Union Pacific CEO: Train Braking Technology Is Clogging the Railway

By Paul Ziobro

Union Pacific Corp. says new technology meant to prevent train accidents is causing congestion on the railway.

The largest U.S. railroad based on revenue is in the midst of implementing positive train control, or PTC, technology, which is designed to automatically stop a train to prevent collisions or derailments. But activating the system in certain areas is causing problems as the railway works out kinks in how it operates.

"As we turn on more of our footprint, that requires us to debug and learn the system," CEO Lance Fritz said in an interview Thursday, adding that sometimes the new technology "makes a train stop where it's not supposed to stop."

Mr. Fritz said the problems have contributed to a slowdown in the network recently, including trains running 5% slower and spending 12% more time in terminals during the fourth quarter. Problem spots are in Chicago, Kansas City and Houston.

Certain areas also have seen a buildup in inventory and the railroad is unable to keep up, he said. "We're not executing our game plan like we have historically."

U.S. railroads have spent most of the past decade implementing PTC, which the industry estimates will cost around $10 billion to install and another $500 million to maintain annually. Congress has pushed the deadline to complete installation to the end of 2018.

Union Pacific has installed the technology across 60% of its network where required. It plans to spend another $160 million this year on the project.

Through Oct. 31, Union Pacific had installed the technology on nearly 2,000 out of 5,600 locomotive where it was required, according to the railroad's latest report to the Federal Railroad Administration.

The service problems caused a rise in Union Pacific's operating ratio to 62.6% from 62% a year earlier. Railroads aim to reduce the metric, which is a reflection of profitability.

Union Pacific shares fell 5.5% in recent trading to $133.43. They are still up 20% over the past year.

The railroad expects the problems to clear over time. For 2018, the company expects the operating ratio to drop. It also expects more volume to move through its network, higher prices and significant cost cuts.

In its fourth quarter, the company logged a 5% increases in revenue, helped by higher volume, fuel surcharges and prices. Net income rose sharply to $7.3 billion, helped primarily by the recent corporate-tax cut. Excluding that, net income rose about 5% to $1.2 billion.

Union Pacific hasn't changed its capital-spending outlook as a result of the new tax law, which benefits it and other railroads due to the lower tax rate. It still plans to spend about 15% of revenue on capital expenditures.

The railroad did announce plans to build a new $550 million railroad facility called a hump yard in Texas that will sort long trains. The Brazos yard is being built in anticipation of more business moving through the region. "We see that our existing infrastructure is going to be overwhelmed at some point in the future," Mr. Fritz said on the earnings call.

(END) Dow Jones Newswires

January 25, 2018 17:06 ET (22:06 GMT)

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