FIXING AN EMPIRE

       Months of deteriorating service quality throughout the railroad's Western Region had already begun to snowball into a mess, centered on the Sunset Route between El Paso and Los Angeles, and the big L.A. Basin classification yard at West Colton. Union Pacific was facing its third crisis in less than a decade.

You won't hear Dick Davidson tell it, but this blow to its solar plexus may have been just what the proud but stubborn company needed to force a long-. overdue look at how it manages its business. Transportation realities changed a couple of years ago, giving railroads market power such as they hadn't seen in a century. But Union Pacific didn't change. Managing its trains with too much attention to budgeted costs and too little to high service levels, it was taken by surprise by the swell of new business and paid a terrible price. Its reputation suffers, as does the bottom line. Adding insult, after 18 months of struggle, UP still cannot get its trains. running per plan. Normalcy is always a month from now.

For instance, this autumn, key inter-modal shipper Pacer Stacktrain reported its containers were consistently running one to three days late between Chicago and the West Coast, just as they had been for more than a year. During October, trains were held in terminals an average of 1,246 hours per day awaiting locomotives that's the same as 52 trains halted a full 24 hours and 289 hours for crews. Each number was far in excess of goals the railroad set. Union Pacific has hired thousands of train-service employees in 2004 1,325 in the third quarter alone but creating new crews is a lengthy process. The truth is, no matter how many people Union Pacific hires or how many locomotives it buys, it lacks capacity on some core routes to handle the business it now has.

Please, give this railroad credit. It keeps screwing up, but it is learning from its latest mistake. By what its top executives say, the actions they're taking, and how the railroad is committing its capital, you can already sense profound changes starting to surface. If these changes take hold, Union Pacific five years hence should again be a formidable company, feared and respected in the railroad business.

How all this plays out really rests with two men. One, of course, is chairman Davidson, 63, an up-from-the-ranks executive who has run the railroad since 1991. The other is someone you've probably never heard of. Last January, David-son, who must retire by early 2007, in effect signaled his successor. He elevated Jim Young, an executive vice president and the chief financial officer, to become president. Barring some unforeseen event, Davidson's baton will pass to Young, 52, two years hence.

Is Young, who has very little experience on the operating end of things, up to the challenge? Like any savvy man living in the shadow of his mentor, Young is careful not to show his cards in public. He keeps a low profile, spending as much as 80% of his time on the road visiting customers and fellow employees, and he listens a lot more than he talks. Those who know him well say Young is extraordinarily smart and a quick learner with excellent analytical abilities and people-handling skills. A field manager who briefed Young recently on a capital project says of the man: "You don't have to explain things twice he gives you his total attention, and as soon as you answer one of. his questions, he asks two more." Young, who arrived at UP in 1978, appears to be well suited for challenging ingrained habits and ways of thinking, and nudging the railroad to the next level.

All this begs the question: What went wrong with Union Pacific? And what evidence is there that, this time, things will be different?

For months now, trains has examined Union Pacific. We've looked 'at the railroad closely from trackside. We've talked to UP's rank and file, its field managers, customers, union reps, and even its competitors. And we've spoken, on and off the record, with key executives. Here's what we learned.

Railroading by budget

Union Pacific's acquisition of Chicago & North Western in April 1995 should have been a piece of cake. North Western was UP's Overland Route connection between- Chicago and Omaha, and its partner in battle against Burlington Northern for coal traffic from Wyoming's Powder River Basin. But the relatively small merger created a giant headache. "It's absurd they screwed it up," says Ed Burkhardt, C&NW's former general manager. "UP made a lot of subtle changes, such as how power was dispatched and how yards worked. Pretty soon everything was at a standstill.".

That was small potatoes compared with the real standstill of 1997-98, following UP's 1996 purchase of Southern Pacific. Management's intent was to run the two railroads separately until their computer systems could be integrated. Then the UP tried to rush the plan, most notably by closing Strang Yard, southeast of Houston, and transferring its work to Englewood Yard in the city. Englewood wasn't up to that challenge and nobody took heroic counter measures to undo the damage in time. Dominoes fell until practically all of Union Pacific reached semi-paralysis.

And this time? This time, for inexplicable reasons, the railroad simply starved itself of oxygen namely, the crews needed to run trains. It didn't help that Union Pacific couldn't invest in time to expand capacity in the right places.

