If the Canadian Pacific-Norfolk Southern merger survives regulatory scrutiny, it would mark a historic change in North American railroading with consequences that could be felt in the Northwest.
The term “transcontinental railroad” in the United States has meant lines running from Chicago or the Mississippi River to the West Coast.
Three transcontinental railroads were built to the Puget Sound region and a fourth reached us by trackage rights. These were critical to the region’s growth and prosperity.
But none truly spanned the continent under the ownership of one company.
This would change if the Canadian Pacific Railway (CP) succeeds in buying the Norfolk Southern (NS). The $28 billion cash-and-stock deal was unveiled last week in a letter from CP Chief Executive Hunter Harrison to James Squires, his counterpart at NS.
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The combined system would run from Vancouver, B.C., to the East and Gulf coasts of the United States. NS alone operates 22,000 miles of lines in 22 eastern states. CP, Canada’s storied first transcontinental, totals 14,000 miles and reaches into the United States, thanks to mergers in the 1980s and 1990s.
If the merger survives regulatory scrutiny, it would mark a historic change in North American railroading with consequences that could be felt in the Northwest.
Today the U.S. has seven Class I railroads, the largest type of system, including two Canadian roads that bought U.S. lines. In the 1950s, the number was 127, as defined by the now-defunct federal Interstate Commerce Commission.
An apples-to-apples comparison is impossible because the Association of American Railroads, the industry’s trade group, defines Class Is differently today. But this midcentury lineup included some large and legendary railroads.
You can find their ”fallen flags” in today’s mega-systems. For example, the Norfolk Southern has all or part of the Southern, Norfolk and Western, New York Central, Pennsylvania, Erie, Reading and Wabash railroads.
In 2012, NS painted one modern locomotive in the colors of each predecessor railroad that makes up the company. They totaled 20 paint schemes.
Today’s BNSF, the dominant railroad of the Puget Sound area, is the inheritor of the Northern Pacific; Great Northern; Spokane, Portland and Seattle; Railway Atchison, Topeka & Santa Fe Railway; Chicago, Burlington and Quincy; and St. Louis and San Francisco (Frisco). These were substantial companies in their day and three were transcontinentals. (Union Pacific also serves this region.)
Mergers and acquisitions were the remedy both government and industry pursued in the decades of industry crisis, especially after the 1950s. Railroads were heavily taxed and regulated, while government built competing highways, interstates and airports, as well as killing mail contracts that helped support passenger trains.
Some mergers were failures, most notably the 1968 marriage of the New York Central and the Pennsylvania, fierce competitors in the Northeast. Falling industrial traffic and, especially, bad management drove Penn Central into bankruptcy in 1970, the largest in U.S. history up to that time.
The Union Pacific’s swallowing of Southern Pacific in 1996 resulted in catastrophic tie-ups of freight traffic. By the late 1990s, regulators instituted a moratorium on big mergers.
Consolidation helped the industry after its fashion, with the lack of a more visionary national freight (and passenger) rail strategy. Deregulation with the 1980 Staggers Act created a railroad renaissance.
Mergers reduced ”redundant” lines and lowered costs. Competition suffered, although the huge deals that resulted in today’s giants required trackage rights so rivals could reach key markets on the home railroad’s lines. Industry employment fell from 600,000 in the early 1970s to 185,000 in 2014.
Still, when the mergers stopped in the late 1990s, Chicago remained the invisible line between east and west (with some exceptions going a few hundred miles in either direction).
Until, maybe, now.
All this history is at play with the CP deal, as well as new developments. CP promises $1.8 billion in cost savings. Lower demand for eastern coal has begun to erode one of Norfolk Southern’s major commodities, perhaps making it vulnerable. Another factor: CP was put on a tight leash to Wall Street when “activist investor” William Ackman won a proxy fight in 2012, leading to a new board and CEO, as well as a strategy more focused on short-term gains and cost cutting.
The deal may not happen. NS might decline; as of last week, a formal bid had not been made and the company appeared cool to Canadian Pacific’s feelers.
The federal Surface Transportation Board, as well as antitrust regulators, would be concerned about the combination’s effect on competition and shippers.
But if it does, the combined entity would gain a straight shot from Vancouver to the eastern U.S., enhancing options around the gridlock of Chicago. This might give our northern competitor an advantage over the ports of Seattle and Tacoma.
The merger also might set off another round of deal-making, as Wall Street and major shareholders push the Class 1s to get even bigger. The lack of enthusiasm at Norfolk Southern came from what its management saw as too low a premium, not a fire to remain independent. Thus, NS is in play.
Even BNSF, secure in Warren Buffett’s portfolio and with a healthy bottom line, might not be immune. The Oracle of Omaha is not one to be left behind if Ackman, the investor, intends to disrupt the railroad industry, one Buffett sees as growing in value.
According to Justin Franz, a writer at Trains magazine, the head of the Surface Transportation Board in 2000, Linda Morgan, was concerned that more mergers could result in only two Class Is in North America.
She wrote that: “While mergers have their place, recent events have shown that no major merger takes place in isolation, and that, once a round of mergers begins, it can be all-consuming, distracting, and disruptive, to the detriment of the nation’s transportation system, rail shippers, rail employees, and communities across the country.”