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Union Pacific Corporation Business Information, Profile, and History

railroad company southern

1400 Douglas Street
Omaha
Nebraska
68179
U.S.A.

Company Perspectives

Since its inception, Union Pacific has been a company whose activities have always been associated with the land--first as a key transportation link spanning the West, later as a developer and guardian of its natural resources. The strategic planning and investment decisions of the modern Union Pacific Corporation stem from this heritage. The corporation concentrates on businesses that it knows, using the specialized knowledge acquired over the years in fields of endeavor critical to the American economy and the nation's future.

History of Union Pacific Corporation

Union Pacific Corporation (UP) is a holding company whose principal operating subsidiary is Union Pacific Railroad Company. UP's railroad business is the largest in North America, linking every major West Coast and Gulf Coast port through more than 32,000 miles of track crossing 23 states. UP ranks as the largest hauler of chemicals in the country, but the company also transports substantial amounts of coal, food, forest products, grain, intermodal (truck trailers and containers), metals and minerals, and automobiles and parts. The railroad also runs a large commuter train operation in Chicago. UP's largest customer is APL Limited, a steamship company that operates in the Pacific, and its second largest customer is automobile manufacturer General Motors.

Transcontinental Origins

Union Pacific came into existence in response to the widely held belief, fully formed by the 1850s, that the United States needed a rail link between its older, eastern states and the distant but rapidly growing states of the far West. Various proposals were made for northern, southern, and central routes, but the U.S. Congress could not agree on a plan. Following the South's secession from the United States in 1861 the remaining congressmen from the North quickly agreed upon a route, and U.S. President Abraham Lincoln signed the Pacific Railroad Act of 1862, urged on by military considerations as much as by those of economics. The act called for the creation of a public corporation, called Union Pacific Railroad Company, to build a railroad from Nebraska to the California-Nevada border and there to meet the Central Pacific, building east from Sacramento, California, and later linked with San Francisco. Later, the meeting place of the two railroads was set at Promontory Summit, Utah Territory. As amended by a second piece of legislation, the act specified that the company would be supported by a loan from the federal government of U.S. bonds, to be paid back in 30 years, and by the issuance of its own bonds and capital stock. Further, the company would receive land grants in the amount of 6,400 acres on alternating sides of every mile of track laid, a checkerboard swath of land across the middle of the country that would eventually total around 12 million acres of valuable minerals, grazing land, and metropolitan real estate. The government retained the right to inspect each section of track laid before releasing the allotted number of bonds, and it would keep two directors on UP's board, but the company was to be otherwise a private sector venture.

While the logic and value of a railroad across the western United States was obvious in the early twenty-first century, it was much less so in 1864. The men who became involved in the leadership of the UP, chiefly Thomas C. Durant and the Ames brothers, Oliver and Oakes, did so largely in order to make handsome profits off the railroad's hurried construction. Durant was the vice-president and dominant figure in the company's early years, and it was he and a handful of others who formed a construction company called Credit Mobilier of America (CMA) to receive contracts from UP for the building of its vast railroad. Estimates vary as to precisely how inflated these contracts were, but later congressional investigations left no doubt that the backers of CMA intentionally siphoned off far more of the UP's capital than was fair to its investors or good for its future financial health. The investigations of the early 1870s also revealed that the CMA principals bribed members of Congress with company stock.

Still, the railroad they built was a splendid success, and so vast a project might never have been undertaken without the promise of equally vast profits to be made. In five years the UP crews laid more than 1,000 miles of rail between Omaha, Nebraska, and Promontory Summit, Utah Territory, where on May 10, 1869, a golden spike completed the first transcontinental rail line. The railroad's completion supplied a critical impetus to the development of the American West, which to that time had been settled only on the Pacific Coast and in areas of unusual mineral wealth, such as Colorado. With the coming of the railroad, farmers, ranchers, and manufacturers were able to transport their goods to the great eastern metropolitan markets cheaply and quickly, and the West began to fill with pioneers. As the area's most significant railroad for almost 15 years, UP enjoyed rapid growth and excellent earnings for its scandal-ridden promoters, who were dominated from 1873 to the mid-1880s by financier Jay Gould.

Expansion in 19th Century

Gould's direction of UP was notable for two things. First, the railroad expanded considerably during the decade of the 1870s. Its main route from Omaha, Nebraska, to Ogden, Utah, was soon joined by a host of feeder lines extending into the neighboring territory, some of them of substantial length; and from its Ogden terminus the company acquired control of two new branches, the Utah and Northern running to Montana, and the Utah Central progressing in the general direction of Los Angeles, which it reached in 1901. More immediately significant was the 1880 annexation by the UP of one of its rivals, the Kansas Pacific. The Kansas line ran from Kansas City, Kansas, to Cheyenne, Wyoming, via Denver, Colorado, and although its finances were in even worse condition than UP's it added an important link to the company's midwestern network. Finally, UP defended its transcontinental business by building a bridge to the Pacific Ocean through Idaho and Oregon, a system of new and existing lines that eventually fell under the aegis of UP's Oregon Short Line Railway Company. UP's original link to the ocean, the Central Pacific line to San Francisco, became a part of its most formidable rival, Southern Pacific, and was therefore lost to UP's purposes until late in the 20th century.