To understand how this can happen, consider Union Pacific's management style as these events unfolded. To call it rigid would be charitable. Life revolved around the AOP the annual operating plan. Tight fiscal controls that overrode other considerations began in the mid-1980s, with the arrival of former corporate CEO Drew Lewis, and continued into the Davidson era. Adherence to the expense side of the budget in the AOP became paramount. Do that, and it's easy to meet quarterly earnings expectations. "The mindset here," says one senior executive, "is we have to cut X number of dollars, so we figure out how to do it and don't give a damn about the consequences. The railroad has downsized so long nobody can remember differently." Says a retired UP executive, partly in jest: "The budget starts with the bottom line. If we don't make it, nobody gets a bonus."

Davidson's budget enforcer until early in 2004 was Ike Evans, a forceful executive lured in 1998 from manufacturing company Emerson Electric to be the railroad's president. Evans could manage a budget, all right. His blind spot was not appreciating what happens in the field when you squeeze too tight.

The squeeze was on in 2002. Supervisory vacancies at the service unit (division) level below that of superintendent lasted for months, and Evans had to personally approve filling every one, no matter how minor. Many positions stayed vacant for months. The open secret (details were published in Union Pacific proxy statements) was that top managers had a personal incentive to boost earnings substantially in 2002. If profits exceeded $5 a share that year, the railroad would forgive and knock off the books a collective $31 million of the $47 million loaned them in 1999 to purchase 1 million shares in the railroad.

They made it, barely. Earnings for 2002 came in at $5.05 per share, thanks to 75 cents per share in extraordinary adjustments, including tax credits. That was a heroic jump from the $3.77 per share reached in 2001, and helped along by & good business climate and rigid cost controls. Did penny pinching in 2002 contribute to tipping Union Pacific over the edge the following year? There is no way of knowing. An incentive arrangement such as this would have been little noticed except for what happened later.

The year 2003 began with the budget clamped tighter than ever. Other regions early on hired some (but not many) conductor trainees anyway, but not Union Pacific's Western Region, presided over by Vice President Jeff Verhaal. For the record, Verhaal told trains that the Western Region hired new conductors throughout 2003 and still operated smoothly that November, when he retired because of health concerns. Both statements simply fly in the face of the facts and are not credible.

The question is: Did Verhaal refuse to bring new blood to the railroad's crew base to be a hero to the front office bysaving money, or was he the fall guy who acted on orders from Omaha to hold the line? A field manager who spoke with Verhaal claims Omaha gave the orders. But an executive in Omaha, who can claim to have observed the debacle without having been personally involved in it, blames the failure to hire on Verhaal as well: "Jeff wanted to cut his budget and be a good soldier. He may have believed he could get his recrews, held-away time, deadheading and absenteeism down to levels he was projecting, and get by. In the end it was a combination of Jeff and a decision made centrally" that is, by Evans or Davidson.

Whoever is to blame, this same executive says Union Pacific's own people accurately projected its train-crew hiring needs in 2003. The projections simply weren't implemented throughout the system. In the end, you are left to wonder how a company run by so many smart, savvy, experienced people could screw up so thoroughly.

Down go the dominoes

As Verhaal's luck would have it, there was no winter lull in 2003 not in the Western Region, at least. Imports from China to U.S. West Coast ports turned into a tidal wave. Already in early 2003, "we were at gridlock on weekends and major holidays," when large numbers of employees marked off from duty, says a Union Pacific manager in Portland. System-wide, average train speed (as reported to the Association of American Railroads) stood at a respectable 25 to 26 mph as 2003 began. In April velocity began to fall, and in June plunged below the critical 24-mph level that, at Union Pacific, is the dividing line between a functional and out-of-sync railroad. It has never gotten above it since.

Velocity is important, but lower average train speed by itself didn't put Union Pacific in the tank. Rival Burlington Northern Santa Fe saw its average train speed plunge just as sharply. Yet BNSF didn't fall apart. The catalyst for disaster at Union Pacific the spark that ignited all the trouble was arrival of "bullet trains" on the Sunset Route.

