Union Pacific aims to boost profits, service with Precision Scheduled Railroading

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UPautoracksNPlatteStevens
Union Pacific multilevel automobile trains pass east of North Platte, Neb., on the railroad’s Overland Route in June 2018. UP has shifted 70 percent of its automotive traffic out of unit trains and into the merchandise network
Bill Stephens
OMAHA, Neb. – Union Pacific’s embrace of Precision Scheduled Railroading principles came just two months after Wall Street analysts peppered CEO Lance Fritz with questions about why his railroad couldn’t be more like CSX Transportation.

CSX underwent an operational and financial transformation under CEO E. Hunter Harrison, who died in December after a little more than nine months on the job. In a year under Harrison’s Precision Scheduled Railroading model, CSX’s operating ratio went from worst to first – making it more profitable than UP.

UP’s announcement yesterday of its new Unified Plan 2020 answered the question: We will be more like CSX.

The Unified Plan will help UP hit its 60 percent operating ratio goal by 2020 and, eventually, its long-term 55 percent target, the railroad says.

Amid the changes at CSX, Fritz and other UP executives over the past year have repeatedly said they would continue to copy best practices from other railroads and industries.

And UP has been inching toward Precision Scheduled Railroading by implementing key elements of the operating philosophy. These include reducing its low-horsepower locomotive fleet by a quarter over the past three years and beginning to shift unit train traffic into the manifest network.

The Blend and Balance program at UP, which began last year with a pilot program in the Pacific Northwest, is reminiscent of the Harrison philosophy of running general purpose trains and balancing the network by running equal numbers of trains in each direction every day. The idea is to keep crews and power in balance with the added efficiency of increasing train length.

UP has moved 70 percent of finished vehicle traffic out of unit trains and into the merchandise network, executives said at the railroad’s investor day in May. UP declined to provide additional details but had said it was in the early stages of reviewing its operating plan on a corridor-by-corridor basis.

Officially adopting Precision Scheduled Railroading comes as UP has been mired in subpar operating performance for more than a year.

"We are not currently meeting customer expectations," Fritz said in a statement. "Unified Plan 2020 is our path forward to secure our place as the industry leader in safety, service, and financial performance."

Elements of the new operating plan include:
  • Shift focus of operations from moving trains to moving cars.
  • Minimize car dwell, car classification, and locomotive power requirements.
  • Run general-purpose trains by blending some unit-train traffic into the manifest network.
  • Balance train movements to improve crew, locomotive, and railcar utilization.
UP’s announcement means that more than half of the big six systems will follow the operational practices championed by Harrison, who developed his philosophy at Illinois Central and later brought it to Canadian National, Canadian Pacific, and CSX.

While Harrison’s operating recipes are well known, no railroad has ever implemented them as deeply and broadly as the systems Harrison has led. And UP’s decision is the first time a railroad has adopted Harrison’s principles without Harrison himself leading the charge.

But UP in February hired former CSX Chief Operating Officer Cindy Sanborn, who spent eight months helping Harrison implement Precision Scheduled Railroading in Jacksonville. She now heads UP’s Western Region.

Last year Sanborn was asked why CSX didn’t simply read Harrison’s books on Precision Scheduled Railroading and adopt his operating model while Michael Ward was chief executive. “You can read a book about brain surgery but that doesn’t make you a brain surgeon,” Sanborn replied.

Having Harrison at the helm is like learning from the professor who wrote the textbook, Sanborn said. Plus, Harrison’s experience implementing new operating plans gave him invaluable insights about making operational changes, she added.

The scheduled railroading announcement comes just a month after an operations management shuffle at UP, including the naming of Tom Lischer as executive vice president of operations. Lischer replaces Chief Operating Officer Cameron Scott, who is retiring effective Feb. 28.

Also a question mark: Can UP make significant operational changes without the disruption that accompanied the rapid operational changes Harrison made while leading CN, CP, and CSX?

UP seems intent on taking a go-slow approach. It will phase-in operational changes over the next 15 months, beginning Oct. 1 in its Chicago-Texas corridor, and develop the new operating plan in conjunction with field operating people. UP also pledges to communicate with customers well in advance of operational changes.

“We will closely monitor the impact of these changes to align our strategy with our overall goals to improve network performance and provide the reliable service you have come to expect,” Kenny Rocker, UP’s new executive vice president for marketing and sales, told customers yesterday.

This is a contrast to Harrison’s top-down methods, which were so fast-paced at CSX that the railroad’s marketing people often did not have time to communicate operational changes with customers until after the fact.

UP’s announcement is likely to only ratchet up investor pressure on Norfolk Southern, CSX’s rival in the East.

On Norfolk Southern’s second-quarter earnings call, CEO Jim Squires faced the same Wall Street analyst questions about why his railroad couldn’t move as fast as CSX to cut costs and boost profitability.

Like UP, NS reported record quarterly financial results. But its operating ratio did not keep pace with the progress at CSX.

CSX posted a record 58.6-percent operating ratio for the second quarter. NS’s operating ratio was a record, too, but at 64.6 percent it was 6 points higher than CSX’s and ranked last among the publicly traded Class I railroads.

Independent analyst Anthony B. Hatch was amazed at the timing of the UP announcement.

“One of the interesting things is this is relatively shortly after their investor conference, where they laid out plans including a $20 billion share buyback,” Hatch says. “So – one thing is – maybe investors are wising up beyond the short-term buyback focus. Or maybe it means investors remain short-term oriented and look only to operating ratio improvement. Time will tell.”

Hatch notes that UP’s second-quarter earnings were impressive, making the CSX comparisons surprising.

“In my 30 years I never thought that the Union Pacific would be taken to task for the ‘crime’ of not being the CSX,” Hatch says. “And now it’s coming to pass – the mighty UP is becoming (more like) the CSX (down to actually calling it 'PSR')!

“Somewhere, up there,” Hatch adds, “EHH is having a belly-laugh!”

NEWSWIRETrains News Wire

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