The second legacy of Jay Gould's years at UP was less beneficial. Beginning about 1875, Gould used the railroad's considerable income to pay an extremely high dividend on its common stock, of which he happened to own about two-thirds. As a result of Credit Mobilier's excessive construction contracts, UP was already badly overcapitalized and faced stiff periodic interest payments on its own bonds as well as an eventual lump sum reimbursement to the federal government of about $76 million of principal and interest on the latter's bond loan. Instead of taking prudent steps to provide for these liabilities, Gould bled UP of its cash flow, drove up the company's stock price by means of the huge dividends, and then sold the bulk of his shares in 1878 for a bulging profit. UP staggered on until 1884 with Gould and others of like persuasion in charge of its failing finances, at which time the company tried to make a fresh start under its newly elected president, Charles Francis Adams, Jr., a Bostonian of impeccable credentials with a scholar's grasp of the railroad business.

Government Receivership: 1893

Adams faced a doubly difficult situation. UP's actual and reputed past sins made it nearly impossible to convince Congress and the public that the new president was in fact taking commendable steps toward reducing the company's debt and improving its efficiency. As a result, Adams's efforts were often thwarted, and UP continued to struggle under the burden laid upon it by its founders. At the same time, UP was by then no longer the sole provider of transcontinental rail service. Competition from three rival lines had cut severely into UP's operating income by the mid-1880s, further complicating Adams's task. The combination of looming government debt, fresh competition in the market, and a skeptical legislative climate proved too much for the company when the financial panic of 1893 strained the U.S. economy to the utmost. In October of that year UP went into government receivership.

It was not until the end of 1895 that a satisfactory resolution of UP's debt was accomplished, during which interval the railroad lost many of its most important branch lines to local receiverships. In 1895 a reorganization committee representing UP's first-mortgage bondholders and backed by the New York investment banking house of Kuhn, Loeb and Company came up with a plan to foreclose on the railroad and sell its assets to a new company of the same name. The foreclosure sale was held in November 1897, and Kuhn, Loeb was able to raise the capital needed to pay off most of the government's $71 million in remaining debt and launch the new corporation on a solid financial basis. Quickly asserting himself on the UP's board of directors was an astute New York financier, Edward H. Harriman, who used his chairmanship of UP as the centerpiece of a remarkable railroad empire. Harriman was as brilliant a dealmaker as Jay Gould, but he also represented a new class of industrial magnate, one who was more interested in the construction of vast and durable business combines than in the clever manipulation of capital for immediate profit. Under Harriman's leadership, UP became one of the best run as well as one of the largest of U.S. railroads.

Harriman's Reign, 1898-1909

Harriman first set about retrieving the various pieces of UP lost during the receivership and soon reassembled the company's three basic networks: those running between Omaha and Ogden, Ogden and the Pacific Northwest, and Ogden and Los Angeles. Between 1898 and Harriman's death in 1909, the UP increased its track miles from 2,000 to 6,000, and when the chairman became frustrated by UP's failure to gain control of the old Central Pacific run between Ogden and San Francisco's bay area, he wasted no time in buying up Central's owner, Southern Pacific (SP). SP was UP's chief rival and equal, the owner of three main routes between San Francisco and Portland, Oregon; San Francisco and Ogden; and San Francisco and the entire Southwest to New Orleans. SP also owned a series of steamship lines extending from California to Japan and Panama, and from New Orleans to New York. UP's purchase of 45 percent of SP's stock in 1901 for $90 million virtually merged the two giants of western rail transport into a single, monopolistic entity dominating the markets from Kansas City to San Francisco and Denver to New Orleans, Louisiana.

E.H. Harriman was a man of unlimited ambition. Shortly after sealing the Southern Pacific merger, he entered into a complicated series of maneuvers that resulted in the purchase by UP of a strong minority position in Northern Pacific, owner of vital Chicago connections operated by the Chicago, Burlington and Quincy Railroad. In turn, Northern Pacific and Great Northern Railroad became a part of a holding company known as Northern Securities Corporation, which was ordered dissolved by the U.S. Supreme Court in 1904. When the pieces of this gigantic, short-lived combination were sorted out, UP emerged as the owner of 20 percent of both Northern Pacific and Great Northern and a substantial amount of cash profit as well. With the proceeds of this wrangling, Harriman bought sizable shares of many of the other important railroads in the western United States, in particular the Illinois Central and the Atchison, Topeka and Santa Fe, the latter providing the UP-SP's sole competition in the Southwest. The empire of E. H. Harriman and UP-SP thus comprised large numbers of railroads, railroad stocks, steamship lines, increasingly valuable real estate holdings, and uncounted tons of coal, iron, and other minerals.

Harriman was a prudent administrator of his roads, reinvesting the bulk of their net income in extensive renovation and new rolling stock. In 1906, however, he began paying an unusually large dividend of 10 percent, raising widespread accusations that Harriman was another profiteer out to gouge the public for his own benefit. The Interstate Commerce Commission (ICC) initiated an investigation into Harriman and UP that resulted in a 1913 decision by the U.S. Supreme Court that the company was inhibiting competition and must divest itself of its Southern Pacific holdings. Harriman did not live to see UP thus reduced roughly to the size and shape it had been in 1900, the company's lines once again restricted to the three main routes between Omaha and Ogden, Ogden and the Northwest port cities, and Ogden and Los Angeles. Lost was the prized route between Ogden and San Francisco, but in the meantime UP had beefed up its branch system and added new lines between Portland and Seattle.