BNSF had been the favored railroad of United Parcel Service, enjoying a monopoly of Brown's high-speed, high-revenue business on Competitive routes in the West, except for Atlanta-Memphis-Los Angeles, where UP had teamed up with Norfolk Southern. But in mid 2003, Burlington and United Parcel deadlocked on terms for speeding up service by one business day on the key lane between New York City/Boston and Los Angeles. (CSX operates these trains east of Chicago.) Faster service meant running a bullet train on a killer 41'/2-hour schedule between Chicago and L.A. one day a week. (On the other four business days, the weekend gives UPS a break, and the required schedule was more relaxed.) So UPS went to Union Pacific, and after several test runs awarded this $40 million plum to Big Yellow effective July 1, 2003. CSX continued to run the trains east of Chicago.

At the same time, Union Pacific agreed to speed up its already-expedited Atlanta-L.A. UPS trains (ZNSLC and ZLCNS) each way on two days a week still more bullet trains. Finally, UPS demanded such fast schedules between Dallas and Los Angeles that BNSF, which had run this service, simply handed it over to Union Pacific.

All three services operated over the Sunset Route, on schedules that were brutal and inelastic, and tore the railroad apart between El Paso and Los Angeles. Before the merger, Southern Pacific ran its share of drop-dead trains, too. But back then, 30 trains a day on the Sunset Route was a lot. By 2003, train density averaged just under 45 a day and on some occasions topped 50, over a largely single-track line.

The effect of shutting down the railroad an hour ahead of each bullet train was devastating. Trains began tying up on line because of the cascading delays. Every siding plugged with a stranded train begot even more delays because there was one less siding available for meets. With no reserve of manpower, each recrewed train meant another train would be made to wait. Every mid-week, the Sunset Route simply fell apart and took days to recover. West Colton bulged with trains ready to leave, but absent either the locomotives or people to run them. By mid-July of 2003, the time spent in West Colton by the typical freight car shot up by one-third in the space of two weeks, and would climb a lot higher in subsequent weeks.

The infamous "dragouts" began that is, to create space in yards such as West Colton, ready-to-go trains were dragged out to a nearby siding or idle main track and parked, usually sans locomotives. Locomotives were rushed to the L.A. Basin to relieve the pressure, but that only created shortages everywhere else, first in Texas, which began to seize up, then in the Pacific Northwest, and later Roseville.

Imagine walking across a room carrying a cookie sheet filled with water. It's almost impossible to keep the contents steady. Every motion moves the water from one side of the cookie sheet to the other. So it was with Union Pacific give life support to one end of the system, and you starve the opposite corner.

Matters really came to a head in March and early April 2004. Dwell times at West Colton spiked the average freight car spent 53 hours there, versus 33 hours a few weeks earlier. System-wide, average train speed fell below 21 mph for the first time. Trains were held awaiting locomotives for 1,550 hours per day in March, on average. A survey by trains of the Sunset Route that month found dozens of trains either held in terminals between Long Beach and El Paso or standing still on line.

Union Pacific got past that scare, largely by giving up the New York-L.A. United Parcel trains. (BNSF took the business back last April, putting trailers on existing Z train schedules, but wanted no part of the weekly bullet trains; so on Tuesdays from L,A. and Wednesdays from Chicago, the trailers go via highway.) Dwell times in the big yards today appear to be headed to normal levels. Yet velocity the average train speed remains stubbornly in the 21-22 mph range, and the effect of this is to require hundreds more locomotives to move the traffic than would normally be the case.

So today, 18 months, many thousands of new employees, and many hundreds of additional locomotives after the troubles began, the effects still linger. And the culprit now appears to be a lack of line and terminal capacity for the number of freight cars on line (consistently about 25,000 more than before its troubles began). If so, the answer would appear to be to flush out the excess cars, or invest in added capacity to make room for those cars. To date, Union Pacific hasn't been able to either accomplish the former or afford the latter.

The new Texas rail corridor

Since absorbing Southern Pacific in 1996, Union Pacific has reinvested $15 billion in its physical plant more than any other railroad. Of that, $2 billion was earmarked specifically for capacity expansion. In 1999, UP finished triple-tracking the 108 miles between North Platte and Gibbon, Neb., where its Central Corridor intersects the coal corridor connecting the Power River Basin and Kansas City. Train density in this so-called Red X now averages 140 a day. The entire Powder River Basin-Kansas City side of the Red X, which sees 65 trains per day, is now either double track or operating over parallel one-way routes. Without such projects, the railroad simply wouldn't function today. On the critical North-South Corridor between Southeast Missouri and Texas, where 75 trains a day are typically seen, all that keeps the railroad fluid is an ingenious one-way arrangement that sends southbound trains through Arkansas via Pine Bluff and northbounds via Little Rock, and a complex one-way network inside Texas,

