Jack Koraleski likes to imagine what Abraham Lincoln would think of the railroad he helped create a century and a half ago.
What began with laborers on a grueling westward push through wilderness is now a complex, high-tech network. The city that saw the railroad's first spikes is now home to Union Pacific's eight-year-old headquarters tower and a dispatch center. From Omaha, some of the railroad's 44,000 workers can monitor trains moving across a 23-state network, detect safety problems in trains hundreds of miles away and talk to customers as far away as China.
Lincoln would see a company that's become the largest railroad in North America, one that operates 8,200 locomotives over 31,900 route miles and finished last year with a net income of $3.3 billion and increasing returns for shareholders.
And he'd find a railroad that, in this milestone anniversary year, says it is poised to continue its strong streak — though it will face plenty of new challenges, from strong competition to new leadership to significant ups and downs in some of its biggest business categories.
“The thing that's really kind of cool about it is, as much as people are really into the history of the 150th, they're even more so interested in where we go from here,” Koraleski said. “I think the thing that really resonates with people is when they think of Abraham Lincoln: 150 years ago, he wanted to build a railroad that would connect the East and the West. But we've taken it way beyond that, because now we're connecting America with the world.”
U.P. ended 2011 on a roll.
Despite a sluggish economy and devastating floods and drought conditions in crucial areas of the network, the year was the railroad's most profitable on record. In the last quarter of the year, it set records in several financial categories and reported its best-ever customer satisfaction ratings. The momentum carried into the first quarter of this year, which was the ninth consecutive record-setting quarter.
In March, however, the railroad hit an unexpected bump. Jim Young, U.P.'s top executive since Dec. 31, 2005, and chairman of its board of directors since early 2007, announced he would take a leave from his roles as president and CEO to undergo treatment for pancreatic cancer. Koraleski, then serving as executive vice president for marketing and sales, would fill in, and a handful of other executives would take on new roles as part of the reshuffling.
Five months later, the company is rolling forward with Koraleski at the helm, though Young continues to serve as chairman of the board. Between treatments, Young keeps in regular contact with executives, sometimes attending meetings.
“We all get phone calls,” Koraleski said.
The company has declined to release details about Young's condition or his prognosis, though Koraleski says his former boss is handling treatments well and “in good spirits.”
While Young is absent from day-to-day operations, executives say little has changed in terms of the railroad's goals or approach to business. Many of the company's leaders have worked together for decades and already had a major influence on the company's direction.
“A lot of people said (after Young's announcement), ‘Are we going to change things?'” Koraleski said. “And a lot of people said, ‘Please don't change things.'”
Analysts who follow the company said they haven't noticed much of a wrinkle in U.P.'s progress, though they acknowledged it can take several quarters before any major issues —for good or bad — start to show up after a leadership shakeup.
“The results show there's been a steady hand on the tiller, they're following the same flight plan, and that's fine by me,” said Anthony Hatch, a New York-based independent transportation analyst.
Any financial ups and downs caused by new leadership are likely to be blurred, at least for a while, by some dramatic changes in three of the railroad's businesses: coal, chemicals and industrial products.
Over the last several months, with a perfect storm of unusually warm weather, record low natural gas prices and concerns over environmental regulations, demand for coal has plummeted. By the first quarter of 2012, the number of coal cars moving on U.S. railroads was at the lowest number in 18 years: about 1.5 million carloads. In the second quarter, coal volume dropped by 17 percent, forcing coal revenues down by 9 percent.
It's a worrisome trend for a railroad that counts coal as its largest single commodity. Last year, freight revenue from the railroad's energy division —which is largely coal — was $4.1 billion, which represents about 22 percent of overall freight revenue.
Talking to investors this month, however, U.P. executives said they expect that part of the business to pick up again in the third quarter and return to normal levels by the end of the year.
The railroad will get some help from growing demand from overseas buyers. In the past, a good year for coal exports meant 1 million to 2 million tons. Last year, U.P. moved 5 tons of export coal. This year, it's projecting a number as high as 8 tons.
But the bigger piece of the story is the reason U.P. was able to post best-ever quarterly results for the second quarter of 2012, even with its biggest business falling off a cliff.
One big growth area: petroleum products.
Not long ago, U.P. saw chemicals as a business that wasn't going anywhere fast. The producers making money were overseas. As recently as 2009, the railroad was only moving about 5,200 carloads of crude oil each year, which made up less than one-tenth of 1 percent of overall revenue.
Then the shale drilling boom began.
By 2011, volume was up to 37,000 carloads. This year, the railroad expects to move more than 100,000.
