UP has long focused on the profitability of its traffic rather than volume growth. While that hasn’t changed, UP’s lower cost structure under Precision Scheduled Railroading will enable it to better compete for intermodal traffic, Fritz said last week in response to an analyst question on the railroad’s quarterly earnings call.
“Let’s talk about the intermodal business broken into two pieces, international and domestic. They are both attractive.” Fritz says. “Our work on cost structure has made growth in both attractive to us, presuming it’s in the right price.”
UP’s domestic intermodal traffic has slumped this year due to loose truck capacity, softer demand, and the railroad’s demarketing of service in low-density lanes, which jettisoned 2% to 3% of its intermodal volume.
Once truck capacity and pricing returns to more normal levels, UP’s domestic intermodal business will resume growth, Fritz says.
“Our current cost structure has changed the playing field for us in terms of what’s an attractive piece of business and our current service product has changed the playing field so that customers look at us and think, ‘Boy, they are a viable alternative to my truck network,’” Fritz says. “So both of those I think should be positives for us to get back on the path of growing domestic intermodal.”
International intermodal volume is down this year, as well, due to the impact of the trade dispute between the U.S. and China, as well as West Coast ports losing volume to Canadian ports and, to a lesser extent, East Coast ports.
“That’s troubling,” Fritz says, noting that says more about costs at West Coast ports than it does about UP’s service.
Changes to UP’s intermodal service, such as streamlining Chicago terminal operations and loading and stripping stack trains faster, will help a return to growth as well.
“All that is moving in the right direction, and I think, all that is going to create opportunity in the future,” he says.
UP’s merchandise network should be able to grow, too, Fritz says, thanks to changes made under Unified Plan 2020, the railroad’s version of Precision Scheduled Railroading. UP has de-emphasized what Fritz calls its “boutique” network of unit trains and has blended much of its traffic into merchandise trains.
The merchandise network now carries between two thirds and three quarters of UP’s traffic, up from 40% to 45% before it implemented Precision Scheduled Railroading, Fritz says.
“That’s enabling us to win business that we used to pass on because it wasn’t conducive to a unique boutique train,” Fritz says.
And that means “volume can grow across different segments and we can leverage it into train size, whereas that opportunity to do that historically was probably a little more limited,” Fritz says. “That’s a big benefit of the Unified Plan 2020.”
Canadian National and Canadian Pacific executives, whose railroads are growing, have talked about lower costs making them more competitive.
But analyst Todd Tranausky, vice president of rail and intermodal services at FTR Transportation Intelligence, is skeptical that UP’s lower cost structure will translate to volume growth.
“It has been talked about, but I can’t think of any railroad that was able to actually execute on that and cause it to occur. I think that is what the carriers would like to happen, in terms of going after business that they can’t go after today because of costs, but I’ll believe it when I see it,” he says. “I think it is good theoretical exercise with PSR, but I’m not sure it has worked.”
Obviously Fritz has not talked to those who ship carloads. If he had he would see how miserably UP is transporting their goods. How hacked they are at demurrage charges caused by UP not delivering cars on schedule or picking them up on schedule. UP’s declining number of trains is a symptom of losing customers due to poor performance.
But, there is Fritz claiming he knows his plan will work because he says it will,l come hell or high water. Suggestion: Stop talking to yourself and talk to your x-customers. You might learn a whole hell of a lot.
Will some one (reporter)please ask UPRR about the 5 fatalities and the devistation they have caused to numorous individuals and communities soley to raise the stock price. Infrastructure is ignored, yards, buildings, roads, equipment. Reporters need to show the real story not just the Fritz/ Vena face that is put out. Look past wallstreet. Please.
“Once truck capacity and pricing returns to more normal levels, UP’s domestic intermodal business will resume growth, Fritz says.”
My thoughts exactly Curt. What I see read here is that the business will not come back due to a better service product from rail, but because of other circumstances. And I also agree that cost cutting will not result in lower rates. It will go straight to the bottom line, the bonuses, and the shareholders.
Lance is 100% correct. East is west, up is down, war is peace, hate is love, lies are truth, and driving away business will attract business. Who could possibly believe otherwise?
Andrew; I worked as a rail shipper for 40 years. PSR has rarely resulted in lower rates for shippers – quite the opposite, in fact.
When CSX implemented PSR; annual contract rate increases generally doubled. NS wasn’t quite that aggressive but; their average increases were going up as well. UP has always been “proud” of what passed for service but; was becoming even more aggressive with contract renewals at the point I “pulled the pin” several months ago.
And for all the PR about how much better service becomes under PSR; I believe most shippers would tell you they experience no measurable improvement. What they do get; in addition to bigger rate increases is higher private car costs, higher switching and demurrage bills and – frequently – fewer days of service each week (NS being an exception on this last point).
I would submit that whatever efficiencies and cost reductions the railroads have achieved through PSR have gone straight to the shareholders (and senior management is included in this group). Railroads employing PSR generally don’t seem to care if their aggressive pricing and reduced service drive away existing business. In fact the basic premise of PSR – from my perspective – is that it is intended to continue jacking rates on the business they still have and not being concerned with replacing business driven off. Fritz’s comments above seem to validate this as essentially he’s saying UP will not change pricing policies – instead waiting for the trucking market to tighten again and hope some of that business comes their way. NS recently noted at an investor conference in New York that while intermodal volumes were down; they were maintaining pricing discipline on what remained. Neither carrier appears interested in pursuing new business at this time by offering truck competitive pricing.
Now; CN under JJ has been using their reduced cost structure as a way to win new business. I’ll note that JJ came out of CN’s marketing and sales organization though and likely has a different. “world view” than Class 1 CEO’s who came from operations or legal.
Jim Foote at CSX is another old marketing guy and seems to be putting some pieces in place to go after new business as well but; only time will tell.
Service dependent intermodal rather.
I’ll believe it when I see it. Service dependent growth in particular requires investment in terminals and line haul bottleneck removal, the kind not permitted under the lower capex high OR regime that comes along with so-called PSR.
UP has declined these investments (even before their latest embrace of PSR) and BNSF hasn’t.
I think PTC will lead to the ability to run more trains, shorter trains (maybe faster trains) with one or no personnel. I think PSR will and PTC will lead to better utilization of equipment and a more efficient railroad. Lower costs will lead to lower prices, which will increase volume, which will increase profits.
This is the same type of thinking that killed computer retail. Since USB cables generated more profit per square foot, the stores kept stocking yet more and more USB cables. Pretty soon, no one needed a USB cable. Its was a cliff they fell off of and never recovered.
Here the railroads just keep optimizing and optimizing what shippers they will work with and what destinations they will deliver to. Pretty soon there will be just one customer, on one track.
Can I get some of what Fritz is smoking?
Volume will not grow if UP keeps pricing itself above the market. The relentless, mindless drive toward lower OR, as practiced by UP, prevents volume growth. They are focusing on margin per unit, rather than overall OR. Once you cut your costs to the bone, that focus means you can only lower the OR by raising rates. And with demand down, that results in lower volumes.
The truly frightening aspect of Fritz’s comments is that the rail analysts on Wall Street actually believe this nonsense.
The industry was given a great opportunity to take back lost traffic and they blew it.
“That’s enabling us to win business that we used to pass on because it wasn’t conducive to a unique boutique train,” Fritz says.”
Well if it wasn’t conducive to a unique boutique train, why didn’t you move it in existing manifest trains back then instead of passing on it???
I’ll second Todd Tranausky’s skepticism.
Is that newspeak, the official language of Oceania?
Now I’ve heard everything. You have to spend money to make money. Not cut to expand growth.