Another Conrail In Our Future?

Yeah, I know. Conrail still exists in the form of the shared assets set aside when Norfolk Southern (NS) and CSX bought the original.

As of the beginning of 2016, there's a battle afoot that could result in another Conrail. My opinion is: If Canadian Pacific (CP) gets its way and forces a merger with NS, the result will be a failure not seen in railroad history since New York Central and Pennsylvania became Penn Central and took down the rest of the Northeast with them. Except that this failure will be flung across the entire continent and through two countries--countries whose ways of handing such colossal failures are as different from each other as, well, NS and CP. The question will be which of the two governments, and which of two economies, has a higher tolerance for railroad mergers that don't work.

Granted, when New York Central and Pennsylvania Railroad merged in the late 60s, both were unprofitable by current standards. They formed a railroad (Penn Central) comprised of about 20,000 route miles with multiple redundancies. It is widely reported that the gross differences between the two corporate cultures went a long way toward bringing down the combined corporation. By comparison, it is also widely reported and agreed upon that NS and CP have very different cultures. CP is focused on efficiency and the bottom line. NS likes to make a profit but focuses on its people to get that done. The two would form a railroad of some 33,000 route miles, give or take, flung across 24 US states, 6 Canadian provinces and the District of Columbia, with upwards of 44,000 employees. All this is before any cuts made to obtain the usual expected merger efficiencies. How to manage such a behemoth is a heady thought to think.

Then there’s the CEO of CP, Mr. E. Hunter Harrison. I do not know the man, but what I’ve read leads me to the conclusion that he is a no-nonsense administrator: He’s the kind of guy who you admire as a CEO but would not wish to have as a boss on your worst enemy. He doesn’t strike me as being very Amtrak friendly. NS hosts a plethora of Amtrak routes/trains, while you can count the number of Amtrak routes hosted by CP on one hand. There are a number of state-sponsored programs in place with both NS and CP. I must note, in fairness, that I know of no effort on the part of CP to shuck Amtrak routes or delay trains to make them less desirable and hence targets for reductions in service. The latter, however, is a game played by all freight railroads in these days of railroad profitability.

Ultimately, the merger will be driven forward by the major shareholders who are looking for turnaround and profit, not for long-term stability of the resulting combination. The currently reported plan is to guarantee share value greater than market for the NS shareholders while the STB considers the merger, a 16 month process. This smacks of Santa Fe / Southern Pacific, which ultimately fell apart without approval when the shareholders could wait no longer. SP was the weaker partner, and that was a merger with a lot of redundancies in track and route miles.

Before the STB rules, you can bet on a massive wave of shipper objections and not a few words from congressmen for the NS served states that are likely to lose thousands of railroad jobs as Harrison works to slim NS’s operating ratio to under 60.

As I was saying, the US government will have different ways of dealing with a failure than Canada. With the economy still susceptible to damage from failures in major sectors, it won’t necessarily take bankruptcy for the war drums of government takeover to start pounding. A meltdown similar to Union Pacific / Southern Pacific when they merged might just be enough; and any such meltdown is more likely to occur on NS rails and on the US side of the border. (Why? Just get on the Internet and pull up a map of each railroad, and you will see intuitively that NS has the more complex system.) At that point, there will either be some serious pressure for BNSF Railway to take over NS while CP licks its wounds, or a new Conrail. BNSF owner Berkshire Hathaway may be the only one of the other four remaining Class Ones that could do it on short notice. But even then, there would be no way to assure that the mess wouldn’t just get worse.

If the STB shows no brains or common sense in the matter, and even if they do after a protracted “holding period,” there may just be another Conrail in our future.

©2016 - C. A. Turek - mistertrains@gmail.com