Union Pacific has enough capacity to handle projected merger-related traffic growth thanks in part to the 24% reduction in active trains on the network since it fully adopted Precision Scheduled Railroading in 2019, Chief Executive Jim Vena told an investor conference last week.
UP (NYSE: UNP) and Norfolk Southern (NYSE: NSC) have said that their merger should produce an 11% surge in volume, including diverting 2 million truckloads annually to rail.
“This is real important,” Vena says. “People ask us, ‘What’s the railroad like? What kind of capacity do you have?’”
Since 2019, UP has boosted train length by 25% while handling its tonnage on 24% fewer trains. “That’s who we are at Union Pacific,” he says.
UP also has made terminal investments, including at its key Englewood Yard in Houston, to boost capacity.
“As we bring in the 2 million loads that we’ve talked about, that we see as an opportunity out there, we’ll be able to put them on the railroad without spending or worrying about whether we have the capacity,” Vena says.
UP and NS have told regulators that they plan on spending $1.1 billion on main line and terminal improvements. Most of the main line projects involve lengthening sidings and adding sections of second main to permit the smooth operation of longer trains on Norfolk Southern’s single-track former Wabash and Southern Railway routes. The terminal projects are mainly focused on intermodal terminal expansions.
Car velocity on UP, measured by car-miles per day, has increased 8% since 2019. “Our customers win when freight car velocity increases,” Vena says. “They need less cars to be able to handle the same amount of product. They need less inventory …. and when we merge, we’ll take it up to another level by removing touch points.”
UP and NS have said that by eliminating interchange handlings they will take 24 to 48 hours out of the transit times of shipments that the two railroads currently exchange. Some industry executives have said privately that the gains could be even greater.
The amount of change in post-merger train volume, Vena says, is relatively small and won’t have a major impact on lineside communities.
“It’s very small, the amount of true change. Because, listen, we’re talking about 2 million loads. That’s 36,000 containers a week. We double stack them. We put 500, 600 per train. If you divide that by seven days, you really don’t end up with that many more trains a day above and beyond what we have. Okay? … It’s not the big wholesale change like some people have made this number out to be,” Vena says.
The railroads’ operating plan, outlined in the merger application federal regulators rejected as incomplete in January, projected launching two dozen new trains, split equally between intermodal and merchandise trains.
“Son of a gun, some people say, can it be 2 million loads? There’s other people that have told us it’s way higher,” Vena says.
CPKC (NYSE: CP) is behind on its Canadian Pacific-Kansas City Southern merger goal of converting 64,000 cross-border truckloads to rail annually. CPKC CEO Keith Creel, meanwhile, has expressed doubts about UP’s ability to hit its merger growth target within three years.
J.P. Morgan (NYSE: JPM) analyst Brian Ossenbeck asked what’s different about the UP-NS merger that gives the railroads confidence that they can take 2 million truckloads off the highway annually?
“We are not a strictly north-south railroad,” Vena says of CPKC. The UP and NS networks are vastly larger and span the west and east, respectively.
“There’s a big difference … if you take a look at the network that Union Pacific has versus Canadian National (NYSE: CNI) or Canadian Pacific,” Vena says.
The UP CEO reiterated his support for reciprocal switching, which allows sole-served customers to obtain access to a second railroad. He also said that UP and NS, rather than following the railroad tradition of always seeking the longest haul, will allow shippers to select their own interline routes.
BNSF (NYSE: BRK-B), CN, and CPKC, however, have been critical of UP’s committed gateway program, which they say will apply to very few customers.
“Think about that. Those are huge ways that we’re changing the way the railroad industry is going to move ahead,” Vena says. “People discount them as small. They are not small. Absolutely, it changes and it makes us all have to compete at a higher level.”
Vena spoke at the J.P. Morgan Industrials Conference in Washington on March 18.
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