The Road to Redemption
The Road to Redemption
Abstract and Keywords
This chapter examines Union Pacific Railroad's road to recovery and redemption. Houston, the most difficult and complex terminal in the nation, continued to plague operations. Every element of the recovery plan took time, from the computer cutovers and the labor agreements for hub-and-spoke, to the training for directional running and the upgrading of Southern Pacific Railroad lines and facilities. Union Pacific's managers understood this, and so did the trade unions, whose people worked hard to clear the congestion. The solution to the congestion proved to be exactly what Dick Davidson, Dennis Duffy, and others at Union Pacific insisted had to be done: complete the merger plan for Southern Pacific Railroad. As 1999 opened, Union Pacific had survived the service crisis and lived to fight another day.
For UP the darkness before the dawn proved to be polar in length. Instead of days or weeks it persisted for months, exhausting everyone and wearing down even the most dogged of optimists. “We were at war,” said Jim Dolan in language uncharacteristic of lawyers. “We had our foxholes dug and were fighting the war on a lot of fronts,” echoed Dennis Jacobson. As the conflict dragged on, there came a moment in March 1998 when Dennis Duffy, normally the most upbeat of persons, learned that some five hundred trains were being held and thought, “My God … we’re not going to get out of this.” The fear lingered for about five minutes before he murmured, “Oh Jesus, okay. We just have to keep going here.”1
Outsiders labeled the crisis a service meltdown, but that was the wrong image. It was rather a perfect storm that had engulfed the company and showed few signs of letting up. Already it had cost UP market share in every sector of its business. Jim Shattuck estimated the lost revenues for the first half of 1998 alone at $400 million.2
Houston, the most difficult and complex terminal in the nation, continued to plague operations. On December 1, 1997, phase three of the TCS cutover, involving the eastern half of the SP, including Texas, was completed, and the inevitable pain of absorbing a new system followed. Part of the problem lay in the rush to get Texas converted to the new system. Originally the phase three cutover had been scheduled for February 1, 1998, but the Houston mess led to urgent demands that it be moved forward and that crew management be implemented at the same time.3
All SP traffic in Texas was still in the TOPS system but not in TCS. With shippers demanding to know what was being done to fix everything, the TCS and crew implementation cutovers for the Houston area took place on the same date, November 1. The result was turmoil that left many trains without crews to man them. SP also used reporting codes from four other railroads it had acquired, which had to be designated in routings. These and other complications made the (p.378) usual learning curve even steeper. The cutover and its fixes continued through December.4
By the year’s end six hub-and-spoke agreements had been signed, setting the stage for directional running. On February 1 the first trains began running northbound on UP lines and southbound on SP lines between Dexter Junction, Missouri, and the Houston area. By April 1 directional running was in place, but Davidson postponed the phase four TCS cutover of western SP lines from May 1 to July 1.5
Every element of the recovery plan took time—the computer cutovers, the labor agreements for hub-and-spoke, the training for directional running, the upgrading of SP lines and facilities. UP’s managers understood this, and so did the unions, whose people worked hard to clear the congestion. “The unions stuck with us,” said John Marchant, “UTU particularly. They’re the most powerful politically, and they stuck with us.” Davidson praised the workforce as “the best railroaders in the world.” The system’s safety record improved dramatically despite the pressure and long hours imposed by the crisis.6
However, outside constituencies showed no patience for either delays or explanations. Shippers wanted their problems fixed and their missing cars located and delivered now. The STB and FRA wanted tangible results ASAP; the former required a weekly letter from Davidson outlining what progress had been made. Investors and analysts demanded immediate evidence that the crisis was not seriously damaging UP’s finances and earnings. On that point they were doomed to disappointment. Earnings crumbled, and the company bled cash in its frantic efforts to solve the crisis.
