Union Pacific Continues to Make Operational Adjustments So the Class I Will be Ready to Roll When the Economy Rebounds

Five years ago, the nation's economy rebounded from a downturn, but Union Pacific Railroad didn't. The Class I didn't have the necessary manpower, rolling stock and infrastructure capacity to accommodate traffic that flooded to its lines after demand surged.

Velocity plunged, while transit and terminal dwell times ballooned. As a result, the railroad had to turn away business it couldn't accommodate and lost some traffic to other modes, much of which wasn't regained.

"You can never slip — shippers have a long memory," says UP Chairman, President and Chief Executive Officer Jim Young. "It takes a long time to regain their confidence."

It also takes a long time to make adjustments to ensure an organization isn't doomed to repeat the mistakes of the past. That's been UP's charge since 2004. The Class I has strived to become a dependable service provider that can both win and retain business by convincing budget-strapped shippers of all sizes that it can take on their traffic and improve their supply-chain efficiency.

UP is moving closer to that objective because senior executives are striving to fulfill these marching orders: analyze every market in the big-six agricultural, automotive, chemical, energy, industrial products and intermodal business groups; and put capacity, operating processes and services — including transloading and door-to-door delivery — in place to serve markets pegged as burgeoning ones.

"It's more than just about having enough people, rolling stock and capacity," says Young. "Do we understand the markets? Are we connected internally? We have hundreds of services and serve hundreds of markets. It comes down to your processes and focus."

But committing enough dollars is paramount to making enough readjustments. The Class I has spent about $11 billion since 2004 — and has budgeted $2.6 billion in recession- and traffic-depressed 2009 — to add double or triple track, build sidings, acquire locomotives and upgrade computer systems.

Now, the Class I has reached the point with its resources, infrastructure, services and network fluidity — including the best velocity, terminal dwell times and freight-car utilization rates in years — that it can reliably handle 200,000 carloads per week vs. 175,000 or 180,000 five years ago, says Young.

"We have a lot of surge capacity now," he says.

However, any surge is a long way off, perhaps well into 2010. Although UP's traffic light is green for those 200,000 loads each week, the recession continues to put up a red light that's kept weekly traffic levels in the 140,000- to 150,000-unit range.

So, senior execs continue to pursue adjustments in all six business groups to position UP to boost volumes no matter the traffic light's color — and especially when the light turns green again.

The Class I needs to generate more returns on its investments, and soon, because spending has reached record levels the past few years, says Young.

"We have to grow volume," he says.

Cut down to size

While traffic has lulled, UP has been generating less revenue — as in a 28 percent drop in the second quarter — and cutting back resources. UP reduced its workforce by 4,400, and stored 1,900 locomotives and 60,000 rail cars through the second quarter to control costs and balance resources with demand. Senior execs continue to seek ways to reduce expenses and manage resources without jeopardizing traffic-generating efforts.

"We have to take costs out and right-size the railroad, all without impacting service. That's the dilemma," says Young.

To UP's credit, the Class I continues to demonstrate the "most favorable momentum" in the areas of cost containment, productivity and asset utilization among all major North American railroads, Stifel Nicolaus & Co. Inc. analysts said in a report issued on July 23.

In the second quarter, train starts dropped 21 percent and average train speed increased 23 percent to 27.4 mph, while the number of active road locomotives and freight cars fell 24 percent and 26 percent, respectively, compared with second-quarter 2008 figures.

"UP continues to make steady, consistent progress in improving the overall fluidity of its network," Stifel Nicolaus analysts said.

The Class I also continues to manage resources with an eventual traffic uptick in mind. For example, the railroad is rotating stored locomotives into service to ensure the motive power remains in good repair.

"They'll be there when we need them," says Young.

Under a heavier blitz

So will UP's sales and marketing forces. The railroad has expanded its staff so more people are on hand to visit customers and potential customers face to face. Recently, the Class I also began to conduct regional sales blitzes to drum up business in certain areas, such as San Antonio, Texas, where the railroad opened an intermodal terminal in March. The blitzes are turning up medium- to small-size shippers that want to do business with UP, but haven't used rail before, says Young.

"Shippers are under pressure to survive and are trying to reduce their own costs, so we're trying to show them we can offer a value proposition," he says.

One way to do that is to provide value-added services — an often-used arrow in UP's traffic-generation quiver. Through subsidiary Union Pacific Distribution Services, the Class I offers intermodal logistics, transloading and door-to-door services for bulk commodities, industrial products and merchandise freight.

"When you walk in the door to a customer, what are you selling? We want to offer it all," says Young.

Adds UP Executive Vice President of Marketing and Sales Jack Koraleski: "We want to offer a full suite of services, and not just move freight."

