Chicago Illinois USA - On 2 Jan 1999, a major snowstorm brought Chicago's rail system to its knees.
 
Fifty-five centimetres of snow fell over two days, snarling train traffic in and out of the city, while a communication breakdown between the railroads meant the trains just kept coming, piling up, even though there was nowhere to go.
 
It took three months to untangle the traffic that resulted from that single snowstorm and get things running normally again.
 
Something had to change.
 
But 15 years later, this last winter of steady snow and ice once again had Chicago's rail system crippled, with passenger trains cancelled for days, and freight trains moving through the city like frozen molasses, when they moved at all.
 
And yet, Chicago is the most important rail hub in North America.
 
More than one-quarter of U.S. rail traffic touches Chicago at some point on its route, that's 1,300 trains a day, or 1.3 million rail cars a year.
 
This city is the most pivotal in the North American rail industry, it's also the most dysfunctional.
 
It's not just snow and ice.
 
Even on the sunniest of summer days, it can take an entire day or more to move a train of goods through the Chicago choke point, so backward and convoluted is the rail system here.
 
And if you want to understand why Canadian Pacific Railway approached its competitor CSX about a possible takeover, as revealed earlier this month by The Wall Street Journal, in fact, if you want to understand the renewed interest in consolidation in the rail industry as a whole, you need to understand Chicago.
 
Shippers often lament that it can take just as long to get a product from Los Angeles to Chicago as it does to get that same product from one end of Chicago to the other.
 
And it's estimated that congestion costs the city US$11 billion annually.
 
The costs to the North American transport economy can only be many times that.
 
In 2012, it took the average manifest freight train, defined as a low-priority train with a mixture of car types and cargoes, 33 hours to move through town.
 
Consider that a major improvement, in 2003, the average was 44 hours.
 
"There is a point, and we are approaching that point right now in Chicago during winter, when you can't handle all the business," Canadian Pacific Railway CEO Hunter Harrison said at an investor conference earlier this month.
 
"Now what are we going to do in 10 years? Do we wait to get in solid gridlock and then address it?"
 
The problems date back to the 19th century, when Chicago's rail infrastructure was developed piecemeal by dozens of different companies.
 
Today, after decades of consolidation, there are six major railways that use Chicago as a hub, CP, Canadian National Railway, CSX, Union Pacific, Norfolk Southern, and BNSF, plus Amtrak, the U.S. passenger rail service, and Metra, Chicago's suburban commuter line.
 
But even after decades of consolidation, the railways are dependent on each other's infrastructure as they make their trek across the city.
 
And as volumes go up, the network becomes increasingly congested.
 
With the North American economy improving in recent years, so has freight traffic.
 
According to data compiled by the Association of American Railroads, average weekly carloads have risen steadily over the past four years, and it's estimated that freight rail trade with Chicago will increase another 89 percent by 2035.
 
The primary drivers of this growth are crude oil shipments, as pipeline delays force energy companies to turn to rail, as well as grain and intermodal, or freight that passes between more than one mode of transportation.
 
"That is the nature of the city, you're trying to get six carriers to connect to six others, and there's no one entity through the city that can solve all that," Cindy Sanborn, chief transportation officer at CSX, said in a recent interview.
 
"We spend a good amount of time each day thinking about Chicago. It attracts a lot of management time on our part."
 
CP and CSX
 
If you look at a map of Chicago's rail system, its complexity is obvious at a glance.
 
Theoretically, a train approaching the city from the northwest on a Union Pacific track could find itself connecting to a line owned by the Belt Railroad of Chicago, before later connecting with a Norfolk Southern line, and perhaps moving onto a CN-owned track from there.
 
It's not just the American railroads that suffer from Chicago's rail congestion, 40 percent of CP's traffic and 25 percent of CN's business passes through Chicago, a source of major headaches for the railroads' executives.
 
"I don't think anybody disagrees that Chicago is fragile at best," Mr. Harrison said on a conference call earlier this week.
 
"It is not where it should be as far as providing service. It's certainly a pinch point that obviously has a lot of challenges."
 
And the knock-on effects of a delayed train in Chicago can be huge, potentially affecting large portions of a railroad's network across North America.
 