Earnings actually rose 33 percent to $216 million during the second quarter of 1997 and 24 percent to $240 million in the third quarter even though Davidson estimated that the congestion cost the company $80–$85 million. By the fourth quarter the impact had hit full force; the company lost $152 million. Davidson called the disastrous figures a “one-time event.”7
White Matthews saw what was coming. The company’s cash flow was flowing all in one direction—out the door. “You buy your locomotives and you place orders early in the year,” he said, “so you’re spending your cash flow at the beginning of the year that you’re going to develop during the course of the year … and the service crisis hits. We’re not making money but we’ve spent it.” In February he asked Gary Stuart to think about the possibility of bankruptcy. Stuart agreed it was a possibility.8
Matthews concluded that the only solution lay in finding a way to raise cash by selling equity. He explained the situation to the management team and was voted down 8–2 with the only positive votes coming from Stuart and himself. “Guys, if we do not fix this,” Matthews pleaded, “we are out of money.”9
(p.379) Stuart understood the dilemma. “Our labor costs go up; our fuel costs go up; our car rental costs go up. All the costs are going up. Revenues are going down. Customers are pissed off. Our workforce is pissed off. Our investors are pissed off because our share price is going down, so we have a real tough time with everybody.” After a strenuous debate Davidson let Matthews take the issue to a board meeting.10
When Matthews got up to present his plan, Judy Hope asked, “Why are you recommending that the dividend be cut in half? Why wouldn’t you totally eliminate the dividend?” Her reaction told Matthews that the directors understood the need for immediate and drastic action. They approved the plan without blinking. Matthews was adamant that any offering had to be equity; otherwise the company would have to sell some form of junk bonds at exorbitant interest rates. But equity would be difficult to peddle with the company’s reputation scarred by the crisis, especially since news of the offering and dividend cut would hit Wall Street like a bomb. Nevertheless, UP forecast a first-quarter loss, cut its dividend in half, and announced plans for a new issue of securities to relieve its cash crunch.11
The credit agencies had dropped UP’s debt from BBB to BBB–, which all but closed the company’s access to the commercial paper market. Matthews and Stuart went to CS First Boston, which had already helped UP raise $500 million through long-term bond financing in January. Together with Dick Bott, First Boston’s vice chairman, they came up with an ingenious security called a trust preferred issue. The usual preferred stock was not tax deductible; by using a trust the bankers turned their version into a tax-deductible investment. It remained junior to the company’s bonds but carried a higher rate of interest and could later be converted into common stock. “It’s a very good security,” said Bott. “You get paid to wait.”12
Hoping to raise $1 billion, Davidson and Matthews managed to sell $1.5 billion, which bought enough time for UP to revitalize its cash flow. “No one in the company would have thought to do that,” said Carl von Bernuth. “… I think he deserves an awful lot of credit.”13
For his pains Matthews got hammered by Wall Street. For months the investor relations people had been telling the Street that everything was fine. “They got diluted in their stock,” he said. “Their dividend cut in half…. It was a hit, a huge hit, and I took a huge personal hit ’cause I had a pretty good reputation of shooting straight to the Street. And I shot it straight here but way too late. They didn’t see it coming. Quite frankly, I didn’t see it coming until I convinced myself that we could go bankrupt. So we did it. I took a huge professional hit but don’t care because quite frankly we had to save the company.”14
But Matthews damaged his own reputation within the company by threatening to resign if he were not promoted to vice chairman of UPC. “He put a gun (p.380) to our head,” said one director. “… We were trying to raise money through the preferred stock offering, and he wanted to have a title that would help his résumé so he could get a job as a CEO.” Without a promotion, Davidson thought, Matthews “really didn’t feel comfortable staying with the company and putting his heart in raising the cash…. That was not the way to do things.”15
“My reputation was going down on Wall Street,” countered Matthews. “… If I’m going to stay, I got to get more authority.” Everyone knew he was looking to become a CEO elsewhere. “He was undermining Dick, and they were never going to get along,” said a director. “It was too bad ’cause they would have made a hell of a team.” Matthews was willing to leave if he got the right exit package. The board obliged with a generous three-year package, and Matthews left the company in June. That same month UP stock sank to 44½, its lowest figure since 1994. “I don’t think,” said one fund manager, “you could find an analyst who will give management a high ranking on performance or credibility.”16
The security sale eased the company’s cash flow problem, but Houston remained the worst obstacle, a 200-mile maze of tracks that Davidson called “the toughest nut for us to crack.” One problem was the inability of the rail infrastructure to keep up with the rapid growth of business in the region. “They have built more factories, refineries and a lot more freeways there,” observed a UTU official, “but they haven’t built any new railroads.” Merely substituting one railroad for another would do nothing to solve the problem and might make it worse.17
BNSF and KCS waited expectantly in hopes that the STB would award them prime chunks of Texas and Louisiana trackage. In February Rob Krebs told Davidson that he would ask the STB to divest the eastern end of SP. He threatened to come out against UP unless it capitulated to his demand for ownership rights between Houston and New Orleans and access to more customers. According to Hemmer, who was intimately involved, Davidson regarded Krebs’s demand as “outright bribery if not thievery.”18
