Canadian Pacific Rail has abandoned its pursuit of US East coast railway CSX, but its CEO remains vocal on the North American rail industry’s need for consolidation. In a conference call with financial analysts a day after CP had officially called off its merger ambitions with CSX, he argued that consolidation would help address some fundamental problems for rail operators in North America.
The Canadian rail operator had approached top management of CSX about a possible merger, but dropped the attempt after “three or four” meetings made it clear that the US railway was not interested. CP CEO Hunter Harrison said that a hostile takeover would not be suitable, as the subsequent integration would require a high degree of co-operation. CP never tabled a formal offer for CSX, he said.
Despite the failure to secure a merger, Harrison reiterated that consolidation would be beneficial for the rail industry