"I can't tell you how many conversations I've had over the past six or seven months explaining how congestion in Chicago affects my ability to move a potash train in Saskatchewan. It's all connected," Keith Creel, chief operating officer at CP, said at an investor day earlier this month.
 
"There's no silver bullet, absolutely no silver bullet. It's an age-old problem for the industry, it's a very fragile place to operate, and it can have an impact on the company as well as the entire industry."
 
This is one of the main reasons that CP approached CSX about a potential merger earlier this month.
 
That conversation didn't go anywhere and CP confirmed earlier this week that no further talks are planned.
 
However, CSX remains an attractive takeover target, in large part because of its rail infrastructure that would have allowed CP's traffic from Western Canada to avoid Chicago altogether, instead using upstate New York as a gateway to the East Coast.
 
Secret Little Advantage
 
For now, CN may have found the best solution to Chicago's congestion problem, avoiding the city.
 
In 2007, under the leadership of Mr. Harrison before he crossed to its CP competitor, CN announced plans to buy a majority of the Elgin Joliet & Eastern Railway, known as the EJ&E, from United States Steel.
 
The purchase gave the Montreal-based railway a continuous route around Chicago, through the Kirk Yard in nearby Gary, Indiana, and has improved velocity by 60 percent and boosted volumes by 74 percent since 2009.
 
"To tell you the truth, it's been sort of our secret little advantage within Chicago," Jim Vena, CN's chief operating officer, said on a conference call earlier this week.
 
"This is why we're growing faster," added CEO Claude Mongeau.
 
"This is why we're growing at low incremental costs. This is why we bounce back quicker when we face adversity, which is why we're back in sync across all our supply chain at the moment. This is why we're in business. It's a big asset."
 
Freight trains aren't the only ones feeling the effects of rail congestion in Chicago.
 
On a recent visit to Chicago's Union Station, the Amtrak arrivals board showed several delayed trains in red.
 
Amtrak spokesman Marc Magliari points out the Lake Shore Limited, which takes passengers from New York City and Boston to Chicago.
 
On this day, the train is finally due to pull into the station at 11:35, just under two hours after its originally scheduled arrival time of 09:45.
 
This is a lot better than usual.
 
The worst freight bottleneck in North America:  A profile.
 
"It routinely arrives at 14:00, 15:00, and 16:00," Mr. Magliari says, adding that passengers will often miss connections, forcing government-owned Amtrak to put them up in Chicago overnight at a cost of as much as US$20,000 a day.
 
Over the past 12 months, the Lake Shore Limited has arrived on time less than 30 percent of the time.
 
In September, it was on time only 21 percent of the time.
 
"As freight volumes have gone up, our on-time performance has gone down," Mr. Magliari said.
 
For an entire week earlier this month, Amtrak was forced to terminate the Lake Shore Limited in Toledo, Ohio, nearly 400 kilometres from Chicago, and bus its passengers the rest of the way into the city.
 
"That's, like, 20 buses a night at midnight in Toledo, going to and from Chicago, so it was very, very, disruptive to our passengers," Mr. Magliari said.
 
Delays snowballed into further delays.
 
"If the trains were arriving from the East Coast 6, 8, 12 hours late, there's not time to service them and go back toward the East Coast within the allotted time."
 
It's a frustrating situation, but Amtrak does have some power to fight back.
 
A 2008 federal law says that the freight railroads, whose networks Amtrak travels over, must maintain an 80 percent on-time performance standard.
 
If they fail to do this for six consecutive months, then Amtrak can ask the U.S. Surface Transportation Board (STB) to investigate and fine the responsible railroads.
 
Amtrak has a pending complaint against CN that's currently in the STB's hands.
 
CN has submitted a motion to have the complaint dismissed, maintaining that court rulings make the investigation invalid.
 
"We're the canary in the coal mine," Mr. Magliari said.
 
"If our passengers aren't being handled well, you can bet that other customers of the freight railroads aren't being handled well either."
 
A Stopgap Solution
 
For shippers that rely on timely delivery, including parcel services like UPS and FedEx, the delays in Chicago are potentially damaging to profitability and customer relations.
 