Another way the railroad is amping up the value-added-service meter is through subsidiary Streamline, which was launched two years ago to offer wholesale door-to-door intermodal services online. Streamline — which has

attracted medium- to small-size shippers and brokers, many of which haven't used rail before — boosted volume 113 percent in the second quarter and generated one-third of the gains from highway diversions.

The site is targeted at those who believe intermodal is too complicated, says UP VP and General Manager of Intermodal John Kaiser.

"This brings all the pieces of intermodal together and is all about ease of doing business," he says.

A new Web site aims to make it easier for automotive shippers to conduct business with UP, too — as well as generate new business.

An auto-matic response

This summer, the railroad launched ShipCarsNow.com, which offers multi-modal, door-to-door logistics services to auto traders and remarketers for used vehicles shipped long distances.

The site provides instant online price quotes, and shipment tracking estimated times of arrival tools. The site is managed by subsidiary ShipCarsNow, which formerly was known as Insight Network Transportation.

A survey ShipCarsNow conducted among 70 auto dealers in May showed 88 percent of the respondents would buy more used cars online if long-distance transportation was easier to arrange, and 72 percent would accept delivery of a vehicle in 10 business days to save 20 percent to 30 percent on shipping costs (see "ShipCarsNow's charge: Generate more auto traffic now").

UP has developed truck-to-rail vehicle distribution expertise through subsidiary Insight Network Logistics L.L.C. and has been looking for opportunities in the used-car market, says Koraleski.

ShipCarsNow seeks to leverage a multi-modal delivery network that already distributes new cars to nearly 20,000 U.S. auto dealers nationwide — a network that hasn't been readily available to used car shippers.

ShipCarsNow.com targets shippers with small lots, from one or two vehicles to 200 units, including those new to rail.

"Last year, we moved about 41,000 vehicles," says Koraleski. "We think there will be more this year."

UP also expects to generate more traffic in other business groups because of new or revamped services and rolling stock or infrastructure investments.

In the agricultural products group, the railroad has spent $300 million the past nine years to acquire 50- and 64-foot refrigerated cars, and $75 million to improve infrastructure in northern Iowa and southern Minnesota for ethanol shippers.

UP also plans to build an ethanol unit train facility in West Colton, Calif., that would be partially operational by year's end and fully operational in 2010.

"The ethanol market continues to shake out, but there are opportunities," says Koraleski. "California is moving from a 5 percent ethanol blend to 10 percent in January."

Getting moves down cold

To accommodate more produce traffic, UP the past few years has acquired 1,500 refrigerated cars and retrofitted another 1,500 cars, and established cold storage facilities in Louisiana, New York and Washington.

The railroad operates a produce train between California and Washington offering two trains starts per week from California; soon, UP will offer two train starts weekly from Washington, says Koraleski.

"This is traffic that we relegated to trucks years ago," he says.

In July, UP in conjunction with Norfolk Southern Railway also began offering a new expedited intermodal service designed for refrigerated trailer shippers between Los Angeles and Atlanta. The service provides truck-like speed and reliability by covering more than 500 miles per day — the rail industry's fastest L.A.-to-Atlanta intermodal service, according to UP.

Industrial development

The need for transit speed and reliability carries over to other business groups, including the industrial products sector.

During the past three years, UP has developed unit-train offerings for wind energy business that provide prompt door-to-door delivery and specialized equipment, says Koraleski.

Last year, the Class I moved 2,300 carloads of wind turbine components, enough to build 141 turbines that could generate energy for 53,000 homes. Component moves will generate about $50 million in revenue this year vs. $8 million in 2007, says Koraleski.

"We can help shippers design equipment, provide rolling stock and arrange trucking services, and put it all on a single bill," he says.

UP also offers the Pipeline Express, a 55-car unit train that can reduce pipe shipment cycle times from eight to six days. In addition, the railroad recently worked with UP Distribution Services to develop transload services for drilling material in the mid-South and Rocky Mountain regions.

In the energy and chemical business groups, infrastructure upgrades are the traffic-generation drivers. In the chemical sector, UP has spent between $650 million and $700 million since 2005 to upgrade infrastructure and improve interchanges in the Gulf Coast region, and $90 million to improve terminals in Houston and Angleton, Texas, Livonia, La., and Pine Bluff, Ark.

In the energy sector, the Class I has invested about $11 billion since 1996 to build mainlines and sidings, install signals, and acquire locomotives and coal cars.

An energizing feat

Last month, the railroad marked the 25th anniversary of coal train loadings in the southern Powder River Basin (PRB), its key coal-traffic region (see "Coal: Silver anniversary in PRB").

In the PRB, UP has triple-tracked the joint line it shares with BNSF Railway Co., built a fourth mainline at Logan Hill, grade separated a Winter Park line, constructed the Moffat Tunnel siding and expanded sidings on the North Fork branch.

