6 February 2006
CPR Sees Mergers Ahead
Speculation about railway mega-mergers has crept back into the industry's boardrooms,
raising the spectre of two colossal companies dominating North America's train routes to handle booming Asian trade, says the chief
executive officer at Canadian Pacific Railway Ltd.
Amid U.S. regulatory concerns in 2000, Canadian National Railway Co. and Burlington Northern Santa Fe Corp. abandoned their proposed
blockbuster merger, but Robert Ritchie said that, after a six-year hiatus, there are again "rumblings" the
CN-BN pairing could re-emerge, or another combination involving CN.
He said he personally opposes large mergers in the rail industry, and emphasized he isn't aware of any deals on the horizon. Still, Mr.
Ritchie said directors and executives have a responsibility to stay on top of potential scenarios for mergers, even if such nuptials
take years to materialize, if ever.
"You could have different permutations and combinations. One leads to the other. It depends on if there is a first mover and how
they go about it," Mr. Ritchie said in an interview.
"Every responsible company has a defensive plan, and a strategy that is offensive."
It may be only a matter of time before one of CPR's competitors attempts to link up with another rival, he said, and a single deal could
trigger a frantic series of match-ups, reducing the number of major long-haul railways to just two from the
current Big Six in North America.
The revival of the merger rumours is being fuelled by forecasts that the Asian trade bonanza is here to stay, with customers clamouring
for more rail capacity and faster delivery, industry observers say.
If Montreal-based CN were to hook up with BN of Fort Worth, Tex., that could force the coupling of
Calgary-based CPR with Union Pacific Corp. of Omaha, Neb., observers say. Those pairings in turn would place pressure on
Jacksonville, Fla.-based CSX Corp. to seek a partner, possibly the CN-BN entity. Meanwhile, Norfolk Southern
Corp. of Norfolk, Va., is left to jump aboard the CPR-Union Pacific train.
Mr. Ritchie hopes that industry players will think long and hard before making any moves that could trigger a transcontinental domino
effect of mergers.
"Certainly, the philosophy of this company is that we should work as a network industry and not try to isolate ourselves into two
systems, which would probably be the end result of further consolidation. That would produce too much angst on the part of customers,
which would lead to negative regulation," Mr. Ritchie said. "We think there are enough opportunities for choice out there
with the six major railway networks. If we work properly as a network and continue to improve interchanges, I don't think mergers are
necessary. Having said that, I'm only one of the six."
It's unclear how a smaller company, Kansas City Southern Railway Co., would fit into merger mania, but a key KCS line in Louisiana and
Mississippi called the Meridian Speedway is attractive to CN, which already works co-operatively with KCS on that track.
To ease congestion, there have been numerous co-operative agreements signed in recent months, where rival railways agree
to share tracks in underperforming regions.
The big question is whether regulators can be persuaded that mergers would clear the way for railways to reduce freight rates and
improve service.
Six years ago, the U.S. Surface Transportation Board "increased the hurdle rates to get a merger done, so it's tougher to do it.
But one of the rules is that a merger has to enhance competition, and nobody really knows what that means," Mr. Ritchie said.
In theory, freight rates would fall if there were more efficient networks owned by two players slashing operating costs instead of six
carriers guarding their turf and contributing to gridlock, particularly at ports bursting at the seams with Asian trade, experts say.
"If there are mergers, the head offices would be in the United States," said transportation consultant Greg Gormick said.
"But it will be a lengthy process. It would be years away."
Many customers would be vehemently opposed to a "rail duopoly," but merger advocates could point to the prospect of greater
economies of scale and streamlined networks to eliminate bottlenecks, Mr. Gormick said. As well, there are dozens of
short-haul regional railways in the United States and a handful in Canada that would continue to operate separately from
the long-haul carriers, he added.
Groups such as Consumers United for Rail Equity in the United States are complaining about higher freight rates, partly from fuel
surcharges, imposed in the past couple of years amid a flood of Asian consumer goods pouring into North America and exports to
resource-hungry countries such as China.
Union Pacific and BN are strong in their respective markets in the western half of the United States, while CSX and Norfolk Southern
have carved out their own niches in the eastern half.
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