Although Harriman died in 1909, his family retained a powerful influence at UP, Harriman's sons W. Averell Harriman and E. Roland Harriman sitting on the company's board for many years and both serving as chairmen. Furthermore, so successful was the elder Harriman that the company he left behind became a model for the railroad industry of financial strength and unexcelled performance. From 1916's gross revenue of slightly more than $100 million, UP more than doubled sales to $211 million by 1923, where they remained for much of that prosperous decade. Earnings were steadily excellent in the 1930s and 1940s, an increasing portion of them in the 1930s generated by UP's oil and gas holdings and industrial real estate. A long-term problem for the railroad industry had by then made itself felt, however; truck and automobile traffic was eroding the railroads' share of both freight and passenger miles. This trend, which would intensify during much of the 20th century, was especially painful when the Great Depression of the 1930s curtailed the heavy industrial transport upon which the railroads had come to depend. UP revenues did not approach their former heights until World War II recharged the industrial economy after 1940, and in the early 1930s they barely topped $125 million annually.

Averell Harriman was chairman of UP for most of the 1930s, and did an excellent job of keeping expenses down during the lean years while also investing needed capital in technological developments such as the diesel locomotive. With the outbreak of World War II the Harrimans had little to worry about in the financial realm. The need to shuttle huge amounts of personnel and heavy equipment around the United States gave UP all the business it could handle, company employment nearly doubling to 60,000 and revenue pushing to more than $500 million by war's end. Between 1914 and 1944 alone, UP purchased 2,270 new locomotives, including a number of Big Boys, the world's largest steam locomotive designed for the most taxing Rocky Mountain routes. The end of the war in 1945 caused only a temporary drop in sales for UP, and by the early 1950s revenue was again exceeding $500 million annually and the company remained in generally excellent financial health.

Stepping Up Resource Development Activities

The next few years were not as kind, however. UP faltered in the late 1950s, its income, dividend, and stock price all falling between 1956 and 1961. Part of the problem lay in the rapid depletion of the company's best oil well, outside Los Angeles, and part in the continuing loss of railroad freight sales to the trucking industry. In response, UP restructured its holdings into three divisions--transportation, land development, and natural resources--and in the mid-1960s began a concentrated program of mineral, oil, and gas exploration. The reorganization into divisions helped UP pursue what had grown into three very distinct businesses, each one with the potential to add significant dollars to the company's bottom line. Only a small percentage of the railroad's 7.8 million acres of remaining land had been fully explored and utilized, but even so by 1967 the firm operated five oil and gas fields and was the owner of the world's largest known deposit of trona soda ash ore; vast reserves of coal; and sizable holdings of iron, titanium, and uranium. In a further step toward the exploitation of these resources, in 1969 UP acquired Champlin Petroleum Company and Pontiac Refineries from Celanese Corporation for $240 million, thus completing the formation of a fully integrated oil and gas business. Champlin would eventually operate three refineries, in Texas, Oklahoma, and California, and to ensure that its plants were kept busy UP also signed a joint-venture agreement allowing a subsidiary of Standard Oil Company of Indiana to drill for oil on its acreage, with UP getting royalties and retaining a quarter interest in whatever oil was found.

Overseeing this diversification at UP was chief executive officer Frank Barnett, the first CEO without intimate ties to the Harriman family to run the company in the 20th century. Barnett, who became CEO in 1967, had as his goal to develop equally strong transportation and nontransport divisions at UP. In 1969 UP established a holding company called Union Pacific Corporation, with Union Pacific Railroad Company becoming one of the subsidiaries of this holding company. With oil prices soaring after the oil crisis of 1973-74, UP's revenue quadrupled during the 1970s to $4 billion, more than half of which was provided in the late 1970s by the nontransportation businesses. The company's coal reserves also became more valuable during the energy-conscious 1970s, when UP upped its production tenfold. Less successful was the company's 13-year effort, begun in 1962, to win ICC approval of a merger with Chicago, Rock Island & Pacific Railroad (CRI&P) and thereby secure a valuable link between UP's Omaha terminus and both Chicago and St. Louis, Missouri. The merger was opposed by rivals of UP who feared the impact of its entry into Chicago, the nation's busiest rail center. The CRI&P subsequently ceased operations in 1980, and many of its lines were sold to other railroads, including the Missouri Pacific and the Missouri-Kansas-Texas Railroad.

Merger with Missouri Pacific and Western Pacific in 1982

In 1982 UP gained a Chicago gateway in another way. In a move reminiscent of E.H. Harriman's reign, the company took advantage of U.S. President Ronald Reagan's deregulation of the railroads to accomplish an important merger with the Missouri Pacific and Western Pacific railroads. Missouri Pacific operated some 11,500 miles of track in Texas, Oklahoma, and Missouri, and also provided the crucial bridge between Chicago and Omaha long sought by UP, along with three key gateways to Mexico; while Western Pacific operated a route between Ogden, Utah, and the bay area of San Francisco.

