Freight rail stakeholders will be watching closely as Union Pacific’s incoming CEO Jim Vena takes over the company, especially given how labor and operational dynamics have changed over the last three years since the industry veteran was last at UP as chief operating officer and later strategic adviser.
Vena, whose appointment came amid hedge fund pressure to change leadership, will assume his new role Aug. 14, replacing outgoing CEO Lance Fritz. Beth Whited, who is currently UP’s executive vice president for strategy and sustainability, will be promoted to the railroad’s president that same day.
Growth or OR?
What observers see as being the heart of the matter is whether Vena will focus on improving operations and creating efficiencies or on attracting more business to the railroad and pursuing growth opportunities — even if it means potentially higher costs in the short term via ensuring UP (NYSE: UNP) has sufficient employee head count to ensure smooth operations.
Vena is a 40-plus-year industry veteran who was instrumental in implementing precision scheduled railroading (PSR), a tool used to streamline operations and cut costs, at UP. He also worked at CN under Hunter Harrison, who is regarded as introducing the PSR model to the Class I railroads. Harrison had been CEO of Illinois Central, CN, Canadian Pacific and CSX. He died while serving as CSX’s CEO in December 2017.
While Vena’s appointment is “undeniably good, it does buck the recent trend of younger, growth-oriented (often former [chief marketing officers]) CEOs” who have been appointed at Norfolk Southern, BNSF, CNI and CSX — “the New Leaders of what I have been calling The Great Experiment,” said independent Wall Street analyst Tony Hatch in a recent note on the appointment. “Which brings us back to the great philosophical question of who should run a railroad — COO or CMO (simplistically)?”
And although Keith Creel, president and CEO of Canadian Pacific Kansas City, previously served as Canadian Pacific’s COO and also worked under Harrison, Creel has proven that he can be pro-growth, Hatch said. Meanwhile, others, particularly Harrison, have been known best — “and appreciated by investors” — as margin enhancers who focus on reducing a company’s operating ratio.
Hedge fund Soroban Capital Partners pushed for Vena’s appointment at UP earlier this year, and hedge fund TCI tried to install Vena as CEO at CN to replace former CN CEO Jean-Jacques Ruest. Still, Vena’s appointment at UP points to “existential questions for the future of the railway(s),” Hatch said.
Union members skeptical of appointment
Last week’s announcement of Vena’s appointment as CEO has gotten some criticism from union members and skepticism from shippers.
After UP’s announcement of Vena’s appointment, five leaders with the International Association of Sheet Metal, Air, Rail and Transportation Workers – Transportation Division (SMART-TD) voiced their disapproval of the selection because of the way Vena implemented PSR at UP. “Watching Union Pacific place this Albatross as CEO for the foreseeable future is heartbreaking for those of us who have worked hard to bring Union Pacific back from the brink,” a July 26 letter to Maqui Parkerson, UP vice president of labor relations, said.
The leaders also expressed doubt that Vena would make or maintain SMART-TD’s collective bargaining agreements. They had planned to meet with outgoing UP CEO Fritz in August, but said they would set their sights on tentatively scheduled meetings in September and November.
“We have every intention to negotiate in good faith … however, we also feel that there is very little chance your group will be allowed to do likewise,” the letter said. “SMART-TD has worked vigorously to make agreements designed around real change and real quality of life for our membership. Make no mistake, we do not wish to abandon the work we have done or the progress we have made during this time.”
The letter went on to say that “Union Pacific took a giant step backwards in its leadership and has lost our trust with the announcement. … We need to see positive actions, not words … from this new group of leadership before any faith can be restored. Until then, we remain skeptical and are preparing our membership for another round of poor service to customers and decreased quality of life.”
Investors also express surprise
Meanwhile, investment firms generally praised the appointment because of Vena’s operational track record at UP and other Class I railroads, particularly at a time when UP has been seeking to improve service metrics.
But investors were also surprised by the timing of the announcement since Vena’s name as a potential successor had been floated around in February by Soroban Capital Partners when UP’s new CEO search became public.
Some investors had also thought UP’s next CEO would have a marketing focus or would have been an industry outsider because of the shifting industry dynamics that Hatch alluded to.
“We’ve known Mr. Vena since he was COO of CNI in the mid-2010s, and think highly of both his rail operating expertise (developed with Hunter Harrison and Keith Creel) and ability to tell the company’s story crisply to investors,” said a July 26 note from Susquehanna transportation analyst Bascome Majors. “We feel he was the best candidate available to get the trains running consistently at UNP over time, but our sense and read of the market consensus had moved on to ‘the field’ with an outsider most likely the odds-on favorite to win the CEO seat at UNP (similar to Joe Hinrichs at CSX last year). Looking forward, we believe the valuation bump will likely be durable for UNP into 2024 and are eager to see Mr. Vena roll out his strategy to railroaders, customers, and investors this fall and next year.”
Said Morgan Stanley transportation analyst Ravi Shanker in a July 26 note: “All eyes will be on the appointment of Mr. Vena as new CEO. We do not expect a redux of his 2019-2020 stint as COO. … Mr. Vena is a well known figure and the market will cheer his appointment. However, we would note that the Rail industry environment of today is very different from the PSR-fueled cost cutting world of 2019, when Mr. Vena was COO of UNP.
“On the one hand, UNP likely does not have the bandwidth or low-hanging fruit to cut costs today as it did in 2019 esp. after the long, hard efforts to resource up and restore service in the last 3 years,” Shanker said. “On the other hand, even if UNP tries to aggressively cut costs, we believe customers, regulators (the STB) and perhaps even Congress may take notice with potentially negative outcomes.”
UP’s new management team, which will include Whited as president, will likely be focusing on growth given the new industry dynamics, Shanker said.
For its part, UP acknowledged that 2023 is a different time from even recent history.
In a statement to FreightWaves in response to the July 26 SMART-TD letter, the railroad said: “Class 1 railroads are in a different era with new stakeholder expectations. Transportation and markets demand new approaches and strategies to meet customer requirements. Union Pacific is proud of the sick leave agreements that we reached with 12 of 13 unions and remains committed to continuing work to address quality-of-life issues.
“Incoming Union Pacific Chief Executive Officer Jim Vena, who started his railroading career as a brakeman, understands firsthand the challenges of our craft professionals and will be meeting with Union Pacific employees and other key stakeholders soon after assuming his new position Aug. 14.”
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