resources,” says Rocker.
In addition to service changes, UP is relying on technologies to help attract and retain shippers.
Earlier this year, the Class I launched application program interfaces (APIs) that enable shippers to access relevant railroad data from their own computer platforms.
For example, shippers can use an API to release rail equipment without having to log into UP’s website.
The railroad so far has rolled out 12 to 14 of the interfaces, which are being used by more than 200 customers primarily for shipment visibility, says Rocker.
“We are listening to customers, trying to get further into their supply chains,” he says. “We plan to expand APIs in 2020, and we want to grow them significantly.”
Overall — considering all the organizational changes and market conditions — Rocker is “very optimistic” about UP’s prospects in 2020, he says.
“Truck capacity has bottomed out and will tighten throughout the year,” says Rocker. “We expect good export grain business in the second half.”
Stronger operating performance is generating confidence among senior execs that UP can attract more business, which then can be leveraged into more revenue.
Lots of communication with shippers — including those who are facing transportation challenges because of UP’s service changes — thus far shows the company is doing “a great job” with customers, says CEO Fritz.
“To a person, they say our ‘do-what-we-say’ ratio is better,” says Fritz. “They say they’ll work with us.”
But some customers are asking for more time to deal with changes or claim that UP still gives them “heartburn,” he adds. So, to ensure the railroad is pleasing all shippers — and appeasing financial goals — senior execs will continue to ponder ways to improve performance and grow business now and in the future.
UP is at an inflection point, Fritz believes.
“We are thinking about what the transportation plan needs to be in three to five years,” he says.
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