And it wasn't just oil. Companies drilling in North Dakota and Texas needed materials to do their work — pipe, sand, minerals, cement — and almost overnight, U.P. was seeing its business surge. Here's what's happened since 2009:
» Frac sand shipments are up 265 percent.
» Pipe shipments have doubled.
» Overall shale-related volume is up by 400 percent.
“We get a chance to play a part in almost every piece of that supply chain,” said Brad Thrasher, vice president and general manager of U.P.'s industrial products division.
That means U.P. is working quickly to build up its facilities in high-traffic areas like Louisiana, home of several oil refineries. It's spending $200 million in the state to add track and build a new rail yard, among other projects.
And while BNSF Railway is the railroad with the bigger presence in North Dakota, U.P.'s southern lines stand to be a major asset, said transportation analyst Michael Baudendistel, of Stifel Nicolaus.
“U.P.'s franchise is very strong in Texas, and they're going to benefit from that,” he said.
Thrasher said he expects the growth to be more than a flash in the pan.
“The booming markets, the drilling-related, energy-related commodities, that will do well for a long time,” he said.
Continued growth, of course, has to be about more than taking advantage of the latest booming market.
Both Hatch and Baudendistel said U.P. has a formidable competitor in the other big western railroad, BNSF, which is owned by Omaha's Berkshire Hathaway. BNSF outpaces U.P. in some areas, including its intermodal (freight container) business.
Hatch said U.P. needs to capitalize on the things it does best and some of its system's advantages. International business — which now makes up about 35 percent of its overall trade — is one big area for growth. The railroad is expanding its presence in Asia and South America, with everything from cars to grain.
U.P.'s international business also will benefit from a $400 million investment in a sprawling new facility in New Mexico, where containers that come through ports in California will be sorted and put onto trains headed across the railroad's network.
It is the only American railroad with access to all six rail entry points to Mexico, which is becoming an increasingly important source for imports and exports. U.P. also owns 26 percent of Mexico's largest railroad.
The trade with Mexico comes with its own set of challenges, not the least of which is a problem with drug-smuggling that led to fines and a yearslong court battle with the U.S. government. In late 2011, U.P. avoided having to pay $500 million in fines by agreeing to a deal under which it will spend $50 million over the next five years. Among the efforts now under way are the use of infared cameras and other sensors in train cars on the border and the development of a communication center for railroad staff, border agents and police.
It's one of several legal and labor issues that the railroad will continue to deal with in the future. Late last year, hundreds of thousands of rail workers were threatening to strike over contract issues. After weeks of negotiation, they settled on a five-year agreement, which should keep things relatively quiet in the near future, said Randall Brassell, a spokesman for the Brotherhood of Maintenance of Way Employees. The group represents 35,000 people who work on railroad tracks, bridges and buildings.
Brassell said safety issues are another big concern for workers and unions. U.P. has had recent cases, including one last week, in which federal officials levied penalties after the company allegedly retaliated against employees who had been whistleblowers about unsafe conditions.
“It's an ongoing issue with all of our railroads,” Brassell said. “From our perspective, we hope (the number of incidents) decrease.”
Company officials are recruiting more people who can design and run high-tech tools and systems that will make the railroad run faster, safer and more efficiently.
It's the first railroad to operate a facility (in North Platte, at the world's largest rail yard) that can detect tiny cracks in wheels that could lead to derailments with the help of cameras and sensors. It has installed electronic detectors throughout the system that can sense a long list of mechanical problems and immediately relay the information to dispatchers in Omaha.
Each year, the railroad hires thousands of people, mostly to keep up with those lost to retirement or other opportunities. This year, it will probably make about 4,000 new hires. Depending on how fast the company grows, Koraleski said that number could get larger over the next several years.
When the railroad can't get enough of the right people in Omaha, it's opened IT satellite offices in other locations, including Boulder, Colo., and Austin, Texas.
Increasingly, a company that once had a headquarters filled with people from in or around Omaha is becoming more diverse, searching the country and the world for top performers.
Hatch said that has been and will continue to be a big asset for the company.
“I think Union Pacific always had a culture that regarded themselves as very strong,” Hatch said. “And that sometimes crossed over into arrogance, but it's a culture that trained good people. You wanted to join the Union Pacific, and you often got very first-rate and very self confident person.”
But despite its wider reach, Koraleski said there's no chance U.P. will outgrow the city in which it was born.
“Omaha will continue to be important for Union Pacific,” Koraleski said. “We're here for the long haul.”
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