Could It Happen Again?

By Guy Span

Everyone in the industry is aware of the huge service meltdown suffered by the Union Pacific Railroad (UP) after it acquired its San Francisco-based competitor, Southern Pacific (SP). This acquisition came shortly after UP bought the smaller Chicago Northwestern Railway and promptly suffered service disruptions. UP sincerely promised the regulators that there would be no service interruptions or problems whatsoever associated with its purchase of SP. And for a time, everyone believed them.
UP had also told its stock analysts that the merger would be instantly accretive and UP would make dramatic savings. Since this was not a merger of equals, but rather a takeover of the venerable SP, UP could get lots of savings by eliminating redundant SP employees, especially managers at the Market St. headquarters. In theory, this should work, but in practice one loses a whole lot of institutional knowledge (and to be fair, many San Francisco managers elected to be shot rather than relocate to the cold, dreary Omaha headquarters).

According to former insiders, their knowledge was important, as the SP, at the time of the merger, was actually quite fragile. It had seen revenues per car drop to an all time low, while car loadings and freight revenues soared to record levels. Operating expenses, driven by car hire (the expense of freight cars sitting around), extra locomotive lease costs and crew overtime ate up the record revenues and then some.

There are at least three theories as to how this came about, according to former insiders who wished not to be identified. The first is straightforward. They theorize that the operating department was incompetent at running trains inexpensively. The second theory has it that the Marketing Department’s takeover of the old costing bureau (that helped set rates) took the governor off of rate decreases or alternatively put the fox in the hen house (depending upon whom you talk to). The third can only be called the “Evil Empire” approach, which claims the drop in revenues was directed by the Marketing Department to eliminate the head of operations (the traditional line of ascension) as a competitor for the presidency. Whether or not any of these theories are correct, each, in its own way, paints a picture of a large, dysfunctional organization with competing department goals.

Even before the merger, congestion and dysfunctional behavior were issues. While some groups were studying double-tracking parts of the Sunset Route (Los Angeles–New Orleans), others were effectively eliminating a parallel track on an additional main that branched through Phoenix, AZ by abandoning it. SP opened and closed the Modoc (Oregon-Denver cutoff) twice. SP studied closing Eugene Yard on the I-5 corridor (but Roseville Yard north of Sacramento filled up). Savings from closing things yielded more congestion and, in many cases, higher operating expenses.

Customers complained. With poor service, marketing elected to cut prices to retain business that SP couldn’t handle. The automotive group was an example. They finally concluded that they had offered the best rates they possibly could and still make money. If they didn’t get the big contract, SP would be better off than with the business at a low-ball price. Everyone agreed. But when they didn’t get the contract the group was exiled to Detroit, losing more than a few employees along the way (you always lose a few things when you move a department). The message from on high was clear: keep the business at all costs.

Operations had its failures. The revolving door at the head of operations kept opening and created its own lack of institutional knowledge. One new operations guy arrived and wondered if SP really needed all those expensive leased locomotives. So he ordered them parked to see what happened. The guys in the field had seen enough nutty orders from headquarters, so they reported fifty locomotives parked by using ones in for short-term mechanical problems. After a while of reasonably smooth operations, the leased 50 were returned and SP suffered a service meltdown and got a new operating vice president.

And the customers complained. The commercial side lowered rates further, and the traffic and problems compounded. Now, it’s not as if UP was unaware that SP had problems–poor to dreadful locomotives and too much cheap-rated business, but sometimes it’s hard to be aware of the extent of the problem, or truly envision how screwed up things could really get. Few on either side saw the big avalanche start.

When the fragile SP finally came under UP’s orbit, the first thing that happened was cost-cutting. The surviving SP types tried to explain what happened the last time that particular cut was tried, but no one was listening. So decisions were made. Eugene Yard was closed, the Modoc stayed closed, and much of this traffic went to Roseville for sorting. While Roseville filled up with too much traffic, some genius decided to enhance capacity by rebuilding the yard (and taking half of its capacity out of service). Unfortunately, live ordinance (military bullets and bombs) were discovered in the yard (a leftover from one of SP’s worst disasters) and this greatly slowed reconstruction. And the cars kept coming. This problem quickly overwhelmed Roseville and drifted down the valley to clog Bakersfield Yard. Los Angeles (West Colton Yard on the other side of the Tehachapi’s) was doing fairly well except for the problem in getting cars into Bakersfield.

Then, a strike by longshoremen halted most intermodal traffic and ships at Los Angeles, so things started getting a little full. While that problem sorted itself out (or tried), Houston had the big one (“Houston, we have a problem!”). A little plastics yard nearby called Strang was closed to save money. All those plastics cars were added to the nearby large, efficient gravity-switching yard, called a hump yard (where long cuts of cars are shoved over the hump and released to roll into various classification tracks, designated by automatic switches). Suddenly, Houston became jammed. In the old days, SP had the Houston “barometer,” which worked to ease congestion when the hump car count reached critical. Bells and whistles went off and all the major yards would block around Houston until the count dropped.

