CEO PERSPECTIVE: Smart Capital Investment Strategies

As part of a special series in Railway Age’s March 2021 issue, 11 North American railroad CEOs address the daunting challenges the freight rail industry faces as the 21st century enters its third decade—from operations and technology to marketing and growth. Here, Lance Fritz, Chairman, President and CEO of Union Pacific, discusses how the Class I railroad’s CAPEX strategy focuses not only on maintaining and improving our network, but also on expanding it.

When developing our capital strategy, our UP team drives forward—with our rearview mirror in plain sight. We have to, because unless you take into account the path you’ve cleared, it’s impossible to see where you’re headed. That was certainly the case as we looked at 2021. 

Union Pacific’s capital investment strategy builds on our accomplishments by reinvesting in our current infrastructure for safety and reliability; using targeted investments to improve our network’s efficiency, productivity and service; and investing to reduce our environmental impact and enhance customer experience, positioning us for future growth.

— “We never stop investing in technology to create a platform that improves the customer experience, reduces our carbon intensity and achieves continued productivity.” —

Our 2021 capital budget of $2.9 billion touches on all of those areas while delivering value to our shareholders through efficient use of capital. Now some might say the spend is holding the line considering the budget is almost flat compared to 2020’s spend, but to understand the numbers, you have to look at what we’ve done as a railroad for the past three years. 

Since we implemented Unified Plan 2020 at Union Pacific—our brand of Precision Scheduled Railroading (PSR)—we’ve seen our adjusted operating ratio go from 61.6% in fourth-quarter 2018 to an all-time quarterly low of 55.6% in fourth-quarter 2020. We basically reinvented the way we operate the railroad, and as a result, leveraged the best rail franchise in North America to generate safe, reliable and efficient service for our customers, while at the same time generating significant capacity. 

Looking at the hard numbers, about 80% of our planned capital investment this year is replacement spending to harden our infrastructure, replace older assets, and improve the safety and resiliency of the network.

It’s that infrastructure investment—along with the strength and perseverance of our employees—that allowed us to quickly react to service issues like the crippling arctic vortex that struck the Midwest and South this past February, or that positions us to provide efficient service as we continue to unbury West Coast ports hampered by slowdowns generated by the pandemic.

Here’s where the future part comes in, as in how we’re going to grow into the next decade.

Our capital investment strategy focuses not only on maintaining and improving our network, but also on smartly expanding it in ways that benefit our service offerings and position us to grow as our customers’ business grows. 

A perfect example of this is our new intermodal ramp in the Twin Cities. With minimal capital investment, we turned an existing yard into a small intermodal terminal, allowing us to provide new service to an attractive market in a quick and efficient manner. This new offering includes domestic intermodal service between the Twin Cities and Los Angeles, expanding our customers’ reach to key Upper Midwest markets.

We started out small in January with capacity of roughly 20,000 loads, with future plans to build out to more than five times that capacity. We’re not stopping there. We continue to pursue additional expansion projects to our meet our projected growth targets.

— “We recognize we must have the flexibility and agility to adjust our capital investment strategy as our business demands—and our customers’ business requirements—evolve.” —

We remain focused on modernizing our locomotive fleet through the upgrade of older core units. Generating a longer life out of an existing asset, boosting its reliability, and improving its fuel efficiency is a win for all stakeholders. The plan also includes targeted freight car acquisitions to support replacement and growth opportunities. 

We continue to invest in capacity projects on our network to improve productivity and operational efficiency. Plans call for completing more than 20 siding extensions focused in the southern and Pacific Northwest portions of our network. These sidings support our train length initiatives and target future growth areas for our business. They also provide operational flexibility, allowing us to pass trains more efficiently and with priority, which means improved customer service as our on-time performance improves. 

We never stop investing in technology to create a platform that improves the customer experience, reduces our carbon intensity and achieves continued productivity. We also remain focused on our enhancements to our energy management system to reduce fuel consumption, leveraging integration with our PTC platform.

Despite this planning, we recognize we must have the flexibility and agility to adjust our capital investment strategy as our business demands—and our customers’ business requirements—evolve. 

For example, earlier this year, UP announced it made the strategic decision to not proceed with additional investments required to complete the freight car classification yard in Brazos, Tex. While the company’s long-term growth outlook in the Southern Region remains unchanged, the implementation of Unified Plan 2020 created capacity at existing facilities to effectively handle that growth. 

On the other hand, later this year, we’ll wrap up enhancement projects that started in late 2019 at our Englewood Yard in Houston, an important asset that supports our ever-growing chemical and plastics business. The $108 million investment included upgrading the hump computer system and constructing a number of track extensions. UP employees closed out 2020 by installing a new master retarder at Englewood, which, along with those other improvements, will allow us to process more cars through Houston than ever. 

Taken as a whole, our capital investment for 2021 supports productivity and operational efficiencies that make Union Pacific the pride of the transportation industry and positions us for a year of unprecedented growth. 

There’s no question that I’m proud of where we’ve been and what our employees have achieved, but I’m even more hopeful about where we’re headed. 

Read more of Railway Age’s special CEO Perspectives series:

• Ian Jefferies, Association of American Railroads: Sustainable Economic and Legislative Policies
• Katie Farmer, BNSF: Leveraging Advanced Technologies
• Keith Creel, Canadian Pacific: Growing the Top Line
• JJ Ruest, CN: Improving Customer Supply Chain Visibility
• Jim Foote, CSX: Railroads as a Sustainable Business
• Pat Ottensmeyer, Kansas City Southern: Maximizing USMCA for Cross-Border Growth
• Jim Squires, Norfolk Southern: Building the Digital Railroad of the Future
• Peter Gilbertson, Anacostia Rail Holdings: Providing Outstanding Customer Service
• Dean Piacente, OmniTRAX: Building Better Communities Through Industrial Development
• Dan Smith, Watco: Integrated Transportation Services Fuel Growth