UP pledges performance improvements through precision railroading plan

Western railroad Union Pacific Corp. expects that its plan to implement a precision scheduled railroading (PSR) model across its sprawling western U.S. network will lead to cost reductions in its utilization of locomotives, crews, and freight cars, while opening up new markets by delivering more reliable service, company executives said in a conference call today.

The Omaha, Neb.-based freight carrier had announced Monday that it will launch a PSR strategy on Oct. 1 for its mid-America corridor, stretching from Wisconsin to Texas, and roll it out to the company's entire network by the end of 2019.

PSR is the practice of prioritizing on-time departures from each station, instead of holding a train at a location until all its cars are full. The approach promises to improve predictable delivery schedules by running freight networks on explicit schedules, like Amtrack passenger trains. However, PSR also puts extra pressure on shippers to make sure their freight is at the yard in time, at the risk of having to wait for the next train.

UP's current plan follows a PSR pilot program called "Blend and Balance," that the company deployed in its pacific northwest region in 2017. The initiative is part of a broader corporate strategy it calls the Unified Plan 2020 that is intended to lower its operating ratio to 60 percent by the end of 2020 and to 55 percent by an unspecified future date.

Executives on the call acknowledged that UP is late to the game of applying PSR principles, a tactic that has lead to improved financial results at competing rail operators such as Canadian Pacific, Canadian National, and CSX. But in comments to analysts, Lance Fritz, UP's chairman, president, and CEO, said "We are not shy about adopting best practices from other railroads."

"By a number of measures, it is evident we have not made the kind of progress I expect in improving our service and productivity performance in recent months. We are not meeting the expectations of our customers, and we know we can be better," Fritz said on the call. "I believe a large part of the problem is attributed to the complexity in our network transportation plan that has emerged over time, compounded by significant changes in business mix. Unified Plan 2020 is a way of addressing that network complexity."

By implementing a precision railroading plan, UP will change its focus from moving entire trains to moving individual cars, ultimately increasing car velocity throughout the network, creating longer, general-purpose trains instead of supporting a variety of different car classifications, and emphasizing reduced locomotive and car dwell times at stops, said Tom Lischer, UP's newly appointed executive vice president of operations.

UP expects that approach to produce gains in service reliability and operating efficiency, cutting overhead costs through reduced labor, locomotive, car, and fuel expense, Lischer said.

UP's delayed embrace of precision railroading could improve its operating record and financial performance, as long as company executives are successful at implementing the approach, an industry analyst said.

"The label 'Precision Scheduled Railroading' obviously elicits excitement among investors given its notable success at Canadian National, Canadian Pacific, and now CSX. However, 'vision without execution is hallucination'—and focus turns to whether [UP] can implement the PSR concept,"Benjamin J. Hartford, a senior research analyst with Baird Equity Research, said in a note to investors.

"Questions and focus will now turn to whether the plan can be successfully implemented by [UP's] leadership," Hartford wrote. "If successful, however, the plan would add clarity to [UP's] ability to sustain its next phase of [return on assets] improvement—a critical catalyst for the stock, in our view."

In his closing remarks on the call, Fritz seemed to address that concern as he reiterated the company's commitment to applying the new scheme. "We expect to be the best railroad in North America. Our service product right now is okay, and that's not good enough," Fritz said.