Neighboring yards such as Pine Bluff, New Orleans, and even West Colton (Los Angeles) would not forward cars to Houston for switching unless the cars terminated there. In this fashion, trains could be blocked to different, less congested yards for further handling. As a result, Houston could recover and remain fluid. When the crisis ended, cars would then be redirected back to Houston and the normal pattern could resume.

Unfortunately, that little bit of institutional knowledge had gone the way of all flesh and without that assistance, Houston collapsed. Trains were parked out of town. Trains didn’t reach town. The forwarding and receiving yards filled, but engines were on the trains that couldn’t get in, so they couldn’t be fueled and serviced to take trains out. While this problem spiraled out of control, the Los Angeles/Long Beach dock strike ended and the rush of double-stack container intermodal trains didn’t get very far up the Sunset towards Houston before they had to park. With nearly all the sidings full, it was very hard to run trains that were also running out of fuel, supplies, and crew time.
The collapse of the Sunset Line was complete and devastating. Crews would report to a train parked in a siding and spend the entire 12-hour shift without turning a wheel. The train dispatchers were pulling out their hair trying to move trains, only to find the crews had short hours to work or that the fuel was so low that the train couldn’t get anywhere. The crews were frustrated sitting in sidings and the supervisors were short-tempered from working all the hours in a day. It was not a good time to work for the railroad.

Then with Houston plugged and the entire Sunset collapsed, the spreading congestion moved to Pine Bluff and New Orleans. But back on the I-5 Corridor, Roseville and Bakersfield had their own problems and they met Sunset problems in LA. With LA choked, Bakersfield choked, Roseville choked, and Houston choked; the congestion virus then spread to Denver and met the same virus working its way up from Pine Bluff to Chicago to Denver. In a very short time, the entire railroad was coagulated. It would then take extraordinary efforts for a long time on the part of all employees to unstuff it. Let’s say that again. It was pure hell for train crews and their supervisors who reported to trains that could not turn a wheel.

Unfortunately, the simple solution of raising rates to reduce traffic was unavailable. Customers supported the merger on the grounds that the efficiencies would REDUCE freight rates, not increase them. UP simply had a long, hard road ahead. Analysts, shareholders, and customers punished the stock. Control of sections of its mainline was ripped away. Everybody wanted service from someone other than UP.

UP was the Grinch that stole Christmas as containers filled with toys didn’t get to stores on time, farmers stored grain on the ground as silos filled, coal fired power plants became dangerously low on fuel, and the list was endless. UP demonstrated to the country that an industry that moves 40 percent of the total volume of freight can’t afford to clog its system. There were hearings, investigations, and emergency service orders by the railway-regulating Surface Transportation Board (yes, it’s called the Surf Board for short).

And slowly, system stability was restored, but not before a whole lot of grief was made apparent for everyone involved. The Surf Board has since slapped a moratorium on mergers and taken other steps to ensure system stability. But chaos theory specialists say that any system must have resilience in order to recover from system hunting–the normal attempt of any system to destabilize.
So could it happen again? “Yes,” say the Chaos Theorists, but probably not for the same reasons. Interestingly enough, the UP agrees with the theorists and has recently issued a number of startling press releases. UP announced that it was grounding its United Parcel Service (UPS) express container train and DRIVING the containers as trucks over the highway across a section of the Sunset due to “congestion.” UP also announced that it was going on a hiring binge to add some 2,000 train and engine service personnel to help staff its many trains, due to an unexpected surge in business (although it takes 14 weeks of training to be a brakeman and six months to be an engineer).
In an unusually frank appraisal to its customers, executive vice president Jack Koraleski admitted to the service problems and noted that the current system was not resilient. He went on to say, “With our recovery capacity reduced, our system velocity began to slow in late January. This, in turn, makes the system less efficient and consumes more of our basic resources: crews, locomotives, freight cars, mainlines and terminal capacity. As more of these resources are consumed, the system’s ability to recover (from events) is further degraded.”

Then, the Oakland truckers who haul containers around the local area struck the Port of Oakland, saying they weren’t being paid enough because of the high price of fuel. Two weeks of delays hit hard on the fourth busiest port on the West Coast, and UP issued an embargo (refused to take more freight) there and at Lathrop (which was also struck). A one-day strike at LA/Long Beach (the busiest West Coast port) brought things to a standstill. The unions are also suing UP, claiming the railroad is using managers to do traditional union jobs, particularly as engineer trainers. If the union fails to win an injunction, it feels it has the right to go on strike against the railroad. Many observers wonder if we are on the verge of another huge service meltdown.

The key factors are in place: lack of engineers and conductors, the use of managers in traditional labor jobs, congestion on the Sunset so severe that UP is using the highway, the threat of strikes by its employees and strikes by truckers. UP is responding by meeting with its large customers, turning away new business, raising its rates ($50 to $100 on containers), issuing 10 service advisories and 14 service cancellations.