STB leadership calls on Union Pacific to provide Precision Scheduled Railroading updates

In a letter written this week to Lance Fritz, chairman, president, and CEO of Class I railroad Union Pacific (UP), top leadership from the Surface Transportation Board (STB) asked UP to provide the STB with updates regarding planned operating changes recently rolled out by UP.

These planned operating changes, which are expected to kick off on October 1, stem from UP’s plan announced this week to roll out its Unified Plan 2020, which is an operating plan that implements Precision Scheduled Railroading (PSR) principles and will be introduced in various phases beginning on October 1 throughout the UP network.

UP said it is moving forward with this plan, because it is not meeting customer expectations, coupled with its desire to secure its place as the industry leader in safety, service and financial performance.

PSR was created by late railroading legend E. Hunter Harrison whom passed away in December 2017, when he was running CSX. PSR requires cargo to be ready when rail cars arrive for loading or risk being left behind, a practice that served also both CP and CN well under his leadership, with both companies seeing multiple positive results in the form of lower operating ratios, improved service, record amounts of reinvestment into networks, as well as creating significant shareholder value.

UP said its expects the benefits of Unified Plan 2020 to result in a 60% OR by 2020, with an ultimate goal of a 55% OR. And it said that the first phase of the plan will be implemented on its North/South corridor, which will create more streamlined operations between Wisconsin and Texas, while further implementation across it network to occur by 2020.

The STB’s letter to UP’s Fritz, written by Ann Begeman, chairman, and Deb Miller, vice chairman, said that the STB is “well aware” of UP’s service challenges over 2018, adding they view it as essential that all carriers strive to provide safe and reliable rail service to their customers.

They also referenced how UP’s fellow Class I competitor, CSX, implemented PSR in 2017, which led to major service disruptions for both its customers, as well as other railroads.

“In order to facilitate CSX’s recovery efforts, the Board engaged in several forms of oversight, including a public listening session in Washington, D.C.,” wrote Begeman and Miller. “In light of those events, we trust that UP will work in a transparent manner to avoid similar disruptions to the nation’s rail system. During the call (UP held a conference call detailing its plan yesterday), we were pleased by the contrast you drew with regard to UP’s planned implementation, including retention of sufficient employee resources and active communication with your customers.”

On yesterday’s call, Rob Knight, UP CFO, discussed a number of initiatives it is undertaking to achieve productivity gains in the coming years, as well as opportunities to further grow volume and price.

“Our initiatives have evolved,” said Knight. “We are now ready to move forward from piloting PSR principles to a full-scale implementation. At this stage…we have not yet quantified the magnitude or the timing of the savings we expect to realize from the new operating plan, however, we do anticipate significant benefits to be realized as the implementation is phased in across the network.”

UP’s Fritz said that by a number of measures it is evident UP has not made the kind of progress it expected in improving its service and productivity performance in recent months.

“We know we can be better,” he 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. In a nutshell, it is PSR principles implemented on the UP network, taking into consideration the unique characteristics of our franchise and our base customers.”

Fritz said that UP is not shy about adopting best practices from other railroads, adding that UP thinks the time is right for a broad implementation of PSR principles for UP.

“The label ‘Precision Scheduled Railroading’ obviously elicits excitement among investors given its notable success at Canadian National, Canadian Pacific, and now CSX,” wrote Ben Hartford, Robert W. Baird & Co. analyst, in a research note. “However, ‘vision without execution is hallucination’ -and focus turns to whether UNP can implement the PSR concept pioneered by the late Hunter Harrison. If successful, we would have incremental confidence in UNP's ability to sustain its next phase of [return on asset] improvement.”