Now it's apparent that despite all this, Union Pacific couldn't expand its capacity fast enough, or in all the right places. Securities analysts blame the poor condition of Southern Pacific at merger time for soaking up UP's capital budgets. True, Southern Pacific's physical plant was worn down by several decades of under investment. But the Sunset Route, where the problems occurred starting in 2003, is a different story. The UP-SP merger actually created a golden opportunity for the combined railroads: If you put SP's Sunset Route between L.A. and El Paso together with UP's Texas & Pacific Route to Dallas-Fort Worth and points east, you create an entirely new and shorter way to connect California with the huge North Texas market and the southeastern U.S. Pre-merger, these rail lines existed, but UP and SP were fierce competitors and wouldn't share traffic. So UP really had no way to get from California to Texas, and SP could only reach Dallas-Fort Worth and the Memphis gateway from Los Angeles circuitously, by dipping into South Texas on what amounted to a 250-mile detour by way of San Antonio.

It didn't take Union Pacific's marketing people long to connect the dots: The Southeast and Southwest regions, plus Texas, are the hot-button growth areas of the U.S. One railroad now directly linked all of them. Burlington Northern Santa Fe is a player, too, but its focus is on Chicago-California business, and its path to Memphis more roundabout. BNSF would find it much harder to compete against a united Union Pacific and Southern Pacific across the southern swath of the country.

In no time at all, UP inaugurated batches of new trains across the T&P, targeted either to DFW, a regional distribution center, or Memphis and Norfolk Southern's network in the Southeast. Train density west of Odessa hit 19 a day last August, compared with just two in 1996. Starting in about 1998, Union Pacific undertook a huge upgrading of the worn-down T&P Route, replacing literally hundreds of miles of half-century-old jointed rail. Wave upon wave of rail, tie, signaling and siding upgrades, from Sierra Blanca on the west to Fort Worth on the east, cost hundreds of millions of dollars, and these investments are nowhere near being finished. The next several years will see the addition of Centralized Traffic Control over the rest of the T&P, plus more and longer sidings. Ultimately, the T&P Route will anchor one of this young century's great railroad corridors. Chairman Davidson describes the T&P as "a terrific 70-mph railroad we're not quite there yet, but the vision is falling in place."

But what of the rest of the Southwest-Southeast franchise: the Sunset Route west of El Paso? With the focus on getting the T&P Route up to snuff, capacity expansion west of El Paso was put off. But thanks to the rebirth of the T&P, train density jumped 50% west of El Paso in just a few years, to that 45-a-day level. When the bullet trains plunged the Sunset Route into crisis in mid-2003, the lack of capacity between L.A. and El Paso through El Paso, for that matter became painfully obvious.

That's where the railroad stands today: Thanks to a buoyant economy, jam-packed West Coast ports, and a constrained trucking industry, UP has all the business it wants, for the taking. All it has to do is figure out how, when the lack of people or capacity or both renders it unable to get back on its feet.

Where money meets metal

The railroad appears determined to shatter its capacity logjams. Capacity-expansion spending in 2004 totaled $274 million, more than any year since the triple-track project east of North Platte in 1999. Many items are relatively small, such as the new siding at Whitewater, Colo., south of Grand Junction on the North Fork branch, to let coal trains meet, and a longer yard lead in Fresno, Calif., to keep main tracks clear.

Other undertakings are truly significant, with far-reaching implications for the railroad. In particular, seven initiatives deserve special note.

Sunset double-tracking. By the

time it's complete, maybe half a decade or more from now, this could become Union Pacific's biggest undertaking since the transcontinental railroad of 1869. Improving the remaining 542 of the 771 miles between West Colton and El Paso with a second main track, at a cost of more than $2 million per mile, could easily surpass $ 1 billion. As of late 2004, 53 of those miles were getting the treatment on the east side of Beaumont Hill near West Palm Springs, Calif., on each side of Deming, N.M., and just west of El Paso. The plan is to add at least 50 miles of double track per year, says operations chief Duffy. "We can go faster," he says, "and if business levels warrant, we will." Ultimately, double track may extend 90 miles east of El Paso to Sierra Blanca, where the Sunset and T&P routes diverge.