UP had no intention of surrendering trackage crucial to its chemical, plastics, and Mexican business, but it had to find some way to keep BNSF’s support and give the STB something to show it was dealing with the crisis. Hemmer pushed strongly for a dispatching protocol that he called “an incremental improvement, not a breakthrough. Directional running was the breakthrough.” It became part of a deal reached by Davidson and Krebs that helped resolve the Houston muddle.19
BNSF returned to UP a half interest in the 194-mile Louisiana line from Iowa Junction to Avondale it had acquired as a result of the UP-SP merger. In exchange UP sold BNSF a half interest in its 148-mile line from Iowa Junction to Houston. The two companies would share the entire road and dispatch it jointly so that neither one would get priority. The deal gave BNSF access to a hundred or so shippers formerly exclusive to UP; they were Krebs’s real target.20
(p.381) The agreement, announced February 13, prompted the STB to reject demands that UP sell its Houston area lines to a neutral operator, which infuriated Mike Haverty. KCS and Tex Mex were invited to participate in the new joint dispatching center but declined. Throughout the crisis Haverty had been poised like a vulture looking to gobble up any pieces of UP he could snatch. Thwarted in this hope, he accused Davidson and Krebs of “getting together and carving up Texas.”21
Other reactions to the deal were mixed. Predictably, the chairman of the TRC, a good nineteenth-century regulator, opposed the idea, grumbling that “I feel like there’s been a sale and Texas has been sold and didn’t even get a notice of sale.” Transportation consultant Robert Banks compared it to “Coke and Pepsi sharing the same bottling plant.” The STB extended its oversight of the crisis from March 15 to August 2 but rejected a request to transfer some yards and track to Tex Mex. “Adding carriers to an already congested and inadequate infrastructure is not going to improve service,” said Linda Morgan.22
El Niño–driven storms produced more washouts in California during February, shutting down the Santa Barbara sub for two weeks. During February the number of cars online rose to 345,220, while the average speed of trains dropped to 12.7 miles per hour compared to 18.8 a year earlier. In March a fierce blizzard wracked the Midwest, forcing the Powder River mines to close and temporarily shutting down the North Platte sub. A jam-up on KCS’s TFM line backed up trains all the way to Kansas City, forcing UP on March 28 to embargo certain traffic until the line cleared. The partial embargo at Laredo lasted until April 22.23
In a Fortune article an unnamed former UP executive blamed Davidson for the road’s problems. The STB too endured a hail of criticism. “Government is not in the business of running the railroads,” retorted Linda Morgan, “and so our job in addressing mergers is not to micromanage every detail of how the railroads should integrate their systems.”24
Davidson and others had long insisted that the real problem was the lack of sufficient capacity in the Houston area and elsewhere. The solution could only be massive investment by the railroads. UP had already pledged to spend nearly $1 billion to improve and maintain its lines in 1998. During 1997 the company had also hired 3,500 new employees. In another mea culpa to the STB, Davidson said he was “acutely embarrassed, and our company is embarrassed, at the time it has taken to recover from our congestion crisis.”25
Since the STB itself was coming up for reauthorization, shippers mounted an intense campaign to have it abolished. Despite data showing that since 1981 average freight rates had dropped 56 percent while railroad efficiency had risen 171 percent, shippers insisted that the consolidating rail industry was hiking rates and providing poor service. They demanded more competition and a simpler process to challenge rates. In response the STB gave the railroads and (p.382) shippers more time to agree on rule changes that would allow railroads to share one another’s tracks and yards in situations where one company dominated the market but stopped short of any more stringent action.26
Davidson again opposed any efforts to restore competition through shared track. “Just cramming more people into already congested facilities would create additional problems,” he insisted. Conceding that railroads charged higher rates to captive customers, he defended the practice as necessary to enable competition elsewhere and provide adequate return on investment to make improvements. This debate echoed in many ways the long and bitter dispute over through versus local rates a century earlier. A few years later it would expand into a dialogue over pricing.27
UP took another earnings hit for the first quarter of 1998, posting a $62 million loss, but in April the skies finally began to clear. “Over the last two to three weeks,” said an analyst, “we’ve seen probably the most dramatic improvement” in clearing up the congestion. Having already been burned several times, Davidson expressed cautious optimism that the worst was past.28
The solution to the congestion proved to be exactly what Davidson, Duffy, and others at UP insisted had to be done: complete the merger plan. Capacity increased once the bugs were worked out of both directional running and the computer integration. Phase four of the computer integration was completed on July 1, putting both UP and SP entirely on the same system for the first time. The joint dispatching center at Spring opened for business on March 15 and became what Duffy called a “spectacular success.” In February 1999 UP and BNSF agreed to set up joint dispatching centers covering southern California and Kansas City.29
By May it had become clear that capacity and congestion problems were hardly confined to UP. All the major roads suffered similar rounds of service delays and customer complaints. “It’s getting to the point where you can’t count on them,” said an NITL official. The reason for lagging performance had become clear long before it was grudgingly accepted by shippers: the sustained growth of the American economy that produced a 30 percent increase in demand for rail service during the decade. “This industry was in a state of decline for decades,” said an NS vice president. “Not in our wildest dreams could we have expected this kind of growth.” The sale of Conrail to CSX and NS, approved by the STB in June 1998, led to a year of confusion and congestion before service at both surviving roads began running smoothly.30
