Union Pacific Corp. says it will divide into three operating divisions by Nov. 1–all but conceding its troubled, 36,000-mile system is so big that managers can’t deal effectively with rapidly escalating problems.
The Midwest division headquartered in Omaha, the Southern division based in Houston and a Western operation based near Sacramento, Calif., will have virtual autonomy in operating trains within their regions, and further subdivisions are said to be under discussion.
“Originally there was a feeling we could manage the railroad more centrally, but we have discovered that it is wiser to put the authority into the field,” said Ed Trandahl, a spokesman for the railroad, which is headquartered in Omaha.
The decision comes almost exactly one year after Union Pacific operations began a gradual meltdown that resulted in the worst rail crisis in a quarter century. The railroad is again entering a harvest season that it already has said will be problematic.
The crisis came to a head last year as the railroad’s operations stalled, resulting in train crews abandoning their trains, rail cars never arriving at the intended destination and grain being left to rot on the ground because there weren’t any cars available for the record harvest. Some companies were forced to shut down because they couldn’t move their products.
Railroad officials said the problem was caused by their inability to successfully absorb operations of the Southern Pacific Transportation Co., which Union Pacific acquired in 1996.
By December, the federal Surface Transportation Board, successor to the Interstate Commerce Commission, had taken the unprecedented step of ordering Union Pacific to allow competing railroads to use its tracks in order to move the thousands of tons of grain, plastic resin and coal that were stalled throughout the rail freight system.
Trandahl said the decentralization plan hopefully will prevent that gridlock from becoming a recurring event. “The regions will have a considerable amount of decision-making authority,” he said.
But Doug Rockel, railroad analyst for Furman Selz in New York, who said the decision was a smart move, pointed out that shippers could have been spared a lot of agony if Union Pacific had made that decision when it acquired Southern Pacific.
“Three years ago, there were three regions and three railroads,” said Rockel referring to the Chicago and North Western, which Union Pacific acquired in 1995, and the Southern Pacific. “Perhaps that should have told them something.”
The Union Pacific signaled its intention to divide the railroad into regions when it reported its second-quarter earnings, Rockel said. The railroad also is discussing dividing responsibility further by splitting its operations into sub-regions and districts, the analyst said.
For the first six months of the year, the railroad said it has lost $481 million, or $2.82 a share, compared with a profit of $344 million, or $1.39 a share, in the year-earlier period.
One of the three new UP regions will be headquartered in Houston, where feelings ran high against the railroad over poor service and freight backups.
Plastic manufacturers in that city united with local officials to force the transportation board earlier this summer to transfer some track used by UP to a competing railroad.
The board is gathering evidence about how the new regional plan would affect service in the Houston area. Houston officials couldn’t be reached for comment on whether the new regional approach would help assuage their anger.
Rockel and other railroad analysts were applauding UP’s decentralization move.
“They have been quite humbled by the problems with the integration of Southern Pacific,” said Rockel, adding the decision to split into regions “is a pretty smart move.”
Analysts said it will be difficult to determine which single measure undertaken by Union Pacific will pay off by repairing the railroad’s operations–assuming that happens.
The railroad has announced plans for more than $4 billion in capital spending; completion of a changeover to a new computer system, and now, splitting into regions.
While extensive information about the regional operation wasn’t available, Trandahl said the railroad wasn’t planning to create “another bureaucracy.”
