Analysts compared Union Pacific’s second-quarter results with those of CSX and during the railroad’s earnings call on Thursday asked executives why UP doesn’t measure up.
Deutsche Bank analyst Amit Mehrotra noted that UP is now less profitable than CSX despite UP’s advantages of operating in the West, where its route structure favors longer hauls and higher revenue per carload.
Does watching the rapid improvement at CSX, Mehrotra asked, bring a greater sense of urgency to UP?
“Notwithstanding what any other railroad is doing, you can see our elevated sense of urgency and focus and determination when our headline quote for a quarter where we just generated record earnings per share and record income is ‘And it could have been better,’” CEO Lance Fritz replied. “Because it could have been better, to your point. We called out $65 million in cost in the network that really shielded us from generating much more attractive productivity. We’ve demonstrated we know how to do that … it’s frustrating that we weren’t able to drop more of the top line to the bottom line.”
UP’s operating ratio increased 1.1 points, to 63 percent for the quarter, as costs increased due to network congestion amid crew shortages and a tunnel collapse that closed a main route for three weeks. Until the May 29 tunnel collapse, UP’s operating metrics had been showing slow, but steady, improvement.
Fritz said UP is “laser-focused on getting the network right.”
And once the system is running normally, the costs of using extra locomotives, freight cars, and crews will go away, he says.
“We’ve got plenty of productivity opportunity. And we know how to get at it. We’ve just got to get rid of these excess costs in the network as we bring service back up,” Fritz says.
Wolfe Research analyst Scott Group noted that UP has added train crews while CSX has reduced its train and engine crew ranks by 11 percent.
“Why aren’t we talking about a real sort of change in strategy here to more fully embrace this Precision Scheduled Railroading concept that seems to be working,” Group asked, referring to the operating model the late CEO E. Hunter Harrison developed at Illinois Central and brought to Canadian National, Canadian Pacific, and CSX.
UP has taken steps to become a more productive and efficient railroad and has learned from CSX, CP, and CN, Fritz says. These include reducing its low-horsepower locomotive fleet by a quarter over the past three years and beginning to shift some unit train traffic into the manifest network.
The Blend and Balance program at UP, which began last year with a pilot program in the Pacific Northwest, is reminiscent of the Harrison philosophy of running general purpose trains and balancing the network by running equal numbers of trains in each direction every day. The idea is to keep crews and power in balance with the added efficiency of increasing train length.
UP has shifted 70 percent of finished vehicle traffic out of unit trains and into the merchandise network, executives said in May. UP has declined to provide additional details but says it’s in the early stages of reviewing its operating plan on a corridor-by-corridor basis.
Fritz also emphasized that the number of active crews at UP held steady as volume grew 4 percent in the quarter. The higher overall crew numbers reflect the presence of more than 700 conductors in the training pipeline.
Morgan Stanley analyst Ravi Shanker came to the rescue by noting that there’s a hyperfocus on operating ratio, which comes at the expense of attention to sustainable growth. UP was gaining volume at a good pace, Shanker added. UP’s quarterly growth was twice that of CSX.
“You’re exactly right, Ravi,” Fritz replied. “We care about a number of measures that demonstrate whether or not we are running the business well over the long-term.”
Generating operating income and cash is at the top of the list.
“We actually had a pretty damn good first half in that context,” Fritz says.
Return on invested capital measures whether the railroad is being wise with capital expenses. And operating ratio measures whether management is dropping top line revenue to the bottom line.
“At this point it’s appropriate to focus on O.R. and say we’re disappointed with our ability to efficiently drop top line to the bottom line,” Fritz says. “That doesn’t mean we can’t do it. It means we didn’t demonstrate doing that in the second quarter. We have all the confidence in the world that we’re able to do that both over the long run and rectifying that in the short term.”
UP is run with an eye on the long-term and meeting the needs of shareholders, customers, employees, and communities, Fritz says.
“We think about all of that when we are running the business,” he says.
At 55 percent, UP has the industry’s most aggressive long-term operating ratio goal. It also aims to hit a 60 percent operating ratio by 2020, something executives say they are confident will happen.
Adding my 2 cents a little late. Most don,t really understand that EHH entire approach is focus on OR and lifecycle management of the entire railroad. OR for EHH is one key metric to confirm the RR is improving significantly. Managing entire RR assets by reviewing and improving all assets can continuously result in bottom line increases in range of 2-12% per year. Almost impossible to do but that I believe, IS the secret sauce of E Hunter Harrison management! Cheers!
Wall Street has totally different objectives than companies, especially railroads. For years I have said tell Wall Street to mind its own business. all they are interested in is “the deal”. They make money whether a stock is sold or bought and that is what they want—–stock sales. Or, mergers.
Their “management ” suggestions, indeed demands, come from a wholly different perspective than the people who run the railroads. Letting Wall Street affect decisions at the railroad is a sure way to do bad things such as delay repair/rebuilds of routes delay equipment needs, all in the name of O R. The surest way to hell is to let Wall; Street call the shots.
One other main thing. As long as executives receive stock options we are not likely to see railroads truly managed to the benefit of the railroad. Get rid of that one thing and railroads will do very well.
“Be like CSX”———-man they gotta be nuts to say that. CSX is customer “unfriendly” and so is the Harrison we all love to hate. Right now both CP and CN are tying to woo back customers he pissed off which are many. IF CSX cuts back on trackage and routes (as EHH did everywhere) it will set up the same scenario bugging CP and CN right now, not enough track to avoid a complete melt down of the railroad when traffic surges. That is a failure in EHH’s system, cutting down the ability to handle increases in traffic.