The merger was a major undertaking, and it signaled a new era of consolidation in the U.S. railroad industry. While the move would benefit all three partners in the long run, it also presented UP with a massive organizational problem. With suddenly bloated employee and management ranks and a doubling of track mileage, UP slipped to dead last in operating profitability among U.S. railroads in 1984, although profits were up nearly 30 percent. The company's problems were not helped by the steadily falling price of oil, which was especially hard on domestic producers trying to squeeze the last drop out of older oil wells; but its basic need was for a drastic pruning of its labor force. This was accomplished by Drew Lewis, U.S. secretary of transportation in the early 1980s and UP chairman starting in 1987, and his railroad president, Michael Walsh, who together cut nearly 12,000 employees from UP's ranks. The cuts had resulted in far greater productivity from line workers as well as a more responsive management, whose ranks were thinned from nine administrative levels to only three. In another cost-saving move, Union Pacific Corporation in 1988 relocated its headquarters from New York City to Bethlehem, Pennsylvania. Walsh resigned in 1991 to become CEO of Tenneco. He was succeeded by Richard K. Davidson.

Meanwhile, UP gave up trying to beat the truckers and instead joined them, buying Overnite Transportation Company, a national trucking company, in 1986 and stepping up its capacity for intermodal services. Union Pacific Corporation in 1987 combined its Champlin oil and gas unit with its Rocky Mountain Energy mineral unit to form Union Pacific Resources Group. In 1988 UP further expanded its railroad operations through the acquisition of the Missouri-Kansas-Texas. The following year the Harriman Dispatching Center opened in Omaha, providing a central location for all train dispatching. Also in 1989 UP acquired a 25 percent stake in the Chicago & North Western Railway (C&NW).

Concentration on Railroad Operations: 1990-95

As the 1990s, a decade of intensified railroad consolidation, unfolded, Union Pacific Corporation increased its concentration on its railroad operations. In 1994 UP gained minority control of the C&NW, then acquired it outright the following year for $1.1 billion. UP subsequently had great difficulty integrating the C&NW, leading to service problems, including widespread delays for Midwest shippers, and an apology from UP management to its customers. Also in 1994 UP entered into a battle with Burlington Northern for control of the Atchison, Topeka & Santa Fe (the Santa Fe). UP's bid failed, and Burlington Northern and the Santa Fe merged in 1995 to form Burlington Northern Santa Fe, which thereby became the number one U.S. railroad. UP was able, however, to gain significant trackage rights from Burlington Northern as a merger concession.

Pennzoil Company, a major energy company best known for its motor oil, approached Union Pacific Corporation in 1995 about purchasing Union Pacific Resources, an overture that UP rejected. That year UP combined all of its natural resource operations into Union Pacific Resources, then sold a minority stake to the public. UP then sold its remaining 83 percent stake in 1996. It was during this period when it was divesting its noncore resources operations that Union Pacific made its boldest railroad acquisition yet in the consolidating 1990s: Southern Pacific.

Southern Pacific's Central Pacific Origins

The history of Southern Pacific begins with the efforts of Theodore D. Judah to build an earlier railroad, the Central Pacific. Judah was a Connecticut engineer experienced in railroad construction who moved to California in 1854 and immediately became absorbed by the possibility of a rail link between that state and the East. Not a financier, Judah lobbied Congress for help with his grand project, and around 1860 became acquainted with four ambitious businessmen from Sacramento. This quartet, whose members would go on to build and own the Southern Pacific, were Collis P. Huntington, proprietor of a large hardware store; Leland Stanford, lawyer and in 1861 governor of California; Charles Crocker, dry goods merchant; and Mark Hopkins, partner to Huntington. Along with Judah and a few other investors, the four promoters created the Central Pacific Railroad of California on June 28, 1861, and then set about finding the cash infusions that would be needed even to begin the mammoth construction project from Sacramento, California, to the East.

The bulk of these funds were eventually provided by the U.S. government, which under the terms of the railroad acts of 1862 and 1864 agreed to loan to Central Pacific a varying amount of government bonds for every mile of road built, depending on the difficulty of terrain traversed, and to grant it a checkerboard pattern of land on alternate sides of the railroad that would eventually total millions of acres of urban and range property. An important caveat deprived the railroad of most mineral rights to this land, a category generally interpreted by the courts to include oil. In addition to this federal aid, Central Pacific was empowered to sell stocks and bonds of its own, but in the early years few buyers for these could be found. The four original promoters were therefore continually scrambling for enough money to support the road's construction, which began in January 1863. To ease its chronic financial burden, Central Pacific persuaded municipalities to buy its bonds, threatening bluntly that if such support were not forthcoming the railroad would simply be built around the town in question, destroying its economic viability. In this way, Central managed to raise a substantial amount of money to complement its federal funds. However, as it became clear that the partners would succeed in their project, public optimism about the benefits thus gained was tempered by the realization that there would be one and only one major rail system in northern California.

Further blackening the reputation of the Central Pacific was the widespread belief that the promoters of the road were skimming profits. They awarded lucrative contracts to construction companies owned by themselves, contracts calling for payments in the form of both cash and Central Pacific stock and so liberal in terms that by the time the road was completed in 1869 the construction company was, in effect, its owner. The net result was that a railroad had been built over the Sierra mountains to Ogden, Utah, with government funds, but was now owned by four individuals.

