Union Pacific makes its UP-NS merger capacity case

UP-NS merger capacity is central to Union Pacific’s case for the proposed Norfolk Southern merger. CEO Jim Vena made that argument at an investor conference last week. He said operating changes since 2019 have created room on the network. That includes a 24% reduction in active trains. UP fully adopted Precision Scheduled Railroading in 2019.

UP-NS merger capacity and operating changes

Volume growth and network room

Also, the railroads have said their merger would generate an 11% increase in volume. That includes the diversion of 2 million truckloads a year from highways to rail.

Addressing questions about whether the railroad can take on that growth, Vena said, “This is real important.” He added: “People ask us, ‘What’s the railroad like? What kind of capacity do you have?’”

In addition, Union Pacific has increased average train length by 25% since 2019. It has done that while moving its freight with 24% fewer trains.

“That’s who we are at Union Pacific,” he says.

Meanwhile, he also pointed to terminal upgrades as another source of capacity. That includes investments at Englewood Yard in Houston.

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“As we bring in the 2 million loads that we’ve talked about, that we see as an opportunity out there, we’ll be able to put them on the railroad without spending or worrying about whether we have the capacity,” Vena says.

At the same time, UP’s car velocity is up 8% from 2019. It is measured in car-miles per day. Vena argued that faster freight-car movement benefits customers directly.

“Our customers win when freight car velocity increases,” Vena says. “They need less cars to be able to handle the same amount of product. They need less inventory …. And when we merge, we’ll take it up to another level by removing touch points.”

Removing interchange handlings would cut 24 to 48 hours from transit times, the railroads say. That applies to shipments the two railroads currently exchange.

Post-merger train volume

Still, Vena said the actual increase in post-merger train volumes would be modest. He also said it would not have a major impact on lineside communities.

“It’s very small, the amount of true change. Because, listen, we’re talking about 2 million loads. That’s 36,000 containers a week. We double stack them. We put 500, 600 per train. If you divide that by seven days, you really don’t end up with that many more trains a day above and beyond what we have. Okay? … It’s not the big wholesale change like some people have made this number out to be,” Vena says.

Main line and terminal improvements in the merger plan

$1.1 billion in improvements

Meanwhile, the railroads have told regulators their plan. They plan on spending $1.1 billion on main line and terminal improvements.

In addition, most of the line work would center on lengthening sidings. It also would add sections of second main. That would permit the smooth operation of longer trains. The routes are Norfolk Southern’s single-track former Wabash and Southern Railway routes. At the terminals, the emphasis is mainly on intermodal terminal expansions.

Operating plan details

Separately, the merger application included an operating plan. Federal regulators rejected that application as incomplete in January. In that plan, the railroads projected launching two dozen new trains. They split them equally between intermodal and merchandise trains. As previously covered by Railway Supply, that was part of the application process.

Still, Vena said some observers have questioned the projected traffic gain. Others believe it could be even greater.

“Son of a gun, some people say, can it be 2 million loads? There’s other people that have told us it’s way higher,” Vena says.

Reciprocal switching, routing, and industry criticism

Comparison with CPKC

Meanwhile, CPKC remains behind on its Canadian Pacific-Kansas City Southern merger goal. The target is converting 64,000 cross-border truckloads to rail annually.

At the same time, CPKC CEO Keith Creel has expressed doubts. He has questioned UP’s ability to hit its merger growth target within three years.

Separately, J.P. Morgan analyst Brian Ossenbeck asked what’s different about the UP-NS merger. He also asked why the railroads are confident. The target is taking 2 million truckloads off the highway annually.

Vena said of CPKC, “We are not a strictly north-south railroad,” adding that the UP and NS networks are much larger and span the west and east, respectively.

He added, “There’s a big difference … if you take a look at the network that Union Pacific has versus Canadian National or Canadian Pacific,”

Switching and routing issues

In addition, Vena also repeated his backing for reciprocal switching. That would let customers served by only one railroad gain access to a second carrier.

He said Union Pacific and Norfolk Southern would depart from the longest-haul tradition. Instead, they would allow shippers to choose their own interline routes.

Still, BNSF, CN, and CPKC have criticized UP’s committed gateway program. They argue that it would apply to only a limited number of customers.

Vena rejected the idea that the proposed changes are minor.

“Think about that. Those are huge ways that we’re changing the way the railroad industry is going to move ahead,” Vena says. “People discount them as small. They are not small. Absolutely, it changes and it makes us all have to compete at a higher level.”

Vena spoke at the J.P. Morgan Industrials Conference on March 18.

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