At Union Pacific, An Old Brakeman Faces His Ultimate Test
It was an apt close to a long, trying summer for Richard K. Davidson, chief executive of Union Pacific Corp. On the Friday before Labor Day, a contrite Davidson faced a crowd of 300 angry customers in the Marriott Airport Hotel near Houston. Apologizing for a string of fatal train wrecks and a series of huge bottlenecks plaguing the country's biggest railroad, Davidson promised to end the delays that have cost shippers millions of dollars. "He got up there and ate crow," says Edward H. Rastatter, policy director for the National Industrial Transportation League, the shippers' group that organized the meeting.
Davidson, 55, has been eating a lot of crow since he took over as ceo of the $11 billion Dallas-based railroad and trucking company in January. Following in the footsteps of the outspoken former U.S. Transportation Secretary Drew Lewis, the low-key Kansan had hoped to make his mark by pulling together the two unwieldy railroads that Lewis combined in last fall's $4 billion Union Pacific-Southern Pacific merger. Instead, the 37-year railroad veteran finds himself at the controls of a stumbling company.
TIRED CREWS. So why can't this self-described "operating guy" get the trains running on time? "That's a damn good question," blurts a frustrated Davidson over a recent steak dinner in Omaha. To critics, the answer is clear: An arrogant up, which also swallowed up Chicago & North Western in 1995, is showing the strains of managing two huge mergers in two years. "When you're growing that fast with any business, you open yourself up for errors," says Robert L. Evans, manager of rail transportation for Occidental Chemical Corp. in Dallas.
Indeed, Davidson is increasingly facing heat from all sides. Irate shippers are claiming millions in losses as a result of up delays along the Gulf Coast, and some are seeking penalties. The railroad is also under siege by federal regulators, who charge "a fundamental breakdown" in the company's ability to operate safely. Meanwhile, disgruntled employees are threatening a walkout unless up fixes "deplorable" safety problems, including fatigued workers and inexperienced dispatchers, says Clarence V. Monin, international president of the Brotherhood of Locomotive Engineers.
Davidson concedes management missteps. But he also contends that factors beyond his control--ranging from bad weather to backups caused by the Mexican railways--are equally at fault. Wherever blame lies, he is on the hot seat. Sensing opportunity in up's problems, Burlington Northern Santa Fe Corp. intends to ask the government for temporary control of some up tracks. Shippers, meanwhile, are defecting.
Already, the snafus have cost up dearly. James J. Valentine of Salomon Brothers Inc. figures the delays and lost business will cost up more than $100 million in pretax earnings for 1997, lowering his net profit estimate to $849 million on $11.4 billion in revenue. While still a 28% rise over last year's earnings before special charges, the drag may spill over into next year. And investors are jittery: From around 72 in July, the stock is now trading around 64.
Union Pacific's troubles are particularly galling for an executive who cut his teeth working the rails. Raised on a Kansas farm, Davidson went to work in 1960 as a brakeman on the Missouri Pacific to support himself while studying history at Washburn University in Topeka. Good pay and steady work, rather than a love for railroading, convinced Davidson to forego plans for law school.
He moved quickly through the ranks, becoming a superintendent of the railroad's largest division at the age of 27. Long hours and a willingness to tackle tough jobs propelled his rise. His first big break came when an early boss suffered a heart attack and he was asked to take charge of building a rail-car classification yard in Fort Worth. "There were many, many nights I'd work all night long," he recalls.
"CLASS ACT." A no-nonsense, detail-oriented manager, Davidson built his reputation by getting up's vast network to run smoothly. By the time the Missouri Pacific and Union Pacific merged in 1982, he had risen to vice-president of operations. Davidson's reputation for running a solid railroad caught the eye of rivals. In 1994, he was offered a top job at Burlington Northern, which was suffering its own operational problems and lacked an heir apparent to then-ceo Gerald Grinstein. "When you looked around the industry at that time, up was the class act," says a bn executive.
Despite his successes, sources close to the company say ceo Lewis was ready to let Davidson leave, but the board wanted to keep him. Lewis didn't return calls seeking comment, but some say he wanted a more visionary successor who could rally employees and customers. Lewis had brought in outsiders with such qualities in the past, including Michael Walsh and Ronald J. Burns, who ran the rail unit after Davidson was named president of the parent company. Recruited from Enron Corp. in 1995, the outgoing Burns wooed customers and tried to shake up up's stodgy culture. "Customers loved Burns," says one big shipper.
Indeed, even before its current woes, shippers complain that up was hardly a customer-friendly place. Customers praise Burns for shaking up marketing and service at up and for frankly discussing problems. A letter Burns wrote apologizing to shippers in late 1995 during the bungled c&nw merger--which Davidson spearheaded--was widely seen as a key factor behind Burns's abrupt resignation late last year. Davidson won't comment on Burns's departure.
With Burns gone, Davidson must rally the troops to win back customers. Throughout the mergers, he has delegated much of the day-to-day operations to his lieutenants. Now, he vows to be more hands-on. "I haven't been as close to the railroad in the last couple of years as I used to be," he confesses. For starters, he's spending four or five days a week in Omaha rather than in up's posh new Dallas headquarters.
Davidson's immediate hurdle is to improve service. He's already vowed to hire 1,500 train and yard crews by yearend, a 6% increase. And to clear out the logjam, Davidson will add another 327 locomotives to the 260 it had planned to buy this year. And though the earlier fiasco with c&nw had led up to go slowly in merging with sp, Davidson is now speeding up the integration of their information systems by 60 days.
In the wake of Davidson's late summer mea culpa, shippers have begun to praise up's efforts to tackle the problems openly, a sharp contrast to the way it handled complaints after the c&nw merger. "They're not wasting time circling the wagons," says shipper Theodore Prince, senior vice-president of steamship company K Line. "They faced the music."
The safety complaints may be tougher to derail. up recently established a hotline for employee safety complaints, and training for dispatchers has been doubled, to six months. But federal regulators still hover over operations, and U.S. Railroad Administrator Jolene M. Molitoris charges that a culture of intimidation has kept workers from reporting problems. Larry W. Parsons, a United Transportation Union official, grouses that managers "talk a good line on safety, but if it costs any money, they don't want to do it." With critics like that, a beleaguered Davidson still has plenty to do beyond simply getting the trains back to running on time.