Tuesday, November 13, 2012

UP, with short lines, strives for customer value

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Union Pacific's annual gathering of short lines in late October was all about giving short lines access to more tools, neatly arranged for ease of access, to bring more business to the railroad.

UP CEO Jack Koraleski opened the proceedings by noting that a quarter of the Class I railroad's $21 billion annual revenue stream involves freight moves that touch one or more of its direct connections with some 180 Class II and III railroads. (UP also touches another 90 Class II and III names beyond.) Creating customer value, says Koraleski, takes clear communication, teamwork and agility. And it's here UP's "diverse franchise"— a term he also used on the third-quarter call—plays well to short lines.

The Class II and III roads' innate ability to communicate, work together with UP, and stay nimble all at once is unequaled. So the more each short line knows about how its franchise can extend UP's access to markets, communicate that to UP, team up with UP to earn money from it, and be nimble in execution, the stronger the competitive advantage.

Short lines thus far in 2012 have done moderately well in the industrial products, chemical, and ag products commodity groups, and the outlook is for more of the same: no home runs but lots of singles and a modest year-over-year gain in revenue carloads. Lumber (dimensional and panel), pipe and sand relating to oil and gas drilling, and construction aggregates will be good for short lines, as will food products from grains to granola. Ethanol and DDGs will be OK but not spectacular.

Operationally, the UP message to short lines is there are no trade-offs when it comes to safety, service and value in the eye of the transportation buyer. Being a safe railroad adds to the value proposition by reducing the chance for expensive errors. In service, the goal is to eliminate delay and the costs associated with delay. And one adds value to the transportation product by examining every part of the process—"granularity"— and involving operating crews and customers in local service design.

Take equipment-days between loads. Right now it's eight and a half days, just slightly more than the record set in 2009, but it does not include time on a short line. I remarked during the Q&A that not including the interchange-on to interchange-off time on a short line can convey an inaccurate picture of how cars are really turning. I expect we may see some changes here.

Tom Jacobi, VP for ops systems and practices, showed how short lines can help UP enhance cycle-time and create customer value by pre-blocking cuts to run non-stop through the class yards. One short line in particular built a fact-based case and communicated that to UP effectively enough that UP marketing bought in, and UP ops was agile enough to make it work. And that, I think, was what this meeting was all about: giving short lines access to more tools, neatly arranged for ease of access, to bring more business to the railroad.

Roy Blanchard

Roy Blanchard is principal of The Blanchard Company and a Contributing Editor to Railway Age.