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Back on track: how an old-fashioned Kansan with railroading in his blood breathed new life into the UP.

By any account, Union Pacific's takeover of Southern Pacific in 1996 and 1997 was a train wreck. Rail cars bound for Houston from Chicago ended up in Los Angeles, thanks to incompatible software and a shortage of locomotives. Coal didn't reach electric utilities. Plastics molders didn't get their pellets. All in all, the botched merger cost Union Pacific's customers $2 billion. In turn, investors punished the venerable, Omaha-based company, forcing down its stock price from $73 in 1996 to $37 in 2000, wiping out about $9 billion in market capitalization.


Yet this is a company planted firmly in prairie sod, where an exec's word is a bond. Had Union Pacific been a high-flying firm typical of the go-go '90s, its chief executive might have bailed out on a golden parachute or brazenly proposed yet another merger.

Not so Richard K. Davidson, who became Union Pacific's CEO during the height of the crisis, in early 1997. The spare-worded Kansan and former railroad brakeman characteristically took the heat himself. "I lived on an airplane for about, oh golly, six or nine months," he says in a flat Midwestern accent. "I went from meeting to meeting and government agency to agency apologizing for what was happening but assuring people that we would get it fixed." When he faced a hostile Surface Transportation Board hearing, his statement was notably lacking in hubris: "Our company is embarrassed at the time it has taken to recover from our congestion crisis."

Dick Davidson's mid-American values seem to consist of straight talk, a steady gaze and a handshake. Not one to throw $2-million toga parties in Sardinia, he lives modestly with his wife, Trish, near the more down-to-earth Omaha. For fun, he goes to work, although he's been known to head off into the fields, shotgun in hand, searching for pheasant or quail. "You look at the other CEOs out there and a lot of them are accountants or lawyers," says Davidson. "I think it's just my good fortune that I know what I am--a son of toil."


This proletarian mind-set, combined with vast investments in advanced information technology, saved Union Pacific. Davidson spent $2.8 billion beefing up computer systems and integrating car coding and routing between the underfinanced Southern Pacific and its new owner. The pieces are still not all in place. Just this past fall, the railroad, along with its competitors, was blindsided by a bumper grain crop and a shortage of rail cars, causing more foul-ups. But Union Pacific has made a solid comeback. Its stock is up to the $65-per-share level and recent third-quarter earnings beat Street estimates by 6 cents and earned record revenues.

The re-energized UP is serving up strong competition against Burlington Northern Sante Fe, its historic and faltering competitor in the West and Midwest. The two railroads battle over low-sulfur coal from Wyoming, NAFTA products from Mexico and cheap consumer goods from China arriving at West Coast ports. UP directors are happy with the results. "I've always been a strong advocate of Dick. He's a no-nonsense, up-from-the-ranks kind of guy who understands the business," says Philip F. Anschutz, the Denver billionaire who is Union Pacific's chairman.

Davidson, his colleagues say, never forgets where he is from--a poor farm family making a tough living in the middle of Kansas. When he was 18, in 1960, he embarked on a career and style that would serve him the rest of his life. Lacking college money, he began working nights and weekends as a brakeman on the Missouri Pacific railroad, later bought out by Union Pacific. He climbed the ladder of the working rails, becoming a conductor and later, supervisor, while earning a history degree from Washburn University in Topeka.

He learned many practical lessons along the way. One of the sharpest came in 1965 from Downing B. Jenks, the late chairman of the Missouri Pacific. There was a massive flood in Texas and the railroad sent all the young members of its management training program, including Davidson, down there to get experience handling emergencies. Recalls Davidson: "Lo and behold, there I was up to my waist in water working on a piece of track that was washed out. Here came Mr. Jenks--the chairman of the company and the vice president of operations. That really set a tremendous leadership example of how you get out and just prove to everybody that you're willing to work as hard as or harder than anyone else in the company."

Unbeknown to Davidson, such experiences were prepping him for his career's biggest challenge, fixing the merger mess. As part of that, he needed to finesse the very different corporate cultures of several railroads. For example, the Missouri Pacific, which was bought by Union Pacific in 1982, had a reputation of being a laid-back, good-old-boy kind of route. By contrast, Southern Pacific was seen as a penny-pinching, second-best outfit struggling to survive.

