Union Pacific rolls out ‘Unified Plan 2020’ to lower OR, improve network efficiency

Taking steps to lower its operating ratio (OR) and reach its objective to operate a safe, reliable, and efficient railroad, Omaha, Neb.-based Class I railroad Union Pacific (UP) this week rolled out its Unified Plan 2020.

Unified Plan 2020, said UP officials, is a new operating plan that implements Precision Scheduled Railroading (PSR) principles and will be introduced in various phases beginning on October 1 throughout the UP network.

PSR was created by late railroading legend E. Hunter Harrison whom passed away in December 2017, when he was running CSX. PSR requires cargo to be ready when rail cars arrive for loading or risk being left behind, a practice that served also both CP and CN well under his leadership, with both companies seeing multiple positive results in the form of lower operating ratios, improved service, record amounts of reinvestment into networks, as well as creating significant shareholder value.

UP said its expects the benefits of Unified Plan 2020 to result in a 60% OR by 2020, with an ultimate goal of a 55% OR. And it said that the first phase of the plan will be implemented on its North/South corridor, which will create more streamlined operations between Wisconsin and Texas, while further implementation across it network to occur by 2020.

Some of the “key principles” of Unified Plan 2020 cited by UP include:

• shifting the focus of operations from moving trains to moving cars;
• minimizing car dwell, car classification events, and locomotive power requirements;
• utilizing general-purpose trains by blending existing train services; and
• balancing train movements to improve the utilization of crews and rail assets

“We are not currently meeting customer expectations,” said Lance Fritz, Union Pacific's chairman, president and chief executive officer, in a statement. “Unified Plan 2020 is our path forward to secure our place as the industry leader in safety, service and financial performance.”

On a conference call with Wall Street analysts earlier today, Rob Knight, UP chief financial officer, said that at the company’s investor conference in May UP discussed a number of initiatives it is undertaking to achieve productivity gains in the coming years, as well as opportunities to further grow volume and price.

“Our initiatives have evolved,” said Knight. “We are now ready to move forward from piloting PSR principles to a full-scale implementation. At this stage…we have not yet quantified the magnitude or the timing of the savings we expect to realize from the new operating plan, however, we do anticipate significant benefits to be realized as the implementation is phased in across the network.”

In addition to expected efficiency gains from this new plan, Knight said UP will continue to see productivity improvements from its other initiatives in the form of positive volume growth and pricing above inflation to also contribute to UP achieving its OR goals.

UP’s Fritz said that by a number of measures it is evident UP has not made the kind of progress it expected in improving its service and productivity performance in recent months.

“We know we can be better,” he said on the call. “I believe a large part of the problem is attributed to the complexity in our network transportation plan that has emerged over time, compounded by significant changes in business mix. Unified Plan 2020 is a way of addressing that network complexity. In a nutshell, it is PSR principles implemented on the UP network, taking into consideration the unique characteristics of our franchise and our base customers.”

Fritz said that UP is not shy about adopting best practices from other railroads, adding that UP thinks the time is right for a broad implementation of PSR principles for UP.

“The label ‘Precision Scheduled Railroading’ obviously elicits excitement among investors given its notable success at Canadian National, Canadian Pacific, and now CSX,” wrote Ben Hartford, Robert W. Baird & Co. analyst, in a research note. “However, ‘vision without execution is hallucination’ -and focus turns to whether UNP can implement the PSR concept pioneered by the late Hunter Harrison. If successful, we would have incremental confidence in UNP's ability to sustain its next phase of [return on asset] improvement.”