Union Pacific (NYSE: UNP) will roll down the Precision Railroading track.
In an announcement late Monday, the company said it would roll out Unified Plan 2020 that would “implement Precision Scheduled Railroading principles.” The plan will begin October 1 and be introduced in phases through the UP network.
“Resulting benefits are expected to help Union Pacific achieve its 60 percent operating ratio goal by 2020, on the way to achieving a 55 percent operating ratio,” UP CEO Lance Fritz said in the prepared statement announcing the launch of Unified Plan 2020.
Precision Railroading was created by the late Hunter Harrison, who had been at the helm of CSX only a short while when he died unexpectedly last December. Harrison previously had implemented precision railroading at Canadian National (NYSE: CNI) and Canadian Pacific (NYSE: CP).
While precision may be in the process name, exactly what entails precision railroading can be debated. It generally consists of the paring of unprofitable operations, the reduction in hub-and-spoke railroading in favor of more point-to-point service, the concurrent reduction in hump yards and pressure on keeping down the size of the workforce.
It has received particular interest after second quarter earnings showed both CSX and Canadian National with operating ratios less than 60%. The rest of the class 1 railroads were all above 60%, and CSX eastern competitor Norfolk Southern has especially heard criticism of its performance relative to CSX.
Norfolk Southern has indicated it will discuss its future at greater length on its third quarter conference call.
In a note to investors, Deutsche Bank’s transportation team led by Amit Mehrotra noted that the specifics in the Union Pacific statement included “shifting operational focus from moving trains to moving cars, minimizing dwell times, as well as other initiatives that are in keeping with PSR principals.” In the release Fritz said UP was “not currently meeting customer expectations” which the Deutsche team said “could imply potential for weak 3Q operating results, which in the context of CSX’s performance, could be driving an increased sense of urgency at UNP. “
Deutsche also said most forecasts assumed a 60% OR for UP by 2020, and that the team was surprised there was not a revision to that number in the announcement of the precision railroading shift.
UP executives will further discuss Unified Plan 2020 in a Wednesday morning conference call.
