Former Chairman, President & Chief Executive Officer, Union Pacific Corporation
Right Time To Step Down, Says Union Pacific CEO
Union Pacific CEO Lance Fritz says that this was the right time for him to step down. He thinks that technology will unlock asset utilization and safety for railroads. Lance also discusses the economy, carbon neutrality and 2Q results in an interview with Bloomberg's David Westin.
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About Lance Fritz
Lance Fritz, former Chairman, President, and CEO of Union Pacific, has discussed the company's operational and financial performance in several media appearances. In October 2022, Fritz stated that the company made "sequential improvement" in network fluidity from the second to third quarter, and he anticipated a return to normal operations in the fourth quarter. He attributed volume pullbacks to cooling consumer demand, particularly in domestic intermodal and parcel shipments, while noting strong demand in coal, grain, and some industrial segments. Fritz also addressed labor negotiations, saying he was "less comfortable" after the BMWED Maintenance of Way employees failed to ratify a contract, but he anticipated closing agreements by the end of the year. In 2023, Fritz described the hiring picture as "very difficult" in 2022, particularly in rural areas, and noted that Union Pacific was using hiring bonuses and a referral program to attract workers. He discussed the company's implementation of Precision Scheduled Railroading (PSR) to lower costs and improve the operating ratio. Regarding the regulatory environment, Fritz said the Surface Transportation Board (STB) had done "a very good job" of balancing its decisions with the health of the freight rail network. Earlier, in 2022, Fritz addressed supply chain disruptions, citing high import demand, a shortage of truck drivers and warehouse labor, and the impact of COVID-19. He also described organized train theft in the Los Angeles area as a "real problem," stating that the company was working with law enforcement and investing in security measures.
Transcript (16 segments)
D
David Westin0:00
So, Lance, you have your earnings. Take us through Q2 earnings. A little disappointing. How much of that is because of some softening in consumer spending?
L
Lance Fritz0:09
David, it was a tough quarter. And you pointed out correctly that the consumer slowdown in goods spending showed up on our top line. We had 2% lower volume, 5% lower revenue. And then we also saw some inflationary headwinds and some one-time items flow through our labor and compensation.
D
David Westin0:27
Did it surprise you or did you see it coming?
L
Lance Fritz0:32
Well, we saw the inflation coming. In our business, given the nature of our contracts and commercial relationships, it takes a little while to recoup all of that inflation through pricing. The part that we didn't know exactly the timing of was the agreement that we achieved with the SMART TD union on break persons. That cost us $67 million in the quarter, but it's going to have a two-year payback.
D
David Westin1:00
So the big news out of this with respect to you is not the earnings so much, but your future personally. You're going to be stepping down as chair and CEO of Union Pacific. First of all, why now? Why was this the right time?
L
Lance Fritz1:07
Well, I had started the conversation with our board at least a year and a half ago, targeting the front end of 2024 or the back end of 2023 as the right time for the board and I to be able to make the decision on my retirement. So we've been working on it for quite some time. We accelerated that work at the beginning of this year, and I'm just so proud of the work that the board did. A very thorough and exhaustive search, and they ended up picking what is a fabulous person for our CEO, a very well-experienced railroad operator. We have some experience with him, so he's rejoining the UP team. I couldn't be happier.
D
David Westin1:52
So it is time, or at least getting towards time, to look back on your tenure there. As you look back, what are you proudest of? What do you think is your legacy that you feel you will leave behind you?
L
Lance Fritz2:01
Well, David, in the eight and a half years, I've been very fortunate and honored to lead this company. I'm really proud of the work that we've done building the team. I've got the best team in the railroad industry. I'm proud of the work that we've done on sustainability, on diversity, equity, and inclusion. My board reflects that. And I'm also proud of the fact that we created value for our shareholders all through those eight and a half years. So it's been a heck of a run and I couldn't be more proud of my team.
D
David Westin2:31
What do you expect next for Union Pacific after you've left? What are the things that are left to be done you didn't quite get done?
L
Lance Fritz2:39
Yeah. One thing that I'm chagrined about is the consistency and reliability of our service product over those eight and a half, nine years could have been better. As we look into the future, our strategy is called Serve, Grow, Win Together. And Serve is building the foundation for a consistent and reliable service that generates growth. And David, you know, we talk about the three-legged stool that creates long-term value for all of our stakeholders: pricing, productivity, and growth. And the growth is enabled by excellent, consistent, reliable service. That's what we have to focus attention on.
D
David Westin3:16
Let's talk about the role technology has played and will play going into the future to achieve productivity as well as growth.
L
Lance Fritz3:22
Yeah, a couple of years ago we added Rahul Jalali as our CIO, and I couldn't be happier with that addition to the team because technology is a big deal for us. Technology is an unlock when it comes to asset utilization, when it comes to the efficiency of our operation, when it comes to safety. Things like wayside detection and evaluating the data that we get from wayside detectors, looking for equipment that's on the way to failure and replacing it before failure. And it also is going to be critically important as we align resources with demand. There's a big role for technology there, and then there's a big role for technology in how our employees show up at work and how they are scheduled for work. You know, we reached just a historic agreement with our engineers on the transportation craft for work-rest schedule. And technology is going to play a role in being able to implement that effectively. That's a life changer for those employees.
D
David Westin4:20
Lance, you mentioned sustainability is one of your goals, one of the things you feel you've made progress on. And you and I have talked in the past about the fact that using the rails often is the more sustainable alternative in terms of emissions. Where are we going in the future? Can we get to zero emissions coming out of railroad?
L
Lance Fritz4:35
Yeah, we're shooting for that in 2050. You know, we're the first railroad with hard SBTi targets that have a threshold for us to reach in 2030 with an eye towards carbon neutral by 2050. Early on, David, that's a lot about renewable fuels, biodiesel. It's also about reducing the amount of fuel that we consume in a more efficient C rate. We had a great month of June in our C rate. And then it's also about making sure that we're looking for ways to reduce the emissions on scope two and three by 2030. Our existing commitment is a 26% absolute reduction, and I'm pretty confident that's going up because we've also been working with SBTi to re-evaluate our commitments, given that we're trying to be below one and a half degrees Celsius warming by 2050.
D
David Westin5:33
Lance, we've always enjoyed being able to talk to you about Union Pacific and about what you're doing in Union Pacific. And one of the reasons for that, frankly, is you have a window on the economy right now. Let's take a step back from where you sit at Union Pacific right now. What can you tell us about where the economy is and where it's going?
L
Lance Fritz5:49
Yeah. So our quarterly results were kind of a little bit of a microcosm into the answer to your question. There were parts of the economy that we serve that are doing quite well. The recovery in the supply chain for automotive, makes finished vehicles and auto parts, vehicle parts. That business is up. Construction is up. And I think that's both reflective of the promise of the Infrastructure Act, but also the existing demand for infrastructure at state level. So that's been real powerful and strong. We saw some increase in things like metals and minerals which feed a fair amount of the economy, but we saw weakness in the consumer-oriented parts of the economy. Lumber for housing, brown paper for packaged goods, intermodal, domestic intermodal and international intermodal, on the shipment of consumer goods into retail distribution. As we look into the future, the best thing about Union Pacific is our franchise and our people that run that franchise and the fact that we touch a lot of the economy. I suspect over some period of time consumers are going to settle back down and then start growing again in their consumption of goods. I think the housing market needs to pick up just to satisfy demand for housing. And I also think that the industrial economy is poised for America to be the most competitive environment globally for production. We've seen that in a sweeping increase in direct investment in the United States. And I think that's going to translate into a really strong industrial manufacturing economy. That's good news for us into the future.