The absorption of Conrail left four major roads dominating the industry: UP, BNSF, CSX, and NS. All four agreed on the need for heightened capital spending to relieve the capacity problem. Together they projected expenditures of $7 billion in 1998 for improvements and upgrades to their systems. UP announced (p.383) plans to spend $2.4 billion, more than half of it for projects in Louisiana and Texas alone.31
In 1996 the company unveiled Project Yellow III, a five-year project to increase capacity in the strained Powder River Basin. It included $116 million for work on a 108-mile third main line between North Platte and Gibbon, Nebraska, as well as double-tracking other coal-heavy lines. Another $79 million went to ongoing work on modernizing the Roseville Yard and $33 million to complete the $64 million new Memphis intermodal facility. The funds raised by the new equity issue made this work possible.32
For the second quarter of 1998 UP swallowed a loss of sixty-four cents a share. On July 31 the STB lifted its emergency order issued nine months earlier but allowed shippers to use BNSF and Tex Mex in the Houston area for forty-five more days. The decision marked the end of a nightmare that for a time seemed endless. When delays arose in August at Long Beach and Los Angeles, the problem was simply too much business pouring into overworked ports. By then the company was ready to launch a new round of changes that put it solidly on the road to redemption.33
The service crisis was for Davidson “one of the darkest periods in my life.” He had worn a hair shirt through a prolonged and humiliating failure in the first year of his leadership. Bloodied but unbowed, he took all the abuse heaped on him without losing his poise, dignity, or belief that the railroad would eventually pull out of its miseries. Where others might have hidden behind excuses or spokespeople, Davidson personally took on all comers and criticism. The merger implementation plan had been a good one, he insisted, “but we came out of the starting gate well and fell on our face. We didn’t execute.”34
Everyone had his or her own notion of what had gone wrong. Rebensdorf, Shoener, and others agreed that UP had underestimated the complexity of the integration. Koraleski and Marchant thought the company had gone too fast in getting it done. Koraleski, Rebensdorf, and Young saw UP as too arrogant, too sure of its ability to pull off so complicated a task.35
Davidson believed that somehow the railroad had gotten away from its commitment to quality. The railroad’s culture was changing in a way that fed a growing disconnect between management and the employees. Shoener’s failure to recognize this change had been a major reason for letting him go. Returning to Omaha gave Davidson a much clearer sense of what had been happening during his absence. Like King and Duffy, he saw how much ad hoc decision-making had crept into operations.36
Simple demographics promised more changes in the culture. Large numbers of employees were approaching retirement age; by one estimate the UP would be hiring four thousand new workers a year for the next decade in what amounted (p.384) to a generational shift in the ranks. Davis grasped the implications of this change. In April 1998 he stressed that “people today don’t have the same attitudes that I and others of my generation had when we went to work for UP. Today, many people don’t want to work seven days a week on uncertain schedules, or spend long periods away from home, just to have a job.”37
Unlike their parents, the younger generation had no memories of economic hard times and weren’t desperate for a job. However, one aspect of the railroad had not changed; it remained a 24/7 operation and needed workers willing to accept its demands. The challenge was reconciling its needs with the changed expectations of workers. Although cultural changes could improve the lifestyles of railroad employees, nothing could alter the fundamentals of railroading that made stiff demands on them. “Railroaders are special,” said Davis. “They meet challenges and handle situations that most people never have to handle, and probably couldn’t handle.”38
Davidson recognized this and showed his appreciation for the yeoman service turned in during the crisis by giving every employee two hundred stock options. To relieve exhausted crews in the field, he had asked for volunteers from the general office building to go out and help. Hundreds of those qualified to run locomotives stepped forward. “They packed big suitcases,” he said, “and were gone from their families for weeks at a time.” Retirees also came forward to help in the field, and Davidson tapped former officers for advice. The unions let management crews run trains without protest.39
Davidson also realized how right Duffy had been in trying to impress on him the complexity of a network railroad and the need to understand its intricacies. In the spring of 1998 he asked Duffy to head a task force to determine what the newly merged system should look like. The team concluded that neither a quick fix nor incremental changes would work; what was needed was nothing less than a transformation. The ultimate goal was ambitious: an organization capable of running local systems while also being optimized to the network. By August Duffy’s team had come up with plans for a revamped organization that fit this need.40
UP was about to undergo yet another reconfiguration, one that reversed previous trends. For the past thirty years it had moved to consolidate and centralize as many functions as possible. Through mergers the company had greatly increased in size to become one of only four giant systems left standing in the United States. The computer and other technologies had made this process of consolidation and centralization possible, but the complexities of an enlarged network taxed the capacities of the most sophisticated machines.
