Morningstar | Union Pacific Starts Precision Scheduled Railroading in Earnest, Held Back a Bit by Track Flooding
Harsh snowfall and flooding constrained the full improvement of Union Pacific’s early progress in precision scheduled railroading. Still, the company improved its first-quarter operating ratio 1 percentage point from the year-ago period to 63.6% despite track outage of 13 days on the east/west mainline and a 2% carload decline. Mix compounded the volume decline as low revenue per unit intermodal volume increased while coal, sand, and agricultural products declined. We expect to make no major adjustment to our fair value estimate and maintain our wide moat rating.New chief operating officer Jim Vena (former COO of PSR pioneering railroad, Canadian National) outlined a handful of progress markers, but given that he has been with the firm only about one quarter, we anticipate Vena will escalate his progress reports in coming earnings reports. We do expect Union Pacific to progress to a mid-50s OR, but it’s starting from a 62.7% in 2018--far, far better than where CN, CP, and CSX began their PSR transformations. Vena emphasized two primary PSR objectives--reducing railcar touches (handling) and speeding car movements. In the quarter, Union Pacific reduced car terminal dwell time 19% year over year and increased car velocity 7% as well as building March trains 7% longer than January trains.
Reduction of and improving utilization of all types of assets are two other hallmarks of PRS, and Union Pacific has shifted a few plans after Vena’s arrival. For example, Hinkle and Pine Bluff humps are now flat switching, and investment in the recently emphasized Brazos Yard has been put on hold. Also, Union Pacific has multiple intermodal yards in Chicago--we suspect these are ripe for rationalization. Finally, we think all car sorting yards (including humps) will be scrutinized for potential shuttering.
Union Pacific, through its operating subsidiary, Union Pacific Railroad Company, is a Class I railroad operating in the United States. The company's network included route miles, linking Pacific Coast and Gulf Coast ports with the Midwest and eastern United States. gateways and providing several corridors to key Mexican gateways. The company serves the western two-thirds of the country and maintains coordinated schedules with other rail carriers for the handling of freight to and from the Atlantic Coast, the Pacific Coast, the Southeast, the Southwest, Canada, and Mexico. The company's business mix includes agricultural products, energy, industrial, and premium.
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