Can’t help but notice this CSX – UP topic has drawn more comments that any other of recent memory.
Because CSX is a corporation that cares about nothing but profits, whereas UP is a railroad that cares about history, people, and tradition. UP over CSX 10 times out of 10
Actually the investors should really ask “So why are most of our customers satisfied with service.” CSX has multiple irate customers complaining about lack of servicer “but” profits are up so who cares
Silly question Lance Fritz.BNSF is your main competition here & no one else
The question they should be asking is “what are you doing to avoid operational problems in the future”.
RRs keep getting themselves in trouble. That costs stockholders plenty in the short and long run.
I get the feeling that the Wall Street bean counters want to kill all Railroads by focusing on the OR. I has taken the railroads 38 years to overcome the mess that Wall Street and the ICC placed the carriers in. Successfully operating a railroad is securing and servicing paying customers. Don’t service the customers and you can easily lower the OR by just eliminating the facilities necessary to get the job done. Of course once the customers are gone so is the income they produced.
Wall Street thinking is shorter than the end of their nose.
Why isn’t UP more like CSX? Perhaps they want to be around for another 150 or so years.
This mindless focus on the OR by the analysts consists of nothing more than a race to the bottom. Deferred maintenance is one way of hyping the OR…. until it catches up with you. Or charging track repair to capital instead of operating expense can have the same result; it’s known as cooking the books. Look at UP’s record over its long history as a money machine, then compare that to CSX’s; that speaks for itself. The big difference between the two is that CSX is controlled by a hedge fund, whose objective is to hype the numbers and therefore the stock price, then dump it and run. UP is owned by investors who have a longer-range perspective.
As a stockholder of UP, I will honestly say comparing UP to CSX is like comparing apples to oranges. These numb-nuts at these major investment groups don’t care about how bad/good service is as long as they get their pockets lined.
If UP had management just like those at CSX, two areas in their system would be major thorns: the Chemical Coast and the Pacific Northwest. CSX does NOT have the extensive network of small (less than 10 cars/day) shippers like UP does. Nor does CSX have to directly deal with the magnitude of chemical shippers like UP, and so many other things that UP deals with that CSX would only dream of in their own network.
The point is these financial analysts only see a small fraction of a railroads work, the financial bottom line and operating ratio. However, as time as proven, if those are the only two elements that are considered, and service and operations are ignored, ultimately the objective of transportation service is lost. So, if analysts make comparisons like this (UP vs. CSX), then they truly don’t care about anything but how much money THEY, not shippers/recievers, can get out of it.
It is a dream of mine that all Wall Street rail analysts must spend a minimum of 12 months working as rail shippers. I suspect that would put an end to the foaming at the month concerning operating ratio’s.
John Winter,
I have been curious about this double standard between trucks and railroads myself. If OR is the be-all-end-all, why aren’t the Wall Street Analysts demanding a lower OR from the trucks also?
Mr. Bauer, of COURSE it was tongue-in-cheek! Well, kinda-sorta…
Too bad I can’t slip a goofy emoticon in here like I can on the Forum!
Because UP is not CSX, duh!!!
Maybe I’m missing something, but isn’t the purpose of RR’s to move freight for their customers, or is it to bend to the wishes of Wall St?? I understand they want to be efficient, but cars sitting around waiting for the next 2 mile train doesn’t sound like moving freight. And if the customers decide to move their freight to trucks, how does that help RR’s? I’ve read trucking industry have op ratios in the 90’s & they seem to be doing well. At one time RR’s with a op ratio in the 60’s was golden. Now it’s 50’s. How long before Wall St demands 40’s. Somehow there has to be a better balance between op ratio, moving freight & meeting customer needs.
RR communities consider AMAZON SMILE’s 1/2% and charity search engine concept.
Reminds me of what a motorcycle dealership industry consultant said he learned the hard way about owning a dealership and listening to his accountant too much. “I finally made my accountant happy, and a few weeks later I was tossing the keys to the place through the mailbox slot”
This is a real tough nut to crack – the struggle between Wall St. and OR – and Ravi Shanker (not of the sitar, I gather) said it best about “hyperfocus”. I recall back around 2K UP had experimented with “running the T-Plan” like the current rage a-la CSX. It only lasts for so long, inasmuch as frequency can affect crew costs and locomotive utilization either for better or worse.
Using CSX as a benchmark is illusive but illustrative of many facets of what might be called national or global vision. We’ll see how that works as time progresses.
How about CSX being more like UP with a focus on customer service excellence, caring about the communities it serves and honoring its history, all while attaining growth.
Wonder if we’ll start seeing UP line sales soon . . .
UP is unlike CSX because UP has customers and UP has trains.
Wayne, I really hope that comment was tongue in cheek. I didn’t see anything in there about where UP is in business to run steam engines for the railfans. Being out there in the field right now from a windshield point of view, I think they have bigger fish to fry right now. I wish they would go one step further and put all of that on the back burner for now like NS did back in 2014 when things got crazy.
While CSX was reducing crews, I receive email updates from CSX HR and they have slowly started posting conductor openings again.
4014 is coming soon. The steam program stays.
We don’t WANT Union Pacific to be like CSX! CSX doesn’t have a steam program!
I mean, let’s keep things in perspective here!