The SP merger pushed UP over the edge of its ability to assimilate. It revived one of the oldest debates within railway management: departmental versus divisional as the most suitable organization. E. H. Harriman’s ambitious and largely (p.385) successful attempt to run both UP and SP kept the railroads separate but consolidated the finance, accounting, law, and traffic departments. Harriman became president of both companies, but each road had its own vice president of operations. A director of operations and maintenance, headquartered off both lines in Chicago, supervised the vice presidents and oversaw major capital programs, equipment pooling, the creation of common standards, and other items of shared interest. Most rail executives dismissed this arrangement as bizarre, but it worked well until the federal government split the two systems.41
During the twentieth century change rolled unceasingly through every department. Each merger brought difficult, often painful adjustments in personnel and procedures. Each new generation of technology required steep learning curves and changed habits. Each new generation of workers brought with them different attitudes, mindsets, and expectations. Every shift in the traffic mix imposed different needs for cars, power, and service. Each new CEO or president was eager to impose his own stamp on the company and its culture.
As the pace of change quickened, so did the need for rapid response to it. Employees might trivialize the process as the fad du jour, but the problem was real and the need urgent. The traditional railroad organization, like fine Victorian furniture, had been built to endure, but the context in which it operated underwent so many profound changes that no arrangement could last for very long. UP management recognized that the time had come for yet another shift in organization. Earlier the answer had been consolidation and centralization; the new context seemed to demand a retreat from those goals.
“Centralization vs. decentralization is the classic argument within the rail industry,” observed Duffy. The SP merger and service crisis had cast serious doubts on the policy of centralization. The railroad needed a clear change of direction that combined some recently neglected values in a striking new framework. Duffy put the need bluntly. “If we don’t change,” he said, “we’ll be a dinosaur and lucky to be alive.” However, any change had to reckon with the polyglot culture of a company that embodied so many mergers.42
Duffy and his team evaluated every process and function to find the optimum system for meeting company objectives, and searched for the proper balance between centralized and decentralized activities. Out of this effort emerged a novel plan. It would be Davidson’s legacy to the company, a reconfiguration worthy of those created by Kenefick and Walsh before him. To emphasize its importance he called the new program the Transformation.43
It consisted of three main parts. The first imposed a new decentralized structure on the railroad. The second created a new department, network design and integration (NDI), charged with combining the work of operations and marketing in a new way. The third, which Davidson called the centerpiece, was a leadership and culture component that sought to revitalize the company’s sense of mission.44
(p.386) The new structure appeared first. Davis, doing what he did best, had gone into the field and talked to employees in every service unit. The cry he heard repeatedly was for the company to move more decision-making authority out of Omaha. Employees wanted more latitude to make decisions based on local conditions that they knew better than did Omaha. “We’re a detail business,” observed King, “but it was too much detail at the wrong level.”45
Duffy’s plan divided the organization into three regions with a vice president in charge of each one. Steve Barkley, based in Houston, took charge of the Southern Region, Mike Kelly (Omaha) of the Northern Region, and Jeff Verhaal (Roseville) of the Western Region. The dispatchers remained at the HDC but were realigned to fit the new regional configuration. “We learned this is such a large company,” said Davidson, “that we could not manage it from a single center in Omaha.” BNSF and CSX had already come to that conclusion; after spending millions to create network operations centers, they began pushing managers back into the field.46
First announced in August 1998, the new structure contained twenty-two operating units headed by superintendents. Support functions such as engineering and mechanical were also decentralized and reported to the regional head to enable quicker responses to local operating needs. “They have all the resources they need to make the right customer-service decisions in a very timely fashion,” said Davidson. The key to the arrangement lay in giving the regions considerable authority and responsibility while requiring them to work within a centralized plan.47
During the 1980s Davidson had led the charge to centralize functions. This approach had served the railroad well for a decade, but the CNW and SP mergers doubled the size of the company and made it unwieldy. The new regions each presided over 10,000 to 13,000 miles of road, making them about the same size as the former UP, SP, and MP systems. This “coincidence,” as Davidson called it, harkened back to Kenefick’s decision to run the UP and the MP as separate railroads until they could be gradually integrated. The key factor then and later was what he called “span of control—how many individuals one supervisor could supervise efficiently.”48
The new structure marked the first step in a major overhaul. The second step, unveiled a week or so later, created the new NDI department. As a separate but equal partner of operations and marketing, it was charged with closing the historic disconnect between them. “We have assumed too often,” said Davidson, “that the product was there when capacity, whether measured as people, equipment, track or facilities, was not…. NDI will design the process to assure that commitments match delivery capacity and that our transportation network is effective and efficient.”49
