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UP hauling tons of trouble
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February 26, 1998: 7:51 p.m. ET
Railroad slashes dividend, forecasts loss, faces federal agency's criticism
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NEW YORK (CNNfn) - Railroad company Union Pacific Corp. forecast weaker results for its first-quarter earnings while, at the same time, dealing with federal government criticism over its safety procedures.
UP will slash its quarterly dividend to 20 cents a share from 43 cents and seek to raise up to $1 billion in financing to alleviate its rail traffic congestion problems.
The company also said it expects to post a loss for the 1998 first quarter as a result of the problems and the costs of implementing its recovery plan. Union Pacific Chairman Richard Davidson told shareholders that cash flow was likely to remain depressed pending a full recovery while congestion and delays plaguing the company's Texas and Louisiana systems could affect business in the second quarter.
"There is no question that we will continue to see our business impacted throughout the first quarter and perhaps into the second quarter while we get this thing back on its feet," Davidson said.
Union Pacific said the dividend cut will reduce its cash requirements by $230 million a year, giving it more money to expand rail yards and track capacity.
It was the second blow for the railroad Thursday. Earlier, the U.S. Federal Railroad Administration revealed its safety recommendations for Union Pacific after a string of accidents last summer that killed seven and triggered a government review.
FRA Administrator Jolene M. Molitoris said the merged Union Pacific and Southern Pacific railroads created a "culture" in which the "companies had varying attitudes toward safety and a primary focus on improving operational efficiency instead of safety."
Union Pacific is the nation's largest railroad, operating 36,000 miles of track in the western United States. The company is based in Omaha, Neb.
The FRA review was launched last year after UP had five major collisions between June 22 and Aug. 31, resulting in the deaths of five employees and two non-UP workers, who were trespassing.
The FRA report, which was the result of two safety audits between Aug. 23 and Nov. 7, concluded that UP had operational problems in the following areas:
- Inadequate staffing at various locations on the UP system resulting in problems of fatigue among crews;
- Unsafe practices by supervisors and dispatchers due to lack of training;
- "Harassment and intimidation" of employees by UP managers when trains were delayed due to safety concerns;
- Incorrect drug and alcohol testing procedures;
- Improper maintenance and inspection of the UP locomotive fleet.
Union Pacific Railroad President Jerry Davis said it was working closely with government officials to improve UP's safety record and asserted that progress already is being made. Year-to-date injuries are down by more than 40 percent and derailments down by 23 percent from a year ago, he said.
"We are also tackling several longstanding industry problems that impact safety, such as employee fatigue and other quality-of-life issues," Davis said.
To date, Union Pacific offficials estimate they have spent about $600 million on capital expenditures to revamp its flagging operations, up from initial forecasts of around $1.3 billion.
The FRA said it is working closely with the carrier to implement change on the railroad. Union Pacific has initiated some steps, including speeding up its hiring to reduce the workload on train crews, providing crews with the right to guaranteed time off, and revamped training programs.
The report came just one day after the FRA released its criticism and recommendations for rival rail carrier CSX Transportation Inc.
Trouble around every bend
Trouble seems to have waited around every bend of the track lately for Union Pacific. Soon after the company launched its $3.9 billion acquisition of Southern Pacific, the railroad came under fire from competitors, customers and federal authorities.
The merger eventually went through, but at a high cost to Union Pacific. Infrastructure problems at the troubled Southern Pacific lessened any boost Union Pacific (UNP) might have gotten from the merger.
That wasn't the worst of UP's problems, however. Union Pacific began an aggressive cost-cutting strategy resulting in the downsizing of crews. Then what would normally have been a good thing happened.
Business picked up.
Suddenly, Union Pacific no longer could keep up with the shipments it was carrying. Service disruptions resulted in delays of shipments of many commodities and materials. As a result, competitors like Kansas City Southern Industries (KSU) and Burlington Northern Santa Fe Corp. (BNI) were able to grab away some market share.
Union Pacific's problems aren't as widespread as they may seem, contended railroad analyst Terry Gardner of Deutsche Morgan Grenfell. He said the Houston hub has become UP's main area of congestion, but that other areas are showing improvement.
Gardner also said that Union Pacific, with its wide-ranging rail network, has an advantage over its smaller competitors. "It's one thing to have access to a shipper. If you don't have access to the destination of that freight, it changes the outlook," Gardner said.
"If they can turn around their service, they should be able to win back business."
-- by staff writer Randy Schultz
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