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A Desperate Effort To Clear The Tracks


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A DESPERATE EFFORT TO CLEAR THE TRACKS

If Union Pacific's latest brainstorm falters, it may lose lines

Thanks to a deal cut on Feb. 12 with rival Burlington Northern Santa Fe Corp., Union Pacific Chief Executive Richard K. Davidson has some breathing room. The deal sidetracks--for the moment--efforts to rearrange his company's 1996 merger with Southern Pacific Rail Corp. Since last summer, difficulties in merging UP and SP operations have led to massive freight delays. The pact, a major concession by Davidson, calls for BNSF and Union Pacific Corp. to share ownership of a rail line between Houston and New Orleans, which should help unsnarl traffic around the Gulf Coast.

It also should keep regulators at bay. Burlington Northern had been threatening to ask the Surface Transportation Board to review the UP-SP merger unless some joint-operating arrangement could be worked out. And on Feb. 17 the STB nixed a request by the Texas Railroad Commission, a critic of the merger, to transfer some lines and yards to the Texas Mexican Railway Co. "Adding carriers to an already congested and inadequate infrastructure is not going to improve service," says STB Chairwoman Linda J. Morgan.

GULF BEACHHEAD. Davidson's deal, however, carries considerable risk. If the plan--along with other operational changes--fails to assuage angry shippers, UP may face new efforts to amend its $4 billion merger with Southern Pacific. Federal regulators could, for example, demand divestiture of track and facilities and allow more competitors into the Gulf. Meanwhile, the deal with BNSF--aimed at helping 100 Gulf area chemical makers--could backfire. "BN clearly has its foot in the door in this petrochemical-producing region," notes analyst James M. Higgins of Donaldson, Lufkin & Jenrette Inc. "I think over time you will see far more erosion of UP's business."

If the mood of 300 shippers at a meeting in Houston on Feb. 13 is any indication, that seems likely. As Davidson, a 37-year railroad veteran, explained the new deal to the crowd, he was showered with bitter complaints. "We're up to Plan 650. What's Plan 651?" barked Harry Ignatowski, transportation manager for Dow Chemical Co. Davidson concedes that UP missed its self-imposed deadlines for clearing the traffic jam--and admits that recent efforts, including running trains one way on certain lines and merging the UP and SP computer systems--have created more delays initially. "I don't think there's any silver bullet," Davidson told shippers.

Meanwhile, Davidson has the STB as a semipermanent partner. Last October, the board declared a "transportation emergency" in the West and ordered UP to open up temporarily some of its Houston business to competitors. Already extended once, those orders are set to expire on Mar. 15. Shippers expect another extension through August. In Congress, some senators are already promising to review UP's problems when they consider reauthorization of the STB later this year.

Shareholders are also growing impatient with Davidson. Because of the traffic tie-ups, UP lost $152 million in the fourth quarter, far more than expected. Some analysts predict the company might only break even this quarter. On Feb. 18, UP's stock was 60 9/16, down 11 from its high in July of 71 15/16. Director and major shareholder Philip F. Anschutz, however, denies rumors that the board has been looking for a new chief executive. "Davidson is doing the right things," says Anschutz.

Meanwhile, shippers have little choice but to wait. "You can't go back, " says Robert L. Goodell, an Olin Corp. manager. "The SP doesn't exist any more." And unless Davidson can regain control of his railroad soon, the Union Pacific, in its present form at least, might not either.By Wendy Zellner in Houston, with Kathleen Morris in Los AngelesReturn to top

TABLE

Easing the Gridlock at Union Pacific

UP and rival Burlington Northern Santa Fe propose to:

-- Create a joint dispatching center for all of their Gulf Coast train operations to avoid route and terminal congestion.

-- Exchange half-interests in the two pieces of the 342-mile Houston-New Orleans line now separately owned by each railroad. BNSF wins access to an additional 100 customers on the line.

-- Allow UP to use BNSF tracks between Beaumont and Navasota, Tex., to bypass Houston congestion as needed. UP will not be able to serve BNSF

customers on that route.Return to top


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