Yet all the double track in the world won't help if Union Pacific cannot solve its El Paso problem too many trains trying to do too much in too little space. All trains were inspected and refueled on two tracks of a three-track "trainway," which snakes beneath downtown El Paso. The gauntlet severely limited capacity in all three directions. Another constraint was the city's hemmed-in freight yard, Alfalfa, five miles east of the trainway. Although Alfalfa's switching leads have been lengthened to keep yard engines off the main track, manifest and automobile trains still wait hour upon hour for their turn to pick up or set out.

To improve the flow, Centralized Traffic Control was installed through the entire terminal, giving dispatchers in Omaha's Harriman Center, rather than a yardmaster, the ability to route trains through the El Paso gauntlet. Three more fueling pads were built east of the trainway. Still, El Paso's capacity is stuck at roughly 45 trains a day. How to get above that? Duffy says fueling and inspection of some Golden State Route trains will be done at Planeport, Texas, eight miles north of downtown. "We're totally redoing our schedules and blocking for El Paso," says Duffy, "and analyzing whether we can consolidate trains all with an eye toward doing less switching at Alfalfa."

In short, UP is doing everything it possibly can short of truly expensive alternatives, such as building a completely new terminal west or east of the city. As it stands, Duffy hopes to squeeze 48 trains a day through El Paso in 2005.

Terminal upgrades. El Paso isn't the only terminal that needs help. Carload business in the Phoenix area has grown beyond the ability of Union Pacific to keep up. A new yard is in the offing. San Antonio has plenty of yards too many, perhaps but not ones large enough in the right places. Fort Worth is slowed down by the BNSF crossing at Tower 55. "Part of the issue is lowered expectations of what is possible the belief we can't be better than we already are," says one executive. "Nobody remembers when dwell time at North Platte stood at 13 hours." It's more than twice that now.

UP has begun sending teams to examine terminal operations closely, with an eye.toward reducing delays. They're asking employees, in effect, "Is there a better way to do it?" President Young reports that a team at Chicago's Global 1 succeeded in reducing equipment dwell time there, as well as damage done to container chassis. Another team, working with Canadian Pacific, streamlined interchanges at the Eastport, Idaho, border. A third team polished the receive-hump-trim-build-set-depart drill at Fort Worth's Centennial Yard, making it a model of consistency. When you need all the help you can get just to get by, little things like these add up.

LA&SL reroutes. First the good news: UP has more than one way to connect Los Angeles to Chicago. In addition to the Golden State-Sunset line (which uses BNSF between Kansas City and Chicago), there's the traditional path over the single-track Los Angeles & Salt Lake Route, which connects with the Central Corridor in Utah. Every train taken off the Sunset west of El Paso frees up a slot for another train that must use the line. Today, the only Chicago-L.A. trains using the Golden State-Sunset are the two each way that use the BNSF trackage rights east of Kansas City.

Here's the bad news: the LA&SL alternative is about 50 miles longer than going via El Paso, 8,000-foot sidings west of Salt Lake City are 18 to 25 miles apart, and routing trains this way just adds to the serious congestion on the LA&SL and across the Central Corridor.

New door to Chicago. The weak link of the Golden State Route has been getting from Kansas City to Chicago. Currently it means going 245 miles directly north to intersect the Central Corridor at Nevada in central Iowa, then another 320 miles straight east.

Union Pacific holds trackage rights for intermodal and auto trains over BNSFs direct 460-mile line but has no easy way of reaching its own Global 1, Global 2, or Global 3 terminals in Illinois from the BNSF. Right now, UP runs two or three El Paso or West Coast trains each way on trackage rights, using subsidiary yards in Chicago.

The next year could see big changes. In 2004, land was being bought for a connecting track at Edelstein, 111., where BNSF crosses over Union Pacific's Peoria Subdivision. From Edelstein, it's another 60 miles north to reach Nelson, 111., on the Central Corridor's Geneva Subdivision. But just east of Nelson is the new Global 3 intermodal yard at Rochelle, and a straight shot east to Global 1 (Chicago) and Global 2 (Proviso). All told, this will be about 90 miles shorter than the Nevada alternative. Then the question becomes whether BNSF's highspeed, 60-train-a-day corridor has room for many more UP interlopers. Says Duffy: "We're working on that."

