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High-Tech Tracks

Davidson's strategic gambit is driven by more than just the difficulties the company confronted during the SP acquisition; it's also a reaction to intractable industry conditions. The railroad business is no free ride. The amount of track owned by the major railroads has gone down in the past two decades, from 164,000 miles in 1980 to 100,000 miles, as carriers have tried to save money by focusing on their most profitable lines. So meaningful growth through expansion is not a possibility. Industrywide, while overall revenue has gone up in the past 20 years, partly due to an increase in intermodal transportation in which railroads carry containers that can be transferred to ships, barges or trucks for other parts of the trip, revenue per mile for each ton shipped has dropped to 2.26 cents in 2000 from 2.87 in 1980 as railroads continue to slash prices to remain competitive with other forms of transportation. That, in turn, has weakened their profit margins, as has a series of downturns in the value of primary commodities hauled by trains—coal, grain and chemicals. As a result, like all railroads, for the past couple of decades UP's growth has mostly been driven by acquiring competitors.

Meanwhile, stealing market share from trucks for other products shipped by big outfits like major retail chains has been tough. Based on revenues, trucks control about 88 percent of overland shipments in North America. The railroads' biggest handicap is the perception, often well-deserved, that they're slow, allergic to technology and utterly ignorant of words like "supply chain," "logistics" and "just-in-time inventory." And further consolidation isn't an option for the time being, in part because the federal Surface Transportation Board, which oversees the railroads, after a 15-month moratorium on industry mergers has instituted rigid guidelines for acquisitions after the railroads botched a series of them, among them the SP debacle. "Business as usual is no longer an option," says Davidson, "In this landscape, we have to use technology to enhance our core businesses and be progressive."

The dozens of technology efforts in the works at UP all have one goal in common: Use UP's stance as the dominant railroad—its $12 billion in annual revenue exceeds No. 2 Burlington Northern by about $3 billion—not only to be the first to develop new technology but also to position these applications as a standard for the industry. This is a critical element for success in the low-margin, labor- and materials-intensive transportation business: Half of all shipments that move on Union Pacific trains are also carried by other rail lines for part of the trip, and frequently by trucks as well. By linking its communications and networking applications with the software and hardware used by other transporters, UP stands to play a bigger part in more shipments and take a larger slice of revenue from the point-to-point deliveries that it is only partially responsible for.

Express Lane, one of Union Pacific's most unrailroad-like undertakings, is an apt example. In this two-year-old partnership with CSX Transportation, the nation's third-largest railroad, the two companies are promising guaranteed, expedited delivery of perishable goods from the West Coast to big cities in the Midwest and the East. The goal: eight days from the West Coast to Boston and seven days to New York, or the railroads reimburse customers for some of their costs. It's not quite as fast as trucks, but it costs about a third less and, most importantly, like trucks, assures on-time shipments. An attractive transportation alternative, Express Lane revenue rose 12 percent in 2001 compared with the year before—and it was on schedule about 90 percent of the time.

For UP, though, Express Lane means more than just increased carloads for its trains before the cargo is passed to another railroad. The company's communications network, including a growing global positioning system that monitors the movement of rail cars via satellite, and its logistics subsidiary, Union Pacific Distribution Services, are the centerpiece of most of Express Lane's technology systems from one coast to the other—spreading UP's reach into parts of the country where its own tracks don't venture. "We're a unique industry of companies that are dependent on one another," says UP CIO L. Merill Bryan Jr. "That's an opportunity for cooperation and cross-selling of technology even with the competition."

This article was originally published on 07-19-2002
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