Rail Outlook 2015: Union Pacific Railroad's Jack Koraleski

Jack Koraleski, Chairman/CEO, Union Pacific Railroad

What's your take on near-term business potential heading into 2015? What's your best-guess business forecast for next year and how can it come to fruition?

We see tremendous opportunity across Union Pacific's diverse franchise and remain focused on improving our network velocity and fluidity so that we can leverage these opportunities by safely providing our customers with excellent service. UP finished its third quarter with 7 percent volume growth.

Overall, the U.S. economy continues to show signs of strengthening, though we are keeping a close eye on softening economies in various parts of the world. Our diverse franchise and strong value proposition will continue to support business development efforts across our network in 2015.

Going forward, overall production and consumer demand will drive opportunities in finished vehicles and auto parts shipments; America's continuing energy production and oil prices should drive demand for frac sand and drilling materials; grain shipments should be strong reflecting another record domestic corn and soybean harvest; and intermodal highway conversions will be supported by around $1.4 billion in investments in our intermodal terminal network since 2000.

In 2014, UP's capital program was $4 billion. We expect to continue investing 16 percent to 17 percent of revenue on an annual basis to strengthen our network, focusing investments on infrastructure, replacement, productivity and growth projects that generate an acceptable level of return. Key projects over the next several years include investing in capacity in the Pacific Northwest and across our Sunset Route between Los Angeles and El Paso, and a new classification yard in Hearne, Texas, that will connect some of the largest and fastest-growing markets in North America, including cross-border traffic originating from Mexico. These and other strategic investments will strengthen our network, add resources and ensure we are prepared for growth.

What will be an important issue for your railroad in 2015 and what are the potential obstacles to growth?

Among the most important issues for Union Pacific and the entire railroad industry is the outcome of several regulatory items.

First on the list are two topics that the Surface Transportation Board (STB) is dealing with: open access and revenue adequacy. We have been very clear that providing open access to customers on another railroad would destroy efficiency and create possible unintended consequences. The STB also is looking at a revenue adequacy standard, established more than 30 years ago by the Staggers Act — which is a great American success story that demonstrated the value of partially deregulating the rail industry by allowing railroads to improve productivity and compete for fair returns in the marketplace. It's absolutely critical that we continue to be able to earn adequate returns, particularly on a replacement cost basis. We're working hard to ensure that the STB and our customers understand that a cap restricting the ability of U.S. railroads to earn an adequate return will reduce the industry's much-needed investments in infrastructure to support future freight transportation growth.

Next, it has become clear that despite investing billions of dollars and a herculean effort, railroads are not going to meet the 2015 deadline for positive train control installation. We are committed to the project, but there is a general understanding in Washington that the 2015 deadline won't be met, and we are hopeful it will be extended.

The final critical issue is crude oil. UP's No. 1 priority is safely transporting freight, including crude oil and all flammable liquids. However, some of the changes under consideration by the U.S. Department of Transportation would have far reaching and unintended negative consequences for the country and for railroads, our shareholders, our customers and our employees. For example, a uniform national speed limit would degrade America's railroad network fluidity, shift freight traffic and risk to over-the-road trucks and other transportation modes, and impose excessive implementation costs. It is critically important that we find a solution that will ensure we can safely and efficiently deliver all customers' freight to help them remain competitive in their respective markets.

Additionally, as we head into the winter season, UP is applying the lessons learned from last winter and already has taken steps to minimize weather impacts on our customers and our operations. These include the development of a Winter Weather Command Center, comprehensive and consistent operations to manage conditions, equipment investments such as generators and blizzard busses, increased staffing and service design considerations.