Southern Pacific Supplants Central Pacific by 1884

Once the road was finished the promoters decided to remain in the railroad business, foreseeing that with a modicum of effort they could establish a virtual monopoly over the state of California. They began an intensive campaign of acquisition and expansion, rapidly solidifying their hold on rail transport throughout the state's midsection. In particular, Central Pacific's attention was drawn to a new government railroad venture known as the Southern Pacific, chartered by Congress in 1866 to build rail lines from the San Francisco Bay area to San Diego, California, thence eastward to California's eastern boundary. The Central Pacific promoters gained control of this new road in 1868, recognizing that such a project would allow them to duplicate their construction profits and also grow to be the dominant railroad in the far West. In the following 15 years the Southern Pacific spread its myriad lines from Sacramento all the way to New Orleans, having effected a number of mergers in the process, and as early as 1877 the Central Pacific-Southern Pacific combination controlled 85 percent of all rail traffic in the state of California as well. In that year the combined companies had sales of $22.2 million and capital of $225 million, soon greatly enlarged by the additional tracks reaching out to Texas and New Orleans.

In 1884 the three remaining promoters, Hopkins having died in 1878, took steps to ensure their control of the rapidly expanding Southern Pacific. Having sold the bulk of their holdings in Central Pacific, which by then was clearly of secondary value, they formed a new corporation, Southern Pacific Company of Kentucky, with which they acquired all of the stock of the old Southern Pacific and its subsidiaries while agreeing to lease the use of Central Pacific's roads. This arrangement not only further concentrated their hold upon Southern Pacific, but it also distanced the promoters from California's laws of incorporation, under which stockholders' liability was unlimited.

SP and its owners remained extremely unpopular for many years. The railroad's early bullying of municipalities, its discriminatory pricing, suspected trafficking in legislative votes by means of bribery, and monopoly power fueled popular resentment. Various legal remedies were attempted by the state of California, including the creation of a state Railroad Commission in 1876, but all were undermined by the Southern Pacific. In the 1890s the federal government also became increasingly involved in the regulation of railroads. The source of its concern was not only the public welfare but the more tangible fact that the transcontinental railroads owed the U.S. government a great deal of money, in the form of the 30-year bonds they had borrowed for construction and due to mature in the mid-1890s.

None of the roads, including Southern Pacific, had made provision for the repayment of these huge debts, operating income instead ending up in the hands of promoters. Partly in response to this crisis, the Interstate Commerce Commission (ICC) was created in 1887 as a federal agency charged with general regulation of the railroads; more specifically, by the mid-1890s it was clear that SP was unable to pay its debts and would require refinancing. So unpopular was the company in its home state of California that a San Francisco newspaper gathered 195,000 signatures, more than 10 percent of the state population, on a petition asking the government to foreclose on the railway and to run it as a public service. This the government was disinclined to do, preferring to get its money back rather than enter the railroad business, and after long negotiations the debt was refunded until 1909 and SP was instructed to have it paid off by that date. As the Southern Pacific was by then already the largest railroad in the United States, with 7,300 miles of track, and a profitable company when managed properly, it was able to meet the new debt schedule and was by 1909 financially independent of the government.

SP Briefly Controlled by UP in the Early 20th Century

In 1901, shortly after the death of the last of Southern Pacific's founders had left the company vulnerable, the rival Union Pacific bought a controlling interest in the road and in effect merged the two great western rail systems. The railroad monopoly of California thus became part of an even larger corporate giant, stretching from Portland to New Orleans and Los Angeles to St. Louis, Missouri, and including a fleet of steamships traveling between California and the Far East and between New Orleans and New York. E.H. Harriman, Union Pacific's chairman, was a far more prudent administrator than the previous generation of rail magnates, and under his direction both the Union Pacific and Southern Pacific were run according to a conservative philosophy of low dividends, the reinvestment of income in capital improvements, and a tight lid on debt accumulation. As a result, SP was able to pay off the federal government while strengthening its physical assets and generally to grow into a mature, efficient corporation.

Congress and the U.S. populace were less interested in Harriman's skills than in the monopolistic status of his railroads. As two monopolies do not make a market, an ICC investigation was followed in 1911 by a federal antitrust suit against the Union Pacific-Southern Pacific combination. The Supreme Court agreed that the combine inhibited competition and in 1913 ordered the sale of SP stock, much of which ended up in the hands of the Pennsylvania Railroad. As of that date, then, the Southern Pacific Railroad was restored to the general configuration it had had before the 1901 merger, its three principal routes being those between San Francisco and Portland, San Francisco and Ogden, Utah, and San Francisco and New Orleans. A second antitrust action deprived SP of its Ogden lines for a number of years, but these were eventually restored. Other litigation forced Southern Pacific to give up most of the oil-producing land included in its original grants, oil falling under the rubric of mineral rights, as well as its timberland.

Southern Pacific survived, however, and enjoyed a decade of unbroken prosperity in the 1920s. Buoyed by a strong national economy and the rapid growth of its two main markets, California and Texas, Southern's net income steadily rose to its 1929 peak of $48 million, despite having lost to the ICC the right to fix its own freight rates. These results were misleading, however, for in the meantime the nature of U.S. transportation had undergone a fundamental change as great as that of the railroad itself. Truck and auto traffic trebled during the 1920s, and along with the airplane would soon wrest from the railroads most long-distance passenger service and many types of freight, except those bulk items for which rail transport is ideal. The impact of these changes was not really felt by SP until the Great Depression brought to an end the era of plentiful business for all; reeling from these double blows, SP watched its net decline to $4 million in 1931 and then disappear altogether for the next four years.

