Union Pacific losing market share over capacity problems.

Once again, capacity problems are causing Union Pacific Corp. to turn away cargo headed east from local ports.

The bottleneck is the 760-mile "Sunset Route" from L.A. to El Paso, Texas, which the railroad inherited with its purchase of Southern Pacific Rail Corp. a decade ago.

To keep up with demand, Union Pacific needs to add a second set of tracks to more than half the route that doesn't now have them. But the line is saddled with long-term contracts that pay low rates, so Union Pacific can't afford to invest the $600 million it would take to complete the job.

Instead, it is upgrading the line piecemeal, and trains going in opposite directions have to take rums using the single set of tracks in most places along the line.

The lack of capacity has caused Omaha, Neb.-based Union Pacific's market share to drop to 45 percent in the intermodal market moving through the ports in the past two years, after traditionally splitting the amount of port cargo evenly with Burlington Northern Santa Fe Corp.

"Of course it hurts," said Kathryn Blackwell, a Union Pacific spokeswoman. "But what we need to do is balance what we think future demand is going to be with the capital we have available to invest."

She did not say how much cargo Union Pacific has had to turn away.

Past logjams

It's just the latest problem with the nation's largest railroad line that will affect cargo outflows from the ports. Last year, Union Pacific began a major hiring program after underestimating the number of people that would accept early retirement, creating a severe labor shortage that made for delays of a week or more in moving goods. (Ft. Worth, Texas-based Burlington Northern has the same problem, but to a lesser degree.)

The situation was exacerbated last winter when a series of torrential storms damaged tracks in several locations, including the Sunset Route.

Double tracks would be a significant improvement to service because they would allow trains to move freely in both directions. Under a single-track system, one train must idle on a side track and wait until a train moving in the opposite direction passes by before it may resume its course.

"As trade volumes continue to grow and there is congestion along that route, that would be a concern for us," said Ezra Finkin, legislative deputy for the Waterfront Coalition, representing many retailers that use the Sunset Route. "Given the volume of freight that is going through the region, they are (also) going to have to build more trains. But there is a fixed stock of track. That track can only handle so many trains per day."

A decade ago, Southern Pacific operated the line as a low-price option to faster and better-run routes to the Midwest offered by competitors. The operator signed long-term contracts with lower-paying customers that guaranteed volume on the line but at low profit margins.

Union Pacific inherited those contracts, some of which don't expire for another five years.

When Union Pacific bought Southern Pacific, less than a quarter of the Sunset Route was double-tracked. Since 1996, Union Pacific has added a second track for 100 miles of the route, and plans to invest $105 million for an additional 69 miles that will be complete in 2007.

Even then, less than half of the overall route will be double-tracked.

"What we need to do is balance what we think future demand is going to be with the capital we have available to invest," said Blackwell. "Strategically, how much capacity do you need?"

Burlington Northern, unburdened by below-market contracts, has taken a more aggressive approach in adding capacity.

All but 110 miles of the 2,190-mile route from L.A. to Chicago is already double-tracked. And the company will invest $50 million this year to add 4.5 miles of tracks through the Abo Canyon in New Mexico by 2006.

"We see the demand is here now," said Lena Kent, a Burlington Northern spokesman. "Volume of cargo has increased and is showing signs it will continue to increase. Adequate infrastructure is necessary to accommodate this growth."

Part of Union Pacific's problem is a low industrywide profit margin that limits the financing options that investment banks will offer to railroads.

Returns on investment for railroad companies nationwide were 6.3 percent on average in 2003, according to the Association of American Railroads, citing its latest figures.

"That is what constrains our ability to raise all the money for all the projects that we would like to put into place," said Tom White, a spokesman for the association. "Wall Street determines how much we can invest."