UP in a Jam

UP in a Jam

Copyright 2004, Traffic World, Inc.

Union Pacific Railroad''s mini service crisis is tying up freight while dragging down the company''s earnings potential.

Severe winter weather along with a shortage of locomotive power and the crews to run them has left trains stopped dead on their tracks for two and three days at a time across the 33,000-mile UP network. Although the current crisis is not of the magnitude that caused the railroad''s meltdown in 1998, it threatens to impede UP''s ability to take advantage of an improving U.S. economy.

"Yes, it is affecting our ability to get the revenue growth that was predicted," said Greg Barbe, UP''s vice president and general manager for industrial products. Based on economic growth projections, investments and overall system capacity, UP had forecast roughly 8 percent growth in its intermodal business and 4 percent growth on the carload side for 2004.

The service crisis, combined with $35 million in damages UP must pay as a result of an accident at a grade crossing, forced UP to adjust its earnings forecast. The company originally targeted a 30 to 40 percent growth over the $0.57 per diluted share it earned from continuing operations in the first quarter of 2003. However, last week UP Chairman and CEO Dick Davidson said the company will not meet the low end of that projection. The verdict in the grade crossing case alone will cost about $0.08 per diluted share.

"Severe winter weather, continuing high fuel costs and lingering crew shortages primarily in the Western region" in January and February have hampered efforts to restore fluidity to the UP network, increasing costs and reducing revenue in the first quarter, Davidson said.

Crew shortages are a continuing and seemingly growing concern behind service problems at several railroads over the last two quarters, including Burlington Northern Santa Fe Railway and CSX.

But UP seems to have been hit harder and longer.

In the week before Thanksgiving last year, an internal bulletin from vice presidents of the railroad''s four operating regions conceded the railroad "should have hired sooner" more than 1,000 new employees, and asked current crews to work as many hours as possible during the holiday weekend.

"I went home that night and stuck that bulletin on my refrigerator," said a UP locomotive engineer who did not want to be identified. "It''s the first time I''ve ever seen UP admit to anything."

The memo also was an indication, say union leaders, of not only poor planning at the railroad but also of a widespread atmosphere of employee abuse.

"I''ve been with the railroad for 41 years and this is the worst I''ve ever seen it," said Richard Karstetter, general chairman for the United Transportation Union, which represents UP conductors. "It''s a crisis now, but we''ve been telling them the dike has been breaking for three years. Their answer has been to step up disciplinary action against its labor force. However, we''re overworked to the point of exhaustion, and it is getting to the point where our members are actually looking forward to being disciplined because it''s the only way that they can get some rest."

John Bentley, a spokesman for the Brotherhood of Locomotive Engineers and Trainmen, said work fatigue was an industry-wide problem. "Railroads in general are trying to get too much work done with not enough people and our members are suffering because of it," he said.

Karstetter said UP has started to address the problem. "They''re hiring, and we''re starting to see a difference in places like St. Louis," he said. "But much of this was too little too late. There are trains stopped all over America, and it''s going to take months to dig out of this mess."

UP spokesman John Bromley acknowledged employees are getting more trip turns than normal but said the railroad is acting within the hours of service laws. "We''ve had a real problem getting people to stay marked up (available for work)," Bromley said. "In some instances there''s been a high percentage of employees not available on weekends, and there has been disciplinary action taken to address that."

Last year UP hired more than 2,500 engineers and another 1,000 in January of this year. The plan for 2004 is to hire 3,500 trainmen.

UP customers, particularly those in the western portion of the UP system where the effect of the labor shortage is biggest, have adjusted their transport plans accordingly. The Portland & Western Railroad, which interchanges lumber shipments with UP in the Pacific Northwest, is temporarily storing product in general-use boxcars until it can get high-end boxcars suitable for transporting finished paper.

"They''ve closed down their temporary crisis center that they set up last year up here to help with the problem, but there''s still a backlog" of inventory, said Ron Vincent, director of customer service for the P&W. "The weather has been worse this year than in previous years, which hasn''t helped. But all things considered, they''ve been doing an excellent job of reacting."

"The noise level from our customers has gotten quite loud," said Tom Shurstad, president of intermodal carrier Pacer Stacktrain, a big shipper of automotive parts on UP between Mexico, the United States and Canada. Because a lack of crews means having to park trains, "locomotives are not getting to destination fast enough before they have to turn around and go back," Shurstad said. He said UP was improving every day but "they haven''t yet hit the right threshold."

To do that UP has to increase the overall velocity of its network, which has shown a dramatic downturn in average train speed in 2004 versus the same time last year. Experts say every one mile-per-hour increase in average train speed results in 250 additional locomotives that wouldn''t otherwise be available.

UP wasn''t placing a timeline on its recovery. "As we look to the remainder of the quarter, our outlook is unclear," said Davidson. "We are hopeful that a solid March performance will help us regain some of the momentum we lost earlier in the quarter. Once the difficult winter operating environment begins to improve, we continue to believe that our efforts will bear fruit."