Union Pacific Corporation (NYSE:UNP), the United States' largest railroad company by revenue, has grown skillfully, even in the face of the challenges the industry has faced. Behind the company's consistent performance is its strong management team. In February, Lance Fritz took over the CEO spot from Jack Koraleski. Here's a look into Union Pacific management's role in making the company a formidable force.
Koraleski, now the executive chairman, was named CEO in 2012. He was 61 then and planning to retire in seven months, but his predecessor James Young's sudden illness shocked everyone -- he was diagnosed with pancreatic cancer -- and the company fell back on Koraleski, who has been with the company since 1972.
Stepping into Young's shoes wasn't easy. Under six years of Young's leadership, Union Pacific's profits increased fourfold, the top line went up 60%, and the share price increased sixfold. In addition to the high expectations, Koraleski was faced with fast-declining coal shipments and a drought that was affecting grain carloads.
In spite of all the challenges, throughout Koraleski's tenure, Union Pacific registered 12 consecutive quarters of record earnings), its returns more than doubled, and the company surpassed its biggest rival, Berkshire Hathaway-owned BNSF, in revenue.
Continuing the tradition
Most of Union Pacific's solid team of professionals started their career with the company and have gone on to reach top positions -- Young and Koraleski are part of that tradition. Fritz, who joined the company in 2000, has strong support from people such as CFO Rob Knight (who's been with the company since 1980) and marketing and sales Vice President Eric Butler (who started in 1986).
Fritz's job is to move forward with the groundwork Young laid and which Koraleski developed. Young, as Jefferies & Co. analyst Peter Nesvold observed, had increased the company's focus on new markets such as intermodal, which Koraleski has continued, and helped to counter the declines in the coal business.
In the past five years, under the stewardship of Young and Koraleski, Union Pacific sales have grown 70% and profits have climbed 173%, while free cash flow rose over 305% to $3 billion in 2014. Also in 2014, the operating ratio came in at a record low of 63.5%, down remarkably from 89.4% in 2004.
Over the years, Union Pacific has been making huge investments in track replacements, capacity expansion, and network safety. In 2014, the company bought 261 locomotives to increase train speed and replaced concrete railroad ties with rock ballast. In 2015, it plans to invest $4.3 billion, again mostly on infrastructure and equipment acquisitions.
All this will help prepare the company for future freight shipment, which is predicted to increase 62% between 2011 and 2040.
Union Pacific has worked to become "less reactionary and much more anticipatory," Koraleski said in an earnings conference call. The company puts a lot of emphasis on implementing the latest technologies for better efficiency and safety. It's been making use of analytics tools to monitor rail tracks, locomotives, and possible equipment malfunctions to minimize train derailments. The derailment rate fell to 3.0 in 2014 from 3.24 in 2013, and it's improved 38% in the past decade. The company uses software developed by General Electric that reduces downtime and increases efficiency.
Foolish last thoughts
"I think cultures in most companies have to change," Young said in 2013. "We went from a company that, I would say, was somewhat internally focused to one that today, it's about safety, customer service. We are providing the best customer service we have ever had in the history of our company."
For a company more than 150 years old, evolving with the times is probably the best formula for success. Luckily, Union Pacific is run by a management team who understands the importance of change and has made the company nimble -- quite a feat for a behemoth in a mature industry.
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