In The Tempest , Shakespeare wrote, “what’s past is prologue,” meaning history sets the context for the present and dictates future events. Except, apparently, when it comes to transcontinental railroads. S.
supply chain. “People have to quit looking backwards and look at what’s possible,” Vena said by phone from UP’s Omaha headquarters. Union Pacific (NYSE: UNP ) has faced withering criticism from industry observers who declared the math supporting the $85-billion transaction with NS (NYSE: NSC ) didn’t add up.
“You have to look at the quality aspect, as well. 4 million truckloads converted to intermodal in 36 months, and 2 million truckloads diverted to rail annually. More numbers: The railroads say the merger will shave up to 2 days off a typical 5 to 7 day journey for railcars moving from coast to coast.
That’s a radical game-changer making rail competitive with transcontinental freight moving by truck; some industry executives have said privately that the time savings could be even greater. The single-line route will also open up the Midwest watershed, where rail has long grappled with a tangle of competing lines and interchange issues. The questions surrounding UP-NS only intensified after the Surface Transportation Board in December rejected the initial merger filing as incomplete, and made explicit requests for more information including forward-looking market data and agreement details.
The companies expect to file an updated application in April. Vena defended not including some data for competitive reasons — “you have to be careful you don’t give everything away to your competitors” — and repeated assertions that the vast majority of growth in the long term will come from taking share away from trucks. But some analysts took issue with the railroads in the application categorizing dray-to-rail conversions and rail-to-rail market share shifts as growth, instead of just truck-to-rail and the opening of all-new markets.
Vena fairly bristles at the critiques, and questions some credentials. “It’s always easy to be on the negative side if you’re not out to deliver,” said Vena, pointing out that UP is atop industry analytics for efficiency, revenue and safety. 8, which specifies “Materially Burdensome Regulatory Conditions” that would allow UP to walk away from the deal.
“With a transaction as large as ours, there will always be protection for both sides,” says Vena, who compared it to the contract terms for the 17 homes he and his family have lived in during his railroad career. “At some point we have the right to walk away, we have an out. But, there’s no walking away without a penalty.
If the STB had told us to put it [the terms] out, we would have. We asked them to keep it confidential; it’s up to them. Why would you ever tell your competitors the financial details?
It’s ridiculous, it really is. ” The STB recently proposed a reset of reciprocal switching rules, which if approved would give some shippers a choice of rail carriers. Vena says that’s not a condition to scrap the merger.
“I’m all for reciprocal switching, it gives optionality. ” Asked about UP’s recent history of dismal growth, Vena says a focus on service can help optimize what the railroad can do, and answer the STB’s ‘higher bar’ requirement that a merger not only preserves competition, but enhances it. “We’re a strong and well-run company,” says Vena.
“Today, we have a low double-digit share of freight that is is moved every day in America. That’s a of tonnage. At the end of the day, we have to ask, does it make movement of goods more competitive?
It will be better for the customer, and better for the country. We have to deliver more optionality and be able to take trucks off the highway, and that’s what we’re doing. ” Long term, Vena says, “50% of UP’s business is intermodal, and the merger will bring that segment to a whole new level of capability, so you need to tackle that, that’s where the growth is.
We continue to work with customers to open up new markets, and spend capital to give them optionality. ” Vena said UP will continue to be efficient with its outlay for motive power, continuing to rebuild older locomotives rather than buy new. 2 billion to modernize UP’s AC4400-series locomotives, the fourth such rebuild program since 2018.
That will bring the carrier’s total to 1,700 rebuilt units. “We’re still spending a lot to modernize, from the frame up, like new,” says Vena, a former locomotive engineer. “That is way more cost- effective, delivers onboard components, fuel efficiency, and reliability, we’re very comfortable doing that.
If there was a product that was substantially better we’d buy it. ” Vena pointed out that the railroad has 1,500 ‘excess’ locomotives. Still, the recent history of transportation mergers among airlines and railroads isn’t a study in customer-facing benefits where fares, rates and choices are concerned.
Vena points out that railroads have succeeded despite the structural limitations of a heavily-regulated, capital-intensive industry. “The cost structure of railroads over the past 20 years is nowhere near inflation,” he says. “Our customers are very large and very sophisticated companies — Cargill, Exxon, ADM, Chevron, Walmart, Fedex, UPS — major internationals, and they push every year to help them be better in the marketplace.
’ My God, as a business, where do we go? ” As for service issues, Vena said that, sometimes, the railroad has to work with what it’s given. “Railroads aren’t precision operations because customers aren’t always precise, and you don’t know what they’re going to give you on a daily basis.
” Asked about Ancora, the activist investor that forced leadership changes at NS and CSX (NASDAQ: CSX ), Vena says, “At the end of the day, companies that are well-operated that fulfill and look for the greatest opportunity to deliver for shareholders and customers, and be the best in the industry, no activist will ever be able to take that company on. The American system of capitalism makes people look at companies that aren’t performing in the marketplace. It keeps your feet to the fire, to deliver as a CEO, that’s your job.
As far as NS, “There are always going to be activists who are not being fair about what they’re doing. Shareholders vote and decide whether management has a good plan or not. The outcome of the [Ancora] campaign was that the management team proved to shareholders they had the right plan moving ahead.
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