Rail Trouble

By DAVID THIGPEN/KANSAS CITY

When Union Pacific Railroad executive vice president John Koraleski faces his customers these days, he prefers to stay on his feet rather than sit in one place, he says, "because it's harder to hit a moving target." It has been that kind of year for UP, the nation's No. 1 freight carrier, which moves millions of tons of coal, lumber, automobiles, corn--you name it--each day.

The most storied of American railroads, Union Pacific Railroad was launched in Nebraska during the Civil War with a handful of tracklayers, helped open up the frontier West and has since grown into a $12 billion-a-year colossus with 48,000 employees and 33,000 miles of track crisscrossing 23 Western states. Today UP handles some 30% of the nation's rail freight traffic. But during the past year, the legendary railroad has been groaning under the weight of embarrassing logistical breakdowns.

Customers from Dow Chemical, UPS and Amtrak to a small New Orleans molasses shipper and a Houston creosote supplier have watched in frustration as delays on UP's rails caused their products to pile up in railyards and ports, arrive hours or days late and sometimes never get to the destination at all. UP has been paying a hefty price too: as its rails began backing up, the company's profits took a hit, falling to $323 million in the first half of 2004 from $717 million in that period a year ago.

"When trains run slowly, sit in terminals and don't get where they should be on time, productivity is lower," says railroad analyst Donald Broughton of AG Edwards, "but labor costs, maintenance and equipment expenses rise, and that cuts into profits."

There's more at stake than the fate of one railroad company or getting a carload of molasses to the supermarket on time. The nation's four largest railroads, UP, Burlington Northern Santa Fe, CSX and Norfolk Southern, are a linchpin of the U.S. economy; when they don't run smoothly, it's tough for the economy to grow. And lately, for companies whose bottom line depends on moving goods on schedule, the situation has become dire. UPS, the huge parcel service, was recently forced to shift some shipments to trucks. Dow Chemical, which supplies, among other things, chlorine for water utilities, suspended operations at a Michigan plant until the distribution logjam clears. Passenger trains are affected too. Amtrak's Sunset Limited, which makes a thrice-weekly run from Orlando, Fla., to Los Angeles, has yet to arrive on time this year, rolling in as much as 40 hours late. Amtrak had to fly one near mutinous trainload of passengers to their destination when the Limited fell behind, leaving customers and Amtrak fuming. "There are other freight tracks we operate over that are busy," says Amtrak spokesman Mark Magliari, "but none are as bad as UP."

UP found itself under the hot lights earlier this month when representatives from the major railroads gathered in Kansas City, Mo., for a regulatory meeting convened by the federal Surface Transportation Board. Asked to explain what has gone wrong at UP, executive Koraleski (sent by CEO Richard Davidson to calm the waters) blamed the strangest of culprits: unexpectedly strong demand. UP executives were caught by surprise when the economy rebounded and freight volume spiked. (Normally, a 1% to 2% uptick is considered a good month, but UP's carloads increased 5.3% in May alone.) Meanwhile, a weakening dollar ratcheted up demand for U.S. goods abroad. On top of that, a chilly winter increased demand for coal, and a bumper harvest on Midwest farms flooded the system with crops. The upshot: in the first six months of 2004, UP has seen record volume, and the 2.37 million carloads it shipped in the second quarter was its most ever. "Our crystal ball did not see this coming," admits Koraleski.

But it gets worse: UP's planning in the preceding years set the firm up for the current crisis. About 30% of its work force--including engineers needed to run the trains--was allowed to take early retirement just before traffic began picking up. UP chief operating officer Dennis Duffy defends his railroad by saying that "predicting capacity is more art than science," and adds that UP is hiring engineers and buying new locomotives as fast as possible. But some railroad customers point out that Burlington Northern and Norfolk Southern have largely avoided UP-style bottlenecks through foresight and quick hiring. (CSX, caught short by sudden congestion on its lines, has also seen its profits tumble.) "This is not an industry that can easily turn on a dime," says Surface Transportation Board chairman Roger Nober. That's hardly news to UP's customers. At the Kansas City meeting, while Houston creosote broker Bobby Godfrey of KMG- Bernuth listened, UP's Koraleski admitted that the railroad has still not cleared backlogs in the Houston area and anticipates more delays. "I've been in this business since I was 20 and never seen it this bad," Godfrey says. For him and hundreds of other customers, there's no light yet at the end of the tunnel.