As a result, shippers have found creative workarounds.
 
One common stopgap is known as "cross-towning", resorting to unloading trains onto trucks that move goods across town from one rail yard to another, where they are reloaded onto other trains.
 
For UPS, whose business depends on getting packages delivered on time, the advantages are obvious.
 
"We are being greatly affected by the congestion issues on the lane between Chicago and the East Coast," said UPS spokesman Dan McMackin.
 
"We look at all network solutions to provide a sustainable transportation plan, which can include transition to other carriers, hybrid solutions that include partial trucking, as well as full conversion to the highway."
 
Mike Burton, president of Chicago-based C&K Trucking, says he gets 75 percent of his business from cross-towns.
 
"Railroads would prefer to use railroads to move the freight if they could," he said, "But it's a necessary service that makes the railroads more productive."
 
We Cannot Continue
 
On one level, the solution to Chicago's rail congestion might be the typical answer to such things, invest in better infrastructure.
 
But it's not always that simple.
 
In 1980, the U.S. government deregulated the railways, giving them the opportunity to set their own prices and service levels.
 
The result was dramatic, over the next decade, rail costs were halved, volumes began to rise, and profitability slowly returned.
 
However, it takes years to build up the kind of capital needed to make major rail infrastructure improvements, and the recession of 2008-09 stopped any spending in its tracks.
 
In addition, with so many companies owning so many different pieces of Chicago's system, no one railroad wants to spend the money if they're not going to reap 100 percent of the benefit.
 
"Over the decades, Chicago's rail system became a great amalgam of different operating relationships," said Jeffrey Sriver, director of transportation planning and programming for the Chicago Department of Transportation.
 
"When something is everyone's responsibility, it becomes no one's responsibility. It was a disaster waiting to happen."
 
That disaster was the blizzard of 1999.
 
In the aftermath, the Surface Transportation Board brought all the railroads together and said, "Fix Chicago," Mr. Sriver said.
 
That order resulted in the creation of the Chicago Transportation Coordination Office (CTCO), with representatives from the five major railroads, CP pulled out of CTCO last year, Mr. Harrison isn't a fan, plus Amtrak, Metra, and Chicago's two intermediate switching carriers, which are jointly owned by the major railroads and are used to move shipments between one railway and another.
 
US$142-million project eases one Chicago bottleneck, but billions of dollars needed.
 
As the railways started trying to co-ordinate with each other, it became clear that Chicago's century-old rail infrastructure needed some significant upgrades, so in 2003 representatives from the rail industry, the U.S. Department of Transportation, the State of Illinois, and the City of Chicago got together to form the Chicago Region Environmental and Transportation Efficiency Program, or CREATE.
 
CREATE's raison d'etre is to raise the billions of dollars necessary to upgrade Chicago's rail infrastructure piece by piece.
 
After asking the railroads for a list of their biggest bottlenecks, the program settled on no fewer than 70 projects, everything from grade separations to new flyovers and viaducts, 22 of which have been completed in nine years.
 
However, critics of CREATE, including CP's Hunter Harrison, say the projects often get politicized since the program is reliant on funding from federal, state, and local governments.
 
"I was not a huge advocate of CREATE," Mr. Harrison said on a conference call earlier this week.
 
"It's been going on for over a decade now. It started off with a budget of somewhere around US$600-million or US$700-million, now the price tag is US$3 billion-plus of taxpayer and railroads' money."
 
But most stakeholders feel the program is doing the best it can without dedicated government funding, and it does seem to be making some difference.
 
According to CREATE's own data, the projects completed so far have resulted in a 28 percent reduction in freight delays and a 33 percent reduction in passenger delays.
 
However, for the time being the industry seems to believe that the best solution to Chicago's chokepoint is to do everything they can to avoid it, acquiring alternate routes, as CP was apparently attempting to do in pursuing CSX.
 
"We are quickly approaching a time when none of this works," Mr. Harrison said earlier this week.
 
"We cannot, in this industry, continue to go down the road we are going down and be successful or not have some gridlock beyond anything that we've experienced before."

Kristine Owram.