The aristocrat of the bunch was Union Pacific. Its predecessor company had pounded in the golden spike in Promontory, Utah, in 1869 with the Central Pacific railroad, creating the first transcontinental line. Later, international troubleshooter Averill Harriman, a major shareholder, added to UP's classy image. In rail's golden age in the 1930s and 1940s, UP's mustard-colored streamliners whisked celebrities like Mickey Rooney and Judy Garland across the country.

So pervasive was Union Pacific's cachet that when the merger went afoul years later, some Southern Pacific officials just threw in the towel, assuming that UP was simply abusing them, as it always had. Having come from the also-modest Missouri Pacific, Davidson was able to squelch that sentiment and move the newly combined teams quickly toward resolving practical problems.

Another change Davidson initiated was improving ties with customers. Historically, railroads have tended to hold shippers hostage on rates and operations. In this regard, Union Pacific was no shrinking violet. But after the disastrous 1996 merger, Davidson knew he had to win customers back, primarily to keep them from shifting even more to trucks. So, he began a wholesale change in sales attitude and created new, express services, such as the so-called I-5 Corridor, which expedites freight along Interstate 5 running from Seattle to Los Angeles. One new service cuts three days off the transport of interposal cargo from Mexico to markets in the eastern U.S., while a "Blue Streak" line rushes containers west to east.

Customers have noticed. "We went in to bid for coal business," says David L. Sokol, chairman and CEO of MidAmerican Energy Holdings, an Omaha-based energy firm, "and Dick and his team came up with innovative approaches. Usually, innovation in rail is an oxymoron."

IT: The Key to Survival

The biggest changes of all have involved rewiring the train and cargo controls covering 33,000 miles of track across 23 states. The two railroads faced major integration challenges. "We had a modern up-to-date computer system," says Davidson. "Southern Pacific had outsourced their work to IBM and so hadn't had much modernization over the years." The biggest problems showed up in former Southern Pacific territory around Houston and then across SP's southern route from Texas to California. Solving those issues took at least a year. Conflicting union rules between the two roads didn't help.

Even today, routing for the area around parts of Texas is still handled locally, in part because not all of the former Southern Pacific's systems are integrated. For most of UP, routing and traffic control are directed at Omaha's Harriman dispatching center, an old boxcar repair shop that has been converted into a tornado- and terrorist-proof bunker. Inside the darkened structure, 23,000 miles of tracks are displayed in color-coded monitors stretching hundreds of feet down big walls. L. Merrill Bryan Jr., the company's CIO, says the railroad spends about $200 million a year on its IT system. Another system to locate locomotives by remote control will cost $70 million.


IT is the key to survival, Bryan says. "We are extremely capital intensive," he says. "So we need to get more out of what we have." At the moment, 90 percent of customer reports, such as bills of lading, are online. But there's still room to grow; only 50 percent of "event" reporting, including accidents, is done electronically.

Logjams still occur, notably with grain shipments last fall. For the first time in several years, the U.S. has had a bountiful grain crop throughout much of the corn belt. It caught railroads short, causing growers to complain of slow shipments. A UP spokes-woman says reasons for the shortages include a dearth of rail cars: UP has 23,500 cars in grain service and has leased another 1,200. More grain is being exported to Mexico, which is positive, but it also takes cars longer to make their return trips for new loads. And UP has been short of train crews and locomotives. In late November, UP signed for 175 late-model SD70M locomotives with General Motors' Electro-Motive Division. It was UP's biggest buy since 1999 and is worth several hundred million dollars, signaling a strengthening economy.

Overall, Davidson, who is due to retire in two years, says Union Pacific's comeback should be replicated by the entire U.S. railroad industry. Rails may not be as fast as trucks, he adds, but trucking faces some of the same woes that bedeviled rails for years. "The infrastructure is getting crowded, it's getting worn out and there's not enough money to renew it all," Davidson continues. And, in fact, UP is jettisoning Overnite, its trucking unit.

Whether or not railroading achieves a big revival remains to be seen. Other railroads that went through the same type of merger blues as Union Pacific in the 1990s--Norfolk Southern, Burlington Northern Sante Fe and CSX--have not made as strong a recovery. But Davidson has the advantage of having railroading in his blood. That may very well be what it takes to transform UP into a 21st-century competitor.
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Title Annotation:Regional Report: Midwest; Union Pacific
Author:Galuszka, Peter
Publication:Chief Executive (U.S.)
Geographic Code:1USA
Date:Jan 1, 2004
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