News / Fritz ousted from UP the latest pointer to change in US railways

Photo: David Johnson

Class I railways remain in the public eye, as the debate over the derailment of a Norfolk Southern (NS) train in Ohio last month has led to allegations that the railway may have destroyed evidence of the accident.

On a less dramatic note, the news that Union Pacific (UP) is parting ways with CEO and president Lance Fritz indicates a shift in the company’s strategy.

Arguably, the latter development may be part of a dynamic ushering in greater change in the industry, perhaps with a stronger focus on customers and employees.

The announcement from UP on Sunday that it was looking for a successor to Mr Fritz had been a long time coming. The board engaged a consultant a year ago and formed a ‘task force’ of directors in November. Things apparently came to a head late last week when Soroban Capital Partners, a hedge fund that holds about $1.6bn of UP stock, pushed to go public on the issue.

On Sunday, Soroban published a letter to UP, expressing its “displeasure with years of persistent operating underperformance” and asked the board to “install new leadership who can get the trains to operate safely and on time”.

The hedge fund wanted “a seasoned executive with a proven track record of railroad operating excellence”. And the letter went on to say that, among all Fortune 500 companies, UP had been rated by employees as the worst place to work.

“The company is not delivering on its commitment to customers, and the Surface Transportation Board has singled out UP as providing the worst service among the Class I railroads,” it added.

The STB had summoned senior UP executives to Washington in December for a two-day hearing on its massive use of embargoes to deal with congestion in its network.

Soroban stated it had no confidence that the current UP leadership could lift operational performance and warned that this constituted “a heightened risk of permanent damage to the franchise if left unaddressed”. It added that UP had the worst shareholder return in the industry.

The company’s Q4 results missed analysts’ expectations, with net income down 4.3%, and its shares have fallen about 20% in the past 12 months.

Lee Klaskow, senior transport and logistics analyst of Bloomberg’s intelligence unit, attributed UP’s poor performance record, compared with other US Class I carriers, in part to “the hand it has been dealt”, noting that the eastern carriers did not have to contend with comparable congestion at gateways, and in part to execution of its operating plan.

“They need somebody to get the operation in order so they can sell service,” he commented, noting that competition for UP would increase after the merger of Canadian Pacific and Kansas City Southern.

The past two years have seen new CEOs take the helm at BNSF, CSX, NS and Canadian National – a new crop of leaders that appears to be more employee-facing and customer-facing, said Mr Klaskow.

Recent agreements with labour unions on sick benefits, a bone of contention during last year’s contract negotiations, also suggest a “gentler” rail industry, he added, noting that this does not align with precision schedule railroading (PSR).

PSR has come under a lot of flak from frustrated shippers and importers facing embargoes, delays and detention & demurrage charges. STB chairman Marty Oberman has voiced concerns that the pursuit of PSR may have been a major cause for the service meltdown, arguing that the carriers had been too aggressive in their staff cuts.

Pressure over safety, after the NS derailment last month, may be adding to the change in the industry. Labour unions were quick to stress that the presence of three crew members on the stricken train may have resulted in faster execution of emergency measures than would have been the case with only one, a snipe against ambitions in the industry to reduce minimum crew size to a single employee.

Yesterday, a group of senators introduced a bill “to enhance safety requirements for trains transporting hazardous materials”, which, among other things, calls for an accelerated phasing-out of older tank cars and tighter inspection of rail cars.

It also proposes that “no freight train may be operated without a two-person crew, consisting of at least one appropriately qualified and certified conductor and one appropriately qualified and certified locomotive engineer”.