L E T T E R F R O M T H E C H A I R M A N
I'm pleased to report that 2000 was a year of solid achievement for our company. We faced many challenges over the past 12 months, from escalating fuel prices to a sharp year-end decline in the economy. But the strength of our franchise, the resilience of our operations, and the dedication and experience of our people saw us through to a successful year. Here are a few of the key financial highlights:
In our last annual report, we reviewed efforts to strengthen our franchise and transform our culture so that we could deliver on the promise of the merged railroad network. As we began to see tangible results, we stepped up the intensity of our efforts to make Union Pacific a company where customers want to do business, employees are proud to work and value is created for shareholders.
The key to achieving this vision is providing high-quality customer service. To do this, we are focused on improving reliability, being innovative in our business approach, and working smarter through the quality process to ensure that things are done right the first time. Throughout this report, you will see examples of this intensified customer focus.
The Market Opportunity
Our unparalleled rail franchise gives Union Pacific a tremendous advantage in serving customers throughout North America. Our studies have estimated the available market for long-haul inter-city rail service in the western United States at close to $90 billion. Today, the majority of this traffic moves by truck. Western railroads have tapped only about 22% of this market, so there is enormous unrealized opportunity. To capitalize on our efficiencies and make headway in this broader market, we need to demonstrate to customers that we can provide reliable service.
According to our customer satisfaction surveys, the speed of our service is not as critical as reliability. Efforts to improve our reliability have been under way on many fronts, from tighter accountability in field operations, to more efficient car scheduling, to the reliability and availability of our locomotive fleet. Over the past three years, we have acquired over 875 new units, with another 500 planned in 2001. This has enabled us to retire more than 1,000 older, less efficient locomotives in that same period, with significantly more retirements to come. This fleet modernization is translating into lower maintenance costs, better fuel efficiency, more flexibility, decreased emissions, and greater reliability for our customers.
While there is room for improvement, we are gaining on the competition. Survey results show that customer satisfaction with Union Pacific has increased steadily over the past three years, while truckload service levels appear to have plateaued.
One of the most significant new opportunities for continuous quality improvement is the growing use of e-commerce and the Internet.
We've taken some early steps in using the Internet to improve our back-office processes. For example, train crews now go on line to determine their work schedules, while auto customers can track individual vehicles across the railroad. Another new opportunity is RailMarketplace.com, an industry alliance for supply management. Through this effort, we should see the cost benefits of standardization and economies of scale.
Beyond back-office processes, the Internet also provides many ways to interact with our customers. One of our recent efforts is a new website called MyUPRR.com. This is a customized workspace that enables customers to see information about their shipments. As this concept continues to develop, it will give us another way to improve productivity, and make it easier for customers to do business with Union Pacific.
Innovation and Alliances
With operations more fluid and the quality of our service improved, we have become more innovative in leveraging the strengths of our franchise. Not only can we serve our traditional customers more effectively, but we can also reach out to customers who have never used rail service before. For example, we're using day-of-the-week pricing to optimize yield and capacity in certain corridors. We're offering truck-rail packages to reach new customers or meet specific service requirements. We're using the strengths of our rail network to offer targeted new premium services.
Innovation can be seen in the spirit of cooperation within the rail industry. We are working to improve interchange points and to track shipments across railroads. We're also forming targeted new alliances to meet specific customer needs and compete effectively for new business opportunities. As an example, we work closely with both Mexico interchange partners, Ferrocarril Mexicano and Transportacion Ferroviaria Mexicana, to ensure an efficient flow of traffic north and south of the border. Our revenue associated with Mexico traffic grew 19% in 2000 to $850 million, and we believe this will be a growing opportunity in the years ahead.
Serving Customers at Overnite
The focus on quality service to customers continues at Overnite as well. Overnite's dedicated employees have remained committed to excellence, despite attempted disruptions by the Teamsters during the year. As a result, transit times and service performance in 2000 were the best in Overnite's 65-year history, with on-time service averaging close to 98%. These strong service levels enabled the company to roll out several expansions of its expedited Overnite Advantage program during the year, including a new Advantage Guaranteed service, which responds to the particular needs of very time-sensitive customers.
Net income at Overnite improved a dramatic 51% to $43 million in 2000, reflecting record revenues, improved productivity and lower strike-related costs. Cash flow to the Corporation increased 46%, to $62 million.
Union Pacific has long been in the forefront of developing technology to support its railroad business. Many of these technologies have expanded beyond their core transportation applications. This past June, Union Pacific formed Fenix LLC, a new holding company subsidiary. Through Fenix, the Corporation is taking steps to help realize this untapped value without losing focus on its primary transportation business.
There are now four separate companies under the Fenix umbrella. These companies have been making great strides throughout the year, developing and expanding their product offerings and reaching out to diverse customers ranging from the Seattle Mariners to Starbucks Coffee.
As we look over the past year, we are encouraged by our progress on many fronts, and proud of the people throughout Union Pacific who have given their best efforts to make our company successful.
We would like to extend our special thanks to a departing member of our Board of Directors, Dick Cheney. Dick left us this past year in order to carry out his new responsibilities as Vice President of the United States. While his contributions to the Board will be missed, we know that his experience and integrity will serve our country well.
We would also like to welcome two new directors to our Board, Archie Dunham, chairman and chief executive officer of Conoco Inc., and Steven Rogel, chairman and chief executive officer of Weyerhaeuser Company. These two business leaders bring extensive experience and customer perspectives that will help us run a quality company.
In the year ahead, there is much more that can be accomplished. We will face continued challenges such as higher fuel prices and economic uncertainty, but we are well positioned to meet these challenges and opportunities. We have strengthened our management team. We have improved the safety and efficiency of our operations. We are more innovative in our business approach, and we are unrelenting in our efforts to improve productivity and lower costs through the quality process.
Going forward, we will build on these efforts, leveraging the strengths of our premier franchise to provide consistently reliable service for our customers and strong returns for our shareholders. As we look ahead, our vision for Union Pacific remains very straightforward. We are committed to being one of America's great companies a company where customers want to do business, employees are proud to work and value is created for shareholders.
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