The age of railroads had come to an end, and under new President Angus McDonald the Southern Pacific began the long evolution needed if it were to survive in a truly competitive marketplace. The former monopoly became far more responsive to the needs of its customers, offering a much more flexible schedule of service and the use of the railroad's own short-haul trucking company, Pacific Motor Trucking Company. Although the latter was barred by law from competing with full-service truck lines it became an integral adjunct to SP's rail system, transporting goods between the rail depots and customer warehouses. SP also fought a well-publicized if losing battle for passenger business, offering low-priced tickets on a number of famous routes between California and the East. These efforts may well have kept the Southern Pacific name before the public eye, but it proved simply impossible to move passengers by rail as cheaply and directly as by car and airplane, and for many years passenger travel was a money-losing burden on all railroads.

Despite these generally gloomy developments, Southern Pacific remained a true giant among U.S. corporations. Its 1936 assets of $1.95 billion were exceeded by only two other U.S. industrial corporations; it retained ownership of millions of acres of land that would some day become extremely valuable; and with 16,000 miles of track and $200 million in annual sales, Southern Pacific was among the three largest U.S. railroads by any measure chosen. Although the industry as a whole faced new competition, SP itself continued to enjoy the benefits of its relatively uncrowded western territory, where only Union Pacific and Santa Fe offered any challenge to its supremacy. The company was thus well positioned to take advantage of the enormous upsurge in heavy freight caused by the outbreak of war in 1939. With every segment of the industrial economy straining to meet the requirements of war, the railroad entered a period of unprecedented prosperity. SP's net income reached an all-time high of $80 million in 1942 and remained strong for several years, despite a vigorous program of debt reduction and capital outlays for new rolling stock and track.

Postwar Prosperity for SP

Following the war, Southern Pacific settled into a long period of sedate good fortune. Business lost to the truckers and airlines was more than replaced by the overall economic growth of its western home. Passenger revenue continued to decline, except for commuter service, but under the regulatory regime of the ICC the railroads were ensured a living wage in the bulk freight business, and since neither mergers nor rate wars were permitted the competitive environment was stable and modestly profitable. Under Donald J. Russell, Southern Pacific's chief from 1952 through the mid-1960s, revenue rose from $650 million to $840 million, and the company expanded its trucking service as well as added a profitable oil pipeline along a segment of its track in the Southwest. Russell spent liberally on maintenance of track and rolling stock, and SP generally built a reputation as one of the country's soundest railroads, although the sheer size of its operations forced the company to incur debt for capital expenditures at a level higher than Wall Street thought prudent. The tremendous growth of California's population and agricultural production kept SP healthy, along with the rapid increase in intermodal (rail-to-truck and truck-to-rail) transport and a booming oil business in Texas and Louisiana. The latter portion of the SP system had been solidified years before by the acquisition in 1932 of the "cotton belt" lines extending northward to St. Louis from Dallas, Texas.

While SP's market area and rate structure were both fixed, it could and did increase efficiency by means of technological innovation and consequent labor cuts. By 1969 the entire railroad was under the guidance of a computerized information system which helped to cut down on idle cars and switching delays. By means of such changes Southern Pacific was able to reduce its labor force from 76,000 in the mid-1950s to 45,000 by 1970, while substantially increasing its volume of rail traffic. This trend continued; in 1990 SP employed about 21,000 workers.

In 1972 SP diversified into telecommunications. Using its existing network of microwave transmitters, the company became a carrier of long-distance telephone and data communications, first to large corporate users and later to the general public under the Sprint name. In 1979 it also bought Ticor, the largest title insurer in the United States. Neither venture was particularly successful, however. Telecommunications was a world all its own, one that demanded expertise and more capital than Southern Pacific could spare from its own vast physical plant; and the Ticor purchase had barely been signed when a severe recession all but killed the residential real estate market on which the title business depends. As a result, both companies were eventually sold off. In 1982 two of SP's chief rivals announced a potentially devastating merger: Union Pacific and Missouri Pacific (along with a third merger partner, Western Pacific) would soon form the largest rail combine since the days of E.H. Harriman.

The merger of Union Pacific and Missouri Pacific was made possible by U.S. President Ronald Reagan's deregulation of the railroad industry and presented Southern Pacific with grave problems. The new Union Pacific would be able to offer longer through service and lower rates than Southern Pacific in nearly every market area, and Southern Pacific immediately began casting about for a merger partner of its own. In 1983 Santa Fe Industries Inc. purchased Southern Pacific with the intention of merging SP with the Atchison, Topeka & Santa Fe Railway (known as the Santa Fe), one of SP's main competitors. The proposed merger elicited immediate opposition from government officials and Santa Fe's competition, and the Interstate Commerce Commission in 1987 blocked the Santa Fe-SP merger as anticompetitive. Robert Krebs, the chairman of Santa Fe Industries, was forced to sell one of his lines and chose SP, which he felt was the weaker of the two.

