Rail Trouble

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When Union Pacific Railroad executive vice president John Koraleski faces his customers these days, he prefers to stay on his feet rather than sit in one place, he says, "because it's harder to hit a moving target." It has been that kind of year for UP, the nation's No. 1 freight carrier, which moves millions of tons of coal, lumber, automobiles, corn — you name it — each day.

The most storied of American railroads, Union Pacific Railroad was launched in Nebraska during the Civil War with a handful of tracklayers, helped open up the frontier West and has since grown into a $12 billion-a-year colossus with 48,000 employees and 33,000 miles of track crisscrossing 23 Western states. Today UP handles some 30% of the nation's rail freight traffic. But during the past year, the legendary railroad has been groaning under the weight of embarrassing logistical breakdowns.

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Customers from Dow Chemical, UPS and Amtrak to a small New Orleans molasses shipper and a Houston creosote supplier have watched in frustration as delays on UP's rails caused their products to pile up in railyards and ports, arrive hours or days late and sometimes never get to the destination at all. UP has been paying a hefty price too: as its rails began backing up, the company's profits took a hit, falling to $323 million in the first half of 2004 from $717 million in that period a year ago.

"When trains run slowly, sit in terminals and don't get where they should be on time, productivity is lower," says railroad analyst Donald Broughton of AG Edwards, "but labor costs, maintenance and equipment expenses rise, and that cuts into profits."

There's more at stake than the fate of one railroad company or getting a carload of molasses to the supermarket on time. The nation's four largest railroads, UP, Burlington Northern Santa Fe, CSX and Norfolk Southern, are a linchpin of the U.S. economy; when they don't run smoothly, it's tough for the economy to grow. And lately, for companies whose bottom line depends on moving goods on schedule, the situation has become dire. UPS, the huge parcel service, was recently forced to shift some shipments to trucks. Dow Chemical, which supplies, among other things, chlorine for water utilities, suspended operations at a Michigan plant until the distribution logjam clears. Passenger trains are affected too. Amtrak's Sunset Limited, which makes a thrice-weekly run from Orlando, Fla., to Los Angeles, has yet to arrive on time this year, rolling in as much as 40 hours late. Amtrak had to fly one near mutinous trainload of passengers to their destination when the Limited fell behind, leaving customers and Amtrak fuming. "There are other freight tracks we operate over that are busy," says Amtrak spokesman Mark Magliari, "but none are as bad as UP."