Drawn largely from the existing customer service planning and delivery department, NDI brought together in a single organization the responsibility for (p.387) decisions relating to railroad services, the creation of plans to deliver those services, and the allocation of resources to support their execution. “Think of it this way,” said Davidson. “NDI will develop the game plan, Marketing will win the business and Operating will execute the plan.”50
“We went to more of a fully integrated regional aspect,” said Duffy, “where we gave these guys every resource they needed to run their business. On the other hand, we overlaid it with a network management…. We didn’t allow them to establish fiefdoms out there.” Then Davidson added a surprise twist: He offered Duffy the chance to run the whole operation. “I’m thinking, Jesus, I’m not sure,” said Duffy, “but you can’t turn down an opportunity to be a key player at Union Pacific.”51
King had grown disenchanted since replacing Shoener. He and Davidson disagreed over how to run the railroad, and King’s position was not helped by having to report to two former operating men, Davidson and Davis. On one occasion he observed pointedly that the road could have only one VPO. When Davidson proposed that he take over the new NDI department, King welcomed the change. Duffy moved up to VPO.52
NDI’s task was to develop two-year rolling business plans organized around three product groups headed by vice presidents who reported directly to King. The three departments were to be separate but equal. “One of the criticisms in our business going way back is that operating and marketing did their own things, and ‘never the twain shall meet,’” said spokesman John Bromley. “This is really a full-press effort to resolve that traditional conflict.”53
The third component of the Transformation aimed to improve every aspect of employee relations through changes in the railroad’s culture, much as Walsh had tried to do a decade earlier. It sought to instill the company’s vision, values, and behavior into all fifty-three thousand employees while also dealing specifically with basic needs like employee fatigue, work schedules, pay systems, staffing levels, and enhanced training.54
Despite vigorous past efforts at changing the culture, vestiges of the old-style management still clung leechlike to the company. Jolene Molitoris of the FRA had charged that “their culture was dysfunctional and characterized by non-communication. They were separated from each other in a way that almost guaranteed problems.” Some employees attributed the problem to Davidson’s personal style. A review by his senior managers described him as cold, brusque, demanding, slow to praise, impatient for results, intimidating, and resistant to innovation. Davidson accepted the criticism well, saying, “It’s like an alcoholic. To get better, you have to admit your weakness.” In urging a hundred field officers to change their style, he shared his personal review with them.55
A key element of this effort involved revitalization of the quality program. “Continuous improvement, teamwork, managing with data and customer (p.388) satisfaction,” said Davidson; “if we just remember those four Quality principles, we’re going to be a winner.” Failure costs had risen 8 percent since the two mergers. Teamwork had gone slack, customer satisfaction had vanished, and everything needed improving. Train performance slid to 36 percent from the low sixties. Failure costs, estimated at $200 million, especially galled Davidson and offered a clear opportunity for improvement if the company could get back to the basics of the quality program.56
The new organization took effect on September 1. Two weeks later Davidson stunned both the railroad and outside observers with yet another change. Davis was bumped up to vice chairman of UPC prior to retiring in six months. In his place as president of the railroad Davidson introduced Ivor “Ike” Evans, who was then senior vice president at Emerson Electric Company in St. Louis.57
Davis remained popular both inside and outside the railroad to the end of his tenure. Columnist Don Phillips described him as “Teflon and believability.” In dealing with the safety and other issues, said Phillips, “the feeling that he engenders is that he has not a single insincere bone in his body.” “Among our employees,” said Davidson, “he probably is the most well-respected senior leader I’ve seen.” Duffy declared that “today’s safe railroad environment owes its very existence to Jerry and his ‘radical’ ideas.” As a tribute the company named its new yard in Roseville after him.58
Evans spent his first two weeks at UP on the road with Davis, visiting all but two of the service units along with shops, major yards, the HDC, NCSC, and a host of other facilities. Davis introduced Evans to all twenty-two superintendents, the AAR board, the STB board, and the FRA’s Jolene Molitoris. Through this process Evans got a feel for the railroad that Burns never had. He enjoyed Davis’s company and found him “very insightful about the railroad.” He also thought Davis was tired and eager to retire59
The new approach to organization involved assessing actual traffic against what was possible. “We had capacity to sell, and we told Marketing and Sales to bring on the volume to create gross revenue,” said King. “Well, we brought it on until it created bottlenecks. As we went through the CNW and SP mergers, we began to approach too many of our problems as episodic instead of systemic…. We weren’t doing the same thing at the same time every day. In the early ’90s, for example, we used to revise our transportation plan three to four times a year for season reasons. Now there are hundreds of changes weekly. There’s no consistency, and that’s lengthened our transit times.”60
This tendency to emphasize volume above all else had long characterized railroads. Trains moved whether filled or not, and they had a long tradition of scratching for whatever business they could get to keep it out of a competitor’s hands. Often marketing did not know (or care) whether operating could handle (p.389) the traffic it solicited in a timely manner or at all. Little attention was paid to the fact that the business acquired might be very low margin or not even profitable.