Acquisition of SP by Anschutz in 1988

In October 1988 Southern Pacific found a new home among the holdings of Denver billionaire businessman Philip Anschutz, whose Rio Grande Industries already owned the Denver and Rio Grande Western Railroad. Anschutz, who had used his political influence to help block the Santa Fe-SP merger, paid $1 billion for Southern Pacific, which thus became a part of Rio Grande Industries, a group of railroads that functioned as cooperating but distinct rail systems.

In the initial years after the purchase, SP suffered from declines in its traditional accounts in auto parts, lumber, and food; increased competition from UP and the Santa Fe; and more rigorous safety inspections in California, where SP trains were involved in two chemical spills in July 1991. SP continued to show operating losses after the merger and was profiting mainly from the proceeds of real estate sales. Its railroad operations were bolstered, however, by improving the quality of its service through heavy expenditures to maintain its track. As trade between the United States and Mexico increased in the early 1990s, SP was positioned to profit from it with its six Mexican gateways in California, Texas, and Arizona. The company's strategy appeared to be working as an operating loss of $347.7 million in 1991 had been reduced to $24.6 million in 1992. Nevertheless, in 1993, SP slid back to a loss of $149 million. Contributing to the loss was $14 million incurred from the settlement of a class-action lawsuit stemming from one of the 1991 derailments which had contaminated the Sacramento River with weed killer.

In the summer of 1993, Anschutz turned to a railroad company veteran, Edward Moyers, to assist in turning SP around. Moyers had retired after a very successful four-year stint at Illinois Central, where he cut its operating ratio (operating expenses as a percentage of revenues) from 98 percent to 71 percent. Anschutz hired Moyers as chief executive, and Moyers immediately focused on SP's operating ratio, which stood at 96.5 percent in 1993. In an effort to reduce SP's debt load, 30 million shares of common stock were offered to the public in August 1993. Although the initial offering price was estimated at $20 per share, the actual price of the shares as issued was $13.50. Still, that the offering was successful at all was attributed by many to the hiring of Moyers. Investor interest in Southern Pacific increased in the several months that followed, so that by February 1994, when a secondary stock offering of 25 million shares was initiated, they sold for $19.75 per share. Following these sales, Anschutz owned 41 percent of the shares outstanding.

Moyers started a multipronged strategy for revitalizing Southern Pacific. First, he worked to cut costs by reducing the employee ranks through a buyout program and a reorganization. In his first year, he reduced the labor force by more than 3,000 to about 19,000 jobs. Second, Moyers focused on service to SP's customers, putting pressure on his subordinates to improve the operations. This initiative saved a lucrative Georgia-Pacific account by increasing on-time Georgia-Pacific deliveries from 0 percent to 80 percent in three months. Overall, on-time deliveries were up by more than 50 percent in his first year. Moyers also sought to bolster Southern Pacific's equipment through the purchase of new locomotives, the rebuilding of existing locomotives, and better maintenance of both trains and track. Although SP was still in weak financial condition, Moyers had managed to make a number of improvements, and in February 1995 he once again retired. Moyers was succeeded as president and CEO by veteran railroader Jerry R. Davis.

Union Pacific-Southern Pacific Merger in 1996

By 1995, the consolidation that followed the deregulation of the railroad industry in the early 1980s had reduced the number of large, Class 1 railroads from 40 to 10, but the mergers were not over yet. In November 1995 Union Pacific filed an application with the ICC to acquire Southern Pacific in a $3.9 billion takeover. One month later the U.S. Congress abolished the ICC, creating the Surface Transportation Board (STB) as the new railroad industry oversight body. The UP-SP deal was fiercely opposed by the Justice, Transportation, and Agriculture departments and by such rival railroads as Kansas City Southern and Consolidated Rail. In spite of this opposition in July 1996 the STB approved the merger, with the only major stipulation being that UP grant trackage rights to Burlington Northern Santa Fe over about 4,000 miles of track. The combined UP-SP railroad, which would operate under the Union Pacific name, was once again the nation's largest, with more than 30,000 miles of track and about $10 billion in revenue. The merger was expected to result in $627 million in annual savings through the consolidation of operations. In late 1996 Lewis retired as chairman and CEO of Union Pacific Corporation, and was succeeded by Davidson, who had most recently been president and COO of the UP holding company. Davidson was also named CEO of Union Pacific Railroad, while Davis became president and COO of the railroad.

Unfortunately, the integration of Southern Pacific into UP was no smoother than that of the Chicago & North Western. In fact it was far worse. Starting in the summer of 1997 and extending into 1998, Union Pacific's rail network suffered from gridlock, particularly along the Gulf Coast. By March 1998 delays in shipments had cost rail customers approximately $1 billion in curtailed production, reduced sales, and higher shipping costs. The STB in November 1997 ordered UP to temporarily open a part of its freight business in its Houston hub to Kansas City Southern. In February 1998 UP and Burlington Northern Santa Fe reached an agreement to create a joint dispatching center for their Gulf Coast operations, share ownership of line between Houston and New Orleans, and allow UP to use Burlington Northern tracks between Beaumont and Navasota, Texas, as needed, to bypass Houston congestion. In addition to its difficulties digesting SP, Union Pacific was also under fire for its safety record. Following three fatal accidents, a joint safety team was formed in August 1997 to review safety across the UP system. The team consisted of UP managers, union employees, and Federal Railroad Administration representatives. Meanwhile, UP moved its headquarters from Bethlehem, Pennsylvania, to Dallas in September 1997.