Central Corridor upgrades. Speaking of the Central Corridor, its capacity is being boosted by the installation of CTC and CTC "islands." By the end of 2005, the last remnants of current-of-traffic double track between Chicago and Omaha on the former C&NW will be converted to bi-directional CTC. About 150 route miles, used by 65 trains a day on the Boone and Clinton subdivisions, will be affected.

Even then,' several hundred miles of current-of-traffic operation across the double-track Central Corridor will remain in Nebraska, Wyoming, and eastern Utah. This limits the ability of faster trains to overtake slower trains in the same direction. A start will be made, perhaps in 2005, to close some of those CTC gaps.

Missouri-Colorado track swapT The constriction point for UP between Chicago and Texas is 40 miles of single track over the former Cotton Belt in Missouri's Bootheel, between Illmo and Dexter. But BNSF's St. Louis-Memphis route parallels the UP. Meanwhile, the constriction point for BNSF coal trains between the Powder River Basin and Denver is 24 miles of trackage rights on a UP branch line between Sterling and Union, Colo. So they're trading track.

In exchange for its Colorado branch, Union Pacific will get ownership of 24 miles of BNSF's River Subdivision, between where the railroads cross at Delta, and Sikeston. From there, it's 20 miles on the Sikeston Sub to Dexter, which is presently the northern end of one-way operation into Texas. When everything is configured and upgraded, the one-way operation will be extended north to Delta. Each railroad will retain trackage rights over its former property.

Debottlenecking Denver. An upshot of the UP-SP merger was rebuilding of the Kansas Pacific Route between Topeka and Denver, primarily to shuttle coal from western Colorado to customers east and south of Kansas City. But there has been no way to go directly between the Moffat Tunnel Subdivision on the west side of Denver and the KP Route's Limon Sub on the east. A loaded coal train, with distributed power mid-train and on the rear, now pulls into North Yard, where the mid-train DP locomotives are removed. Then the train leaves North Yard the way it came, with the former rear DP units in the lead, and wyes to the east on the Belt Line Industrial Lead to reach the Limon Sub four miles way. This exercise can take hours and tie up tracks in North Yard.

By the time you read this, coal trains should be avoiding the North Yard runaround, by way of a new double-track cutoff that directly connects the Moffat Tunnel Sub to the Belt Line.

These are the marquee projects that are under way or soon to start. "We'll be debottlenecking for years to come," Davidson told a securities analyst in October. "That's a good situation when you have business growth and can expand capacity by taking out constraints." However, Davidson says UP must earn a return on invested capital of 9% to 11% before it will increase its expansion spending according to several sources, that's the attitude of the company's board of directors. "Our return on . invested capital has been bouncing around 7% for years," says the chairman, "and it will fall below 7% this year. That's not adequate."

It's different this time

There's no doubt that Union Pacific will recover fully. But then what? Will things revert to the same old, same old tyranny by budget cuts, slice-to-the-bone staffing, low morale in the field, cantankerous labor relations, and all the other hallmarks of Union Pacific before it got into trouble? The challenge is framed by one jaded field manager: "We come to work and try to do our jobs well and go home feeling good about our lives. But we don't give a damn about the company. It's Jim Young's job to figure out how to change the culture of this place, so we'll feel good once again about working here."

Actually, there's abundant evidence that Union Pacific is moving in directions this demoralized officer would appreciate. Ike Evans, relentless wielder of the budget whip during his six years as president, is now vice chairman and proudly tells a visitor: "We have changed our manning levels. We will have the resources to run trains on demand. That's not something we were always capable of doing." The buzzword now is "over resourcing the railroad" with crews and locomotives quite a switch from the old way of doing things.

The old UP tried to do everything at once. This led to spending hundreds of millions on improvements to the Golden State Route, in a race to make UP competitive with BNSF between Chicago and Los Angeles, when perhaps the money could have been put to better use elsewhere. Today, Golden State enhancements are on the back burner, and Jack Koraleski, executive vice president of marketing, says, "Our objective is not to be No. 1 in the Chicago-Los Angeles market. Oh, I suppose we could if we wanted to spend enough money. But there is plenty of business in that corridor. We can be No. 2 and do just fine there." Look for future investments to tilt toward routes where Union Pacific enjoys a natural advantage, such as to the Mexican border at Laredo, Texas, across the Sunset and T&P routes between California and Texas, Memphis, and New Orleans, and over the North-South Corridor from Texas to Illinois.