The emergence of capacity restraints intensified this problem. Service deteriorated, and situations arose where low-margin business pushed aside traffic with higher margins. The service crisis gave UP a golden opportunity to throw off low-margin business to other railroads, but even then old habits died hard. In one meeting some of the finance people wanted to suggest leaving some low-margin traffic to BNSF to free UP for better-paying business. Before they could even speak, however, it was announced proudly that UP had just scooped some of BNSF’s intermodal traffic by offering a lower rate.61
In announcing the new structure, the company hinted that it was studying what sorts of traffic produced the best results and whether to charge more for shipments moving through crowded corridors at peak seasons. Davidson added hastily that the object was not to chase customers away. “Rationing the business really isn’t the main underpinning of what we’re getting at here,” he said.62
Bromley offered a more revealing comment. “We’ve certainly learned the hard way that the days of seemingly unlimited capacity are behind us,” he said, “and before we sign a contract we’d better be careful. That’s a sea change in our thinking. We can’t be all things to all people.” The problem was that UP was already locked into many long-term contracts. Even with a newborn emphasis on pricing it had to find ways to solve or at least mitigate the capacity problem. The business kept coming, and Davidson said his primary goal was to recover the 10 percent of traffic lost during the crisis.63
To ease capacity crunch on the Powder River lines, UP bought back a 107-mile line in northeastern Kansas that it had sold in 1990. The line could relieve pressure on the Red X by serving as an alternative route between the Midwest and Wyoming, especially for returning coal empties. UP also decided to rebuild the old Kansas Pacific line to handle eastbound Colorado and Utah coal. Having decided earlier to abandon the Tennessee Pass line in Colorado, one of the steepest and costliest to operate in the country, UP found it useful during the capacity crisis and postponed its demise.64
In December the STB formally declared the crisis ended and rejected yet another attempt to force the UP to share its tracks in the Houston area. The board also noted that the service failures had been caused not by the SP merger but by an “operational crisis that has now been solved.” A Dow Chemical official grumbled, “It’s obvious we are getting nowhere with the STB. The next step will have to be Congress.” Ahead loomed a fight over reregulation that had loomed since passage of the Staggers Act.65
History hung over the UP as it did over every railroad. Many of the problems facing Davidson echoed those confronted by Walsh a decade earlier: the growing pains induced by mergers, the decline in quality, the disconnect between (p.390) marketing and operations, changes wrought by new technologies; the roller coaster of employee morale, the need to delegate responsibility, and the lack of communication within the ranks. The struggle to free itself of the shackles of the past proved more difficult than anyone suspected.
As 1999 opened, however, UP had reason to celebrate. It had survived the service crisis and lived to fight another day. Davidson had kept his post and brought in a new leader to preside over the Transformation. “We went to hell, looked the devil in the eye, and came back,” said Davidson. “It has been a profound experience. We have all made a blood-oath commitment that we’re going to learn from the desperate situation we were in and come out of it a far better railroad.”66
The road to redemption, like another well-known artery, was paved with good intentions. The question that intrigued some and worried others was where it would lead and how successful the company would be in staying on it.
(1.) Dolan interview, 40; Jacobson interview, 56; Duffy interview, 38.
(2.) Info, July/August 1998, 7.
(3.) Ibid., November/December 1997, 4, and July/August 1998, 20–21; Marchant interview, 75; Bryan interview, 68.
(4.) Bryan interview, 68–69; Industry Week, October 5, 1998, 33–35.
(5.) Industry Week, October 5, 1998, 70; Info, November/December 1997, 4–5, and April/May 1998, 6; RailNews, April 1998, 9, 23; Hemmer e-mail, May 14, 2010.
(6.) Marchant interview, 74; Info, November/December 1997, 6.
(7.) WSJ, July 18 and October 23, 1997, and January 6 and January 23, 1998.
(8.) Matthews 2 interview, 35.
(10.) Ibid., 36; Stuart interview, 79.
(11.) Matthews 2 interview, 36–38; WSJ, February 27, 1998.
(12.) Stuart interview, 82–84; Treasury & Risk Management, January/February 1999, 38. The UP called the issue “convertible preferred securities.” For a detailed description of them, see UP Report, 2000, 45.
(13.) Matthews 2 interview, 37–38; von Bernuth interview, 20–21; RailNews, July 1998, 32.
(14.) Matthews 2 interview, 36–37.
(15.) Source withheld by request; Davidson 4 interview, 35.
(p.479) (16.) Source withheld by request; Davidson 4 interview, 35–36; Waller interview, 41–42; BW, June 15, 1998, 53.
(17.) WSJ, February 10, 1998; NYT, February 14, 1998.
(18.) WSJ, February 9, 1998; CNN Money, February 9, 1998; Hemmer e-mail, May 14, 2010.
