Union Pacific CEO: Lower cost structure will lead to volume growth

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A Union Pacific merchandise train climbs the Tehachapi grade in California in September 2019.
Bill Stephens
OMAHA, Neb. — Union Pacific’s shift to an operating plan based on Precision Scheduled Railroading ultimately will enable the railroad to capture more traffic thanks to a combination of lower costs, better service, and a more robust merchandise network, CEO Lance Fritz says.

UP has long focused on the profitability of its traffic rather than volume growth. While that hasn’t changed, UP’s lower cost structure under Precision Scheduled Railroading will enable it to better compete for intermodal traffic, Fritz said last week in response to an analyst question on the railroad’s quarterly earnings call.

“Let’s talk about the intermodal business broken into two pieces, international and domestic. They are both attractive.” Fritz says. “Our work on cost structure has made growth in both attractive to us, presuming it’s in the right price.”

UP’s domestic intermodal traffic has slumped this year due to loose truck capacity, softer demand, and the railroad’s demarketing of service in low-density lanes, which jettisoned 2% to 3% of its intermodal volume.

Once truck capacity and pricing returns to more normal levels, UP’s domestic intermodal business will resume growth, Fritz says.

“Our current cost structure has changed the playing field for us in terms of what’s an attractive piece of business and our current service product has changed the playing field so that customers look at us and think, ‘Boy, they are a viable alternative to my truck network,’" Fritz says. “So both of those I think should be positives for us to get back on the path of growing domestic intermodal.”

International intermodal volume is down this year, as well, due to the impact of the trade dispute between the U.S. and China, as well as West Coast ports losing volume to Canadian ports and, to a lesser extent, East Coast ports.

“That’s troubling,” Fritz says, noting that says more about costs at West Coast ports than it does about UP’s service.

Changes to UP’s intermodal service, such as streamlining Chicago terminal operations and loading and stripping stack trains faster, will help a return to growth as well.

“All that is moving in the right direction, and I think, all that is going to create opportunity in the future,” he says.

UP’s merchandise network should be able to grow, too, Fritz says, thanks to changes made under Unified Plan 2020, the railroad’s version of Precision Scheduled Railroading. UP has de-emphasized what Fritz calls its “boutique” network of unit trains and has blended much of its traffic into merchandise trains.

The merchandise network now carries between two thirds and three quarters of UP’s traffic, up from 40% to 45% before it implemented Precision Scheduled Railroading, Fritz says.

“That’s enabling us to win business that we used to pass on because it wasn’t conducive to a unique boutique train,” Fritz says.

And that means “volume can grow across different segments and we can leverage it into train size, whereas that opportunity to do that historically was probably a little more limited,” Fritz says. “That’s a big benefit of the Unified Plan 2020.”

Canadian National and Canadian Pacific executives, whose railroads are growing, have talked about lower costs making them more competitive.

But analyst Todd Tranausky, vice president of rail and intermodal services at FTR Transportation Intelligence, is skeptical that UP’s lower cost structure will translate to volume growth.

“It has been talked about, but I can't think of any railroad that was able to actually execute on that and cause it to occur. I think that is what the carriers would like to happen, in terms of going after business that they can't go after today because of costs, but I'll believe it when I see it,” he says. “I think it is good theoretical exercise with PSR, but I'm not sure it has worked.”
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