The old Union Pacific was jealous of BNSF's near-monopoly on United Parcel and less-than-truckload premium trailer business. It leapt to grab that New York-Los Angeles bullet train that UPS wanted to run, when BNSF hesitated. Asked if they still have an appetite for super-expedited intermodal trains, Davidson and Duffy fall over each other to answer the question. Davidson: "The blanket answer is no. When we know we can provide the reliability that's required, we'll look at it." Duffy: "Our east-west line across Iowa is about one-third bulk, one-third manifest and one-third inter-modal. You are not going to introduce a premium train that must average 55 mph into that mix you are just not, because of the footprint it leaves and the mess it makes."

The old Union Pacific, to get long-term commitments, offered lower and lower rates on Powder River Basin coal. (So did Burlington Northern Santa Fe.) Those days are over. Says marketing chief Koraleski: "Coal pricing got to the point where you could not afford to reinvest in that business. Ten years ago I would have fought to keep a coal contract. Today, I can fill that slot with a manifest or a grain train." Almost a year ago, UP instituted semi-public spot pricing on coal trains from Wyoming, saying to shippers, "Here's our published rate, take it or leave it." As coal contracts expire, the spot prices take effect. BNSF is pursuing a similar policy. "In addition to fuel surcharges," says Koraleski, "we are taking coal rates up 3%" via the new pricing.

The old Union Pacific worked its field managers as hard as it did the crews.

The new Union Pacific will recruit 200 college graduates to assign as trainees in the field, with the purpose of spreading the workload and bringing in new faces. All of these things are just aspects of the larger corporate culture. If you've been around Union Pacific, how would you describe that culture? Most people we asked who work for other railroads say the same thing: Union Pacific is arrogant. Of course, there is arrogance that comes from knowing you are the best, and UP does many things well for instance, witness the market share it has regained in fresh foods.

Still, you don't sense much cohesive-ness, top to bottom, which helps explain why the commitment to quality that Davidson has tried to instill hasn't really taken hold. Says one Eastern rail executive: "UP is very inward-focused. They're ill bright people, and I like them as individuals, but reflection and analysis is not something they do very well." Says mother rail executive: "Any time I am around Union Pacific it's like going back n time 10 or 15 years." This person adds, "Its operating people have no perspective on how to deal with anyone accept confrontationally. Someone there needs to develop a passion for running the system right."

As we said at the start, the guy at the top within two years will probably be Jim Young. What's he like? One service unit manager got an insight recently when Young had to cancel a visit to his facility at the last minute and fly back to Omaha. The service unit superintendent called and left word. But in no time at all, Young was on the phone as well to apologize for not getting to this out-of-the-way spot on the map in the West, and to promise he would reschedule the trip. The manager was stunned the president of the Union Pacific is calling me to apologize? He's interested in my problems way out here?

A fellow occupant of Union Pacific's executive floor is confident that Young will seek to reach out in ways that a CEO of this company is not used to doing. Says this source: "Jim listens. He cuts to the heart of an issue very quickly. He learns real fast. His intention is to break some of the mores and cultural attributes of this place. He will explore whether we can cultivate a different kind of relationship with our employees. Think about it our operating department has been on a starvation diet so long nobody knows how to work differently. Tackling the mindset that this has left on people is a big task."

If you're Jim Young, that's a lot of expectation to carry on your shoulders. Around a visiting journalist, Young deflects questions about his future intentions. Even so, when he speaks he seems to draw you toward him. For instance, when asked what feedback he gets from employees he visits outside of Omaha, Young replies: "I always try to visit the crew rooms and talk to folks. Whether I meet younger guys or 35-year veterans, they aren't shy about speaking up. Their issues are whether we are giving them resources people and locomotives and track. What are we doing on capacity? They're interested in the business. Everyone wants to win here."

As he says these words, Young looks right at you, his eyes unblinking, the faintest of smiles across his face. You listen and can't help being pulled into Jim Young's magic circle. You want to grab your oar and begin rowing, to help move Union Pacific along. If he can persuade enough fellow employees, high and low, to pick up oars, then yes, maybe it really will be different this time.

Fred W. Frailey is editor ofKiplinger's Personal Finance magazine in Washington, D.C.

Excerpted from TRAINS, February 2005