Letter From Jack Koraleski
April 26, 2006
To our Customers:
In the first quarter 2006, Union Pacific handled all-time record volume for any first quarter, with a year-over-year increase of 4%. We did this while showing a slight improvement over a year ago in both our velocity and average terminal dwell time. Record volume with higher velocity came in large part because of the success of the Unified Plan and its 12% reduction in switches at intermediate terminals and a similar 16% reduction in the rate of en route work events. Better weather was also a factor, but of less importance than the improved health of our network.
Stronger financial results will drive investments
This improvement in operations was reflected in stronger financial results as well, which are a critical underpinning for increased investment in capacity of our main lines, terminals and commercial facilities. These investments must be made to accommodate traffic growth and meet future service needs. The company plans to spend $2.75 billion in capital in 2006. This includes $1.5 billion in track programs and $485 million in additional capacity and commercial facilities. We are also purchasing 200 new road locomotives, 102 low-emission yard locomotives, and 2700 freight cars. Many of the construction and maintenance programs are ahead of plan for the year, as our engineering department was able to take advantage of the milder winter and accelerate the work.
One of this year’s more significant capacity projects is the completion of over 50 miles of double tracking on the Sunset Route – 20 miles of which were finished in the first quarter. In addition, we are adding track capacity on our coal routes; building a new run-through track in North Platte, Nebraska; and constructing new intermodal and auto ramps in Salt Lake City, as well as upgrading the signal system across Iowa.
Additional capacity comes from more than just capital investment
Additional capacity is also created by operational improvements. For example, since every 100 rail cars on the system fill a mile of track, by reducing the inventory of cars to the optimal level, we improve fluidity.
Our Customer Inventory Management System (CIMS), which we began last year in the Phoenix area, is being expanded to many new locations across the network. This system matches the track capacity at customer locations with the flow of rail cars to and from the location. This balance means fewer cars in rail yards, which decreases terminal dwell time, reduces switching and improves throughput.
Our industrial engineering, or Lean, initiatives are also creating capacity by reducing the time it takes to service locomotives and equipment. The less time it takes to service or repair a locomotive, the more time it is available for moving trains.
Our focus remains on improving overall network fluidity
We occasionally hear concerns that our capacity projects favor one commodity group over another; but, in fact, a healthier and faster network benefits all traffic. For example, the capacity improvements on the Sunset Corridor also create more capacity on the Central Corridor through Nebraska and Wyoming. Some trains that are currently using the Central route can then move across the Sunset, opening up additional slots for SPRB coal. There are other examples of this as well, so we will remain focused on network fluidity.
Looking ahead to the second quarter
The undercutting program on the Joint Line that serves the Southern Powder River Basin that was suspended for the winter resumed earlier this month. This program, conducted by the BNSF, is necessary to remove large amounts of coal dust that compromise the track structure. Coal tonnage out of the basin was up slightly during the first quarter and is projected to increase in the second quarter. Loadings were impacted during the first quarter by a combination of mine production problems and rail issues. Integration of the mines, the railroads and the receiving utilities into a well-coordinated supply chain will be critical to meeting these objectives.
The Pacific Northwest has been a problem area recently as heavy congestion has created a spot rail car shortage that we are working hard to relieve. Congestion is beginning to ease, and we are restoring normal equipment flows back into the region. We are also working closely with the shortlines in the region to alleviate the shortage. We anticipate that this situation will substantially improve in the near future.
The Los Angeles Basin continues to be very busy as intermodal and other traffic in that area remains heavy. Additional capacity is essential in that area, but it is difficult to overstate the complexity of creating that capacity given the large number of public agencies, political jurisdictions and community groups involved in any discussion of investment.
While the economy continues to look strong, the price of diesel fuel remains at historically high levels. In the first quarter we were able to hold our consumption rate flat while moving more volume due to better train handling and more fuel-efficient locomotives. We will continue these and other efforts to optimize our efficiency, but we must continue our fuel surcharge program. Our objective remains to recover all of the increase in fuel cost above our $.75/gallon base – an objective we have yet to reach. It is not our objective to recover more than our incremental cost. The fuel surcharge issue will be discussed in more detail at the upcoming hearings at the Surface Transportation Board in May.
In conclusion, we remain focused on improving our efficiency and service as the demand continues to increase. We appreciate your support and will continue to communicate with you regularly through these letters.