(19.) Hemmer e-mail, May 14, 2010.
(20.) NYT, February 14, 1998; WSJ, February 17, 1998; BW, February 23, 1998, 47; RA, March 1998, 20.
(21.) RailNews, May 1998, 9.
(22.) NYT, February 14, 1998; WSJ, February 17 and 27, 1998; Trains, March 1998, 16–17, 76; BW, March 2, 1998, 46.
(23.) Info, January/February 1998, 4, March/April 1998, 5, and May/June 1998, 12; WSJ, March 12, 1998; NYT, March 26 and April 10, 1998; RailNews, May 1998, 9.
(24.) Fortune, March 30, 1998, 99, 102; RA, April 1998, 24.
(25.) RA, April 1998, 24; RailNews, April 1998, 23; WP, April 1, 1998.
(26.) WSJ, April 2 and April 20, 1998; CSM, April 7, 1998; WP, April 17, 1998.
(27.) NYT, April 21, 1998.
(28.) CNNMoney, April 23, 1998; Trains, April 1998, 21; WSJ, April 24, 1998; RA, May 1998, 23.
(29.) Trains, May 1998, 24; NYT, July 7, 1998; RailNews, July 1998, 23; telephone interview with Mike Hemmer, December 20, 2009; Info, March/April 1998, 4, and January/February 1999, 12–16.
(30.) WSJ, May 29, 1998; Saunders, Main Lines, 340–45.
(31.) WSJ, April 30, 1998; RA, June 1998, 34–35, 70.
(32.) RA, June 1998, 34–35, 70; Info, January/February 1998, 8–12.
(33.) NYT, July 7 and August 1, 1998; WSJ, July 7, July 24, July 28, August 3, and August 19, 1998; CNNMoney, July 23 and August 14, 1998; RA, August 1998, 27.
(34.) Davidson1 interview, 73, 75; Davidson2 interview, 44–45; Info, September/December 1998, 8.
(35.) Rebensdorf interview, 35–36, 40–42; Koraleski interview, 48–49; Marchant interview, 71–72; Young interview, 31–33; Peterson interview, 40.
(36.) McAuliffe interview, 59; Bryan interview, 79.
(37.) Info, March/April 1998, 2.
(38.) Ibid. Emphasis is in the original.
(39.) Info, May/June 1998, 8–9; UP Report, 1998, 46; Davidson1 interview, 73; Davidson5 interview, 48–49.
(40.) Duffy interview, 48–49; Davidson5 interview, 37–39; Info, September/December 1998, 18.
(41.) Kenefick, “Railroad Operating Organization,” 4. For more detail on Harriman’s organization, see Klein, UP: The Rebirth, 129–42.
(42.) WSJ, August 25, 1999; RA, August 2000, 47–49.
(43.) RA, August 2000, 49.
(44.) Info, May/June 1998, 2, and September/December 1998, 7, 10.
(45.) Ibid., September/December 1998, 12; Schuster1 interview, 82–83; WSJ, August 25, 1999.
(46.) NYT, August 20 and August 21, 1998, and March 7, 1999; CNNMoney, August 20, 1998; RA, September 1998, 22.
(47.) Info, September/December 1998, 9, 11.
(48.) Ibid., 8; Kenefick, “Railroad Operating Organization,” 1.
(49.) JC, September 14, 1998; PR Newswire, August 31, 1998; RA, October 1998, 22.
(50.) PR Newswire, August 31, 1998.
(51.) Duffy interview, 48.
(52.) King interview, 21.
(53.) PR Newswire, August 31, 1998; JC, September 14, 1998.
(54.) Info, September/December 1998, 15.
(55.) WSJ, August 25, 1999.
(p.480) (56.) Info, September/December 1998, 10, 16.
(57.) WSJ, September 16, 1998; NYT, September 16, 1998; RA, October 1998, 22; Gerry Jr. interview, 34; Schuster1 interview, 76–77.
(58.) Trains, June 1998, 14–15; Info, January/February 1999, 18–19, and May/June 1999, 12–13.
(59.) Davis interview, 47; “Memo to file,” undated, JRD; interview with Ike Evans, June 11, 2008, 7–8, 77–78, hereafter cited as IEvans interview.
(60.) Info, September/December 1998, 16.
(61.) Matthews1 interview, 68–70; Source withheld by request.
(62.) NYT, September 1, 1998.
(64.) Ibid., August 20, 1998; Trains, July 1997, 88–89; Info, September/December 1998, 17; RailNews, October 1997, 23, November 1997, 27, December 1997, 76–77, and June 1998, 32; RA, September 1998, 24.
(65.) NYT, December 22, 1998; RailNews, March 1999, 9, 21.
(66.) NYT, March 7, 1999.