Union Pacific hires CEO hedge fund recommended as 2Q profit fell 15% on weaker demand

union pacific hires ceo hedge fund recommended as 2q profit fell 15 on weaker demand
The Associated Press

Union Pacific hired the CEO Wednesday that a hedge fund pressuring the railroad to improve recommended earlier this year

Union Pacific hires CEO hedge fund recommended as 2Q profit fell 15% on weaker demandBy JOSH FUNKAP Business WriterThe Associated PressOMAHA, Neb.

OMAHA, Neb. (AP) — Union Pacific on Wednesday hired the CEO recommended earlier this year by a hedge fund pressuring the railroad to improve, as the company cut its outlook after reporting disappointing results driven by weakening consumer demand and higher labor costs.

The Omaha, Nebraska-based railroad said its former chief operating officer Jim Vena will take over as CEO next month. The Soroban Capital Partners hedge fund that holds a $1.6 billion stake in Union Pacific had been urging the railroad to hire Vena because of his expertise in streamlining operations.

The hedge fund said that UP lagged behind its peers during Lance Fritz’ 8-year tenure in all key measures. Soroban declined to comment on the hire Wednesday, but investors resoundingly endorsed it by sending Union Pacific’s stock soaring more than 9% to $235.63 in afternoon trading.

“I am excited about returning to Union Pacific and look forward to the journey to be the safest, most reliable and most efficient railroad in the industry,” Vena said in a statement. “Working closely with the entire team, my focus from day one will be to ensure the company delivers industry-leading customer and operating excellence, cultivates and empowers our employees, and cares for the communities in which we operate.”

Fritz acknowledged that the railroad didn’t deliver “consistent and reliable” service during his tenure, and “that needs to be remedied.” He said proving to Union Pacific customers they can count on good service will help the railroad attract new business and improve profits in the future. At times, UP has struggled to handle everything companies wanted to ship after cutting too deep during the pandemic. Regulators had to twice order the railroad to deliver emergency shipments to livestock producer Foster Farms to ensure that company wouldn’t run out of feed for the millions of chickens it raises.

The rail industry has also been under pressure to improve safety ever since the fiery Norfolk Southern derailment in February prompted evacuations and sent a towering plume of black smoke over the town of East Palestine, Ohio. Lawmakers and regulators are considering imposing new rules on railroads.

Vena was brought in to Union Pacific in 2019 after more than 40 years at Canadian National to help the railroad change to a new operating model that relies on fewer, longer trains and significantly fewer employees and locomotives to move freight, but Vena left after less than two years on the job.

“He knows us and he’s laser-focused on running the safest, best-service railroad in the industry,” Fritz said. “And that’s going to be that’s going to be really valuable to us.”

But rail unions have criticized UP and the other major freight railroads’ reliance on that precision scheduled railroading model that has become the industry standard. They say the deep workforce cuts that have accompanied that model have made railroads riskier because employees are spread too thin and under pressure to rush safety inspections and maintenance. Plus, the changes made it less desirable to work for the railroads with train crews on call 24-7 and increasing demands on all rail workers.

Union Pacific has made progress this year in addressing workers’ quality of life concerns by agreeing to provide paid sick time to all its workers and improve scheduling for engineers so they can reliably know ahead of time what days they will have off. The president of the Brotherhood of Locomotive Engineers and Trainmen, Eddie Hall, was operating UP trains during Vena’s previous stint with the railroad, and he said he hopes the new CEO is willing to temper his approach now.

“We would like to see continued progress, including necessary changes to the precision scheduled railroading operating model,” Hall said. “Few people alive know more about PSR than Vena. He should be fully aware of its failings. If not, rest assured, we will make him aware.”

UP didn’t follow the lead of CSX that went outside the rail industry to hire its new CEO last year and instead went with someone with deep experience running a railroad. Edward Jones analyst Jeff Windau said “the key is his knowledge of precision scheduled railroading and, you know, his ability to help improve productivity and efficiency overall for the railroad.”

Union Pacific also promoted board member Mike McCarthy to chairman and named its chief human resources officer Beth Whited president Wednesday and added two new independent directors who both have experience has CEOs of other companies.

In addition to the hiring news, Union Pacific said its second-quarter profit declined 14.5% to $1.5.7 billion, or $2.57 per share, as it hauled 2% less freight and dealt with rising costs, including higher wages promised to workers in last year’s bitter contract fight and the cost of adding sick time and $67 million of bonuses for conductors as part of one recent agreement. That’s down from $1.835 billion, or $2.93 per share, a year ago.

That fell short of the $2.74 per share that the analysts surveyed by FactSet Research were generally expecting.

The railroad’s 5% decline in revenue to $5.96 billion also disappointed. Analysts had been expecting $6.09 billion.

Union Pacific said the weakening consumer demand and higher costs will now make it hard to meet its previous goal of seeing the number of shipments it hauls grow more than industrial production. The railroad said its volume will likely will likely fall short of the current forecast for industrial production to grow by 0.1% this year.

Union Pacific is one of the nation’s largest railroads with a network of 32,400 miles (52,000 kilometers) of track in 23 Western states.

Authored by Ap via Breitbart July 26th 2023