In May 1998 Union Pacific Corporation announced that it planned to divest its Overnite trucking unit through an initial public offering (IPO), in order to further focus on its core rail business. However, the IPO was abandoned following a deterioration in market conditions. An attempt to find a third-party buyer failed as well. In the fourth quarter of 1998 the corporation recorded a $547 million charge to reflect an impairment in Overnite's goodwill, leading to a net loss of $633 million for the year, a loss that was also due to UP railroad's service problems and system congestion. Another outcome of the railroad's service difficulties was the August 1998 announcement of a plan to decentralize its railroad management. The railroad was reorganized into three regions: southern, based in Houston; northern, based in Omaha; and western, based in Roseville, California.

In September 1998 Ike Evans was named president and COO of Union Pacific Railroad, succeeding Davis, who became vice-chairman until his retirement in March 1999. Evans had previously been a senior vice-president at Emerson Electric Company, a manufacturer of electrical, electromechanical, and electronic products and systems. In July 1999 UP moved its headquarters again, this time landing in Omaha, where its main subsidiary, Union Pacific Railroad, was located. The corporation continued to look for an opportunity to divest Overnite through an IPO or sale to a third party and was likely to be busy assimilating Southern Pacific well into the 21st century.

Entering a New Century

The Southern Pacific merger presented UP with arguably the most difficult challenge in its history. Difficulties with absorbing the assets persisted for years, continuing to plague the company a decade after the deal was completed. If it was any comfort, UP was not the only railroad to stumble through a megamerger: The acquisition of Conrail Inc. in 1999 by CSX Corp. and Norfolk Southern created profound operational problems for both of the acquiring railroads, but UP struggled far more than its rivals struggled. The company suffered from capacity problems during the first years of the 21st century, experiencing particular difficulties with the 760-mile "Sunset Route" it inherited from the Southern Pacific merger. Connecting El Paso, Texas, and Los Angeles, the route was used by Southern Pacific as a low-price alternative to faster, better-run service offered by competitors. Under UP's control, the Sunset Route became a bottleneck, forcing the company to turn away cargo originating from ports in the Los Angeles area and scheduled to move eastward. The cause for the capacity problems was the layout of the track, less than a quarter of which was double-tracked when UP acquired it from Southern Pacific. UP had added a second track to 100 miles of the route by 2005, enabling trains to move in both directions without idling on a side track to wait for a passing train, but the capital improvement project, slowed by low-paying customers using the route, still had much to accomplish a decade after the merger. In the short term, UP planned to invest $105 million to add 69 miles of double-track to the route, which was expected to be completed by 2007.

The problems along the Sunset Route represented a microcosm of broader operational inefficiencies UP experienced during the first years of the 21st century. In some respects, the lack of fluidity across the vast UP network was a function of ranking as the largest railroad, the price the company paid for being the industry behemoth. The company was able to devote more attention to smoothing out the wrinkles hobbling its progress after it disposed of its trucking business. In November 2003, after years of contemplating the divestiture, UP spun off Overnite in an initial public offering, making it what industry analysts referred to as a "pure" railroad company. Midway through the decade, there was evidence that UP was turning a corner, as the company posted encouraging results concurrent with a change in leadership. James R. Young became UP's president and chief executive officer at the beginning of 2006, succeeding Richard Davidson. Young, who joined UP in 1978 in the company's finance department, assumed day-to-day control over the company two years after being appointed president and chief operating officer of the railroad subsidiary. He inherited a company that posted record profits and revenue in 2005, gains that were attributed to a more efficient rail network that enabled UP to make more money per carload. In the years ahead, Young hoped his legacy would add another chapter of success to the history of one of the country's most powerful transportation companies.

Principal Subsidiaries

Union Pacific Railroad Company

Principal Competitors

CSX Corporation; Norfolk Southern Corporation; Burlington Northern Santa Fe Corporation.

Chronology

  • Key Dates
  • 1862 The Pacific Railroad Act calls for the formation of a public corporation to build a railroad connecting the eastern United States to the western United States.
  • 1866 Southern Pacific Railroad is chartered by the U.S. Congress to build rail lines from San Francisco to San Diego.
  • 1869 The first transcontinental rail line is completed.
  • 1901 Union Pacific Railroad acquires a 46 percent interest in Southern Pacific Railroad.
  • 1913 The U.S. Supreme Court rules that Union Pacific must sell its stake in Southern Pacific to comply with antitrust legislation.
  • 1969 Union Pacific Corporation is formed as a holding company.
  • 1982 Union Pacific merges with the Missouri Pacific and Western Pacific railroads.
  • 1986 Union Pacific enters the trucking business through the acquisition of Overnite Transportation Company.
  • 1988 Southern Pacific is acquired by Philip Anschutz and becomes part of Rio Grande Industries.
  • 1995 Union Pacific Corp. completes the $1.1 billion acquisition of the Chicago & North Western Railway.
  • 1996 Union Pacific Corp. and Southern Pacific merge, creating the largest railroad company in the United States.
  • 2003 Union Pacific Corp. exits the trucking business by spinning off Overnite in an initial public offering of stock.
  • 2006 James R. Young is appointed president and chief executive officer.
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