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Profit Grows as Union Pacific Engineers Turnaround

May 13, 1999|JAMES F. PELTZ

Union Pacific Corp. finally knows how to run a railroad again, and Wall Street is happily on board.

Less than two years after the nation's biggest rail carrier suffered bottlenecks and other operating snags so massive that they nearly paralyzed the U.S. freight-transportation system, Union Pacific is again moving its trains faster, posting growing profit and enjoying a surging stock price.

"What's been surprising is the speed with which its revenues have returned and its costs have dropped," said James Higgins, an analyst at Donaldson, Lufkin & Jenrette Securities in New York.

Just recently, in fact, Union Pacific reported sharply higher first-quarter earnings from operations, at the same time its operating expenses were falling 7% from a year earlier.

Those results drove Union Pacific stock even higher, and its shares have now soared 60% since last August and are trading at their pre-crisis levels. The stock closed Wednesday at $62.31 a share, down $1 for the day, in composite trading on the New York Stock Exchange.

Call it redemption for Union Pacific's chief executive, Richard Davidson, a former railroad brakeman whose reputation for managing both an enormous railroad and an acquisitive corporation was badly damaged during the crisis.

Now, though, "we're clearly winning back a lot of the customers that we alienated," Davidson said in a telephone interview. "But we've got a lot further to go."

The derailment of Union Pacific--which runs 36,000 miles of track mostly west of Chicago, including 3,700 miles that blanket California--started after the Dallas-based company bought the Chicago & North Western railroad in 1995, and followed that with the purchase of Southern Pacific Rail Corp. for $4 billion in 1996.

Within months after the Southern Pacific deal closed, Union Pacific struggled to merge the two carriers' equipment and personnel. Bad weather in certain regions and a surge in grain shipments exacerbated its problems.

By early 1998, Union Pacific's massive logjams--especially at its big Houston complex--caused a ripple effect that stranded Midwest crops, clogged ports in Southern California and delayed shipments of all manner of goods, from chemicals to paper to lumber.

Some estimates said the crisis cost the railroad and its shipping customers more than $2 billion. Union Pacific also suffered three fatal wrecks in 1997, prompting federal regulators to order stiffer safety checks at the railroad.

All of which left Union Pacific with an $86-million loss last year on revenue of $10.6 billion (excluding one-time gains and charges), after the company earned $432 million in 1997 and $904 million in 1996.

The disruption was so extensive that various groups, including coal shippers and rival railroads, asked the U.S. government to undo all or part of the Union Pacific-Southern Pacific merger to allow for more competition. The government refused.

Union Pacific, meanwhile, took several actions to pull itself out of the crisis. It spent more than $1.5 billion to buy new track, locomotives, signaling equipment, improved dispatching systems and other gear to break up the gridlock. The company also hired more than 6,000 employees, and it teamed with its main rival, Burlington Northern Santa Fe Corp., to form joint dispatch centers in Southern California and other regions to keep the trains moving.

Union Pacific also decentralized management of its railroad, giving managers in various regions of the country the authority to move the trains faster and more efficiently.

Now the railroad is "operating with one common computer system for the whole company," Davidson said.

As a result, the average speed of Union Pacific's trains is now about 25 miles per hour, double what it was during the worst of the crisis and about equal to the current speed at Burlington Northern Santa Fe.

And few dispute the market-share benefits that Union Pacific achieved with the Southern Pacific deal.

The railroad's access to California's ports, Chicago, the Gulf of Mexico and Wyoming's coal-rich Powder River Basin "gives it a unique franchise," said analyst James Valentine of Morgan Stanley, Dean Witter.

There could be even more good news for Union Pacific around the bend.

Union Pacific serves as the main railroad gateway to the Pacific Rim, whose ailing economies are now showing signs of rebounding. If Asia keeps coming back, it could mean a surge of additional freight traffic for the company.

But Union Pacific's recovery isn't complete. During the depths of its problems, the company slashed its quarterly dividend to 20 cents a share from 43 cents; it has yet to raise the pay-out again.

What's more, the company is expected to earn between $2.70 and $3 per diluted share this year, but that is well below the $3.36 per share Union Pacific earned (from continuing operations) in 1996--the year it bought Southern Pacific.

Davidson said Union Pacific also still faces the challenge of incorporating the workers it acquired from Southern Pacific and Chicago & North Western, so that "we get everybody on the same page of what we're trying to do."

Even so, "we're 75% to 80% along the way of total integration" of the three railroads, he said, "enough so that we're seeing dramatic results in the improvement of our operations."


Back on Track

The Union Pacific congestion woes that snarled the U.S. transportation system are now clearing up, lifting the giant railroad's earnings and stock price. Union Pacific quarterly net income or loss, in millions:

First quarter 1999: $129 million

Source: Union Pacific Corp.

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