Infrastructure upgrades are key to intermodal traffic growth, as well.

Since 1999, UP has spent $1 billion to add capacity — primarily double-track mainline — to the 760-mile Sunset Route between L.A. and El Paso, Texas.

The route is crucial to the railroad's objective to accommodate import traffic flowing from Asia to West Coast ports to Southwest markets, although international traffic remains sluggish.

Since 2000, UP also has invested $900 million to upgrade a number of intermodal terminals and build facilities.

Coming soon: Joliet terminal

In addition to the new San Antonio terminal that opened this year, the Class I plans to establish an intermodal facility in Joliet, Ill.

"Joilet is in a freight-friendly county, has good access to highways and has land available," says VP and GM Kaiser. "We did a study out to 2025 and determined that this is the area where distribution is growing and freight is flowing."

After the 785-acre facility opens next year, UP will operate five Chicago-area terminals handling either domestic, international or a mix of both traffic segments to provide shippers flexibility for the markets they need to tap, says Koraleski.

The railroad also has focused intermodal investments on the Interstate 5 corridor between L.A., Portland and Seattle.

The Class I cleared tunnels that couldn't accommodate double-stack trains, upgraded other infrastructure and leased a terminal from the Port of Tacoma, Wash., says Kaiser. UP then developed an intermodal service, which now is averaging 250 units per week.

"This was all moved by truck before," says Kaiser. "We previously had some slow orders on the track."

In addition, UP has developed truck-competitive container and trailer services between L.A. and Atlanta, Dallas and Memphis, Tenn., that have registered on-time performance of 99.5 percent, he says.

Earlier this year, a major intermodal marketing company cited the Class I's improved intermodal service performance as a main reason for shifting a significant amount of its container traffic from BNSF to UP. The Hub Group Inc. now uses UP to move about 90 percent of its container loads in the West.

The Hub Group "likes how our network is situated" and believes UP offers better origin-destination combination pairs from the West Coast, says Koraleski.

"They also liked that we have our own container fleet, which provides them flexibility with their own fleet," he says.

Making the grade

More shippers are noticing UP's performance-improvement efforts of late.

In a second-quarter customer satisfaction survey, UP's overall rating reached a record 87 percent, matching the first quarter survey. The railroad received an 80 rating in second-quarter 2007 and 83 rating in second-quarter 2008.

The most recent results aren't record-setting because volume is down, making it easier to keep traffic flowing and provide good service, says Koraleski. Instead, the satisfaction rating reflects the fruits of UP's labor, he says.

The survey, which is based on one developed by Toyota Corp., includes 35 questions that touch on price, the value of UP's service vs. other carriers, transit times and other key service components.

Respondents rate UP's performance on a scale of 1 to 5, with 5 the highest score.

"It's a tough survey with a tough grading system," says Koraleski. "It's really an outcome of adding capacity where we desperately needed it and how our operating team addressed processes that had to improve."

Although volumes are expected to remain down at least through year's end while UP continues to upgrade infrastructure and boost service performance, there are signs that the railroad's traffic will at least hold its own in 2009, according to a RBC Capital Markets report issued on July 23.

"Positive indications" include the fall grain harvest, which will include an increase in soybean and corn acreage; ethanol plant reopenings; new auto production — the first in 18 months; a promising summer coal burn; an uptick in stimulus spending; and the forthcoming peak intermodal season, RBC analysts said in the report.

On track for bounce-back

In addition, there are opportunities for UP to generate more traffic through the rest of the second half, analysts believe.

Among them: a drought in Argentina could help the U.S. agricultural sector; the resolution of the GM and Chrysler bankruptcies, and record-low auto inventories; a strengthening potash market; an increase in paper production; and a still-strong domestic intermodal market.

Traffic likely will "come back in all six business groups to some extent, but I don't think there will be any rebound this year," says Koraleski, adding that when an uptick occurs, UP will "come back even stronger and more efficient."

The keys to any rebound are jobs and consumer confidence — neither of which are showing any signs of a turnaround, says Young.

"My gut tells me that when traffic turns, it will be a trickle and not a flood," he says. "But we're prepared either way."

UP's adjustment period has lasted five years and counting, and there are more modifications to come. The Class I's tortoise-rather-than-hare approach to self-improvement — as Stifel Nicolaus analysts described it in a report issued last year — has been slow, but steady, reaping gains in productivity, asset utilization, customer service and traffic generation.

Despite economic and freight-flow trends, UPers expect to continue chalking up wins. They're just hoping to rack up more sooner rather than later.

"It might seem like this has been a slow process, but we feel like we've been going 100 miles per hour internally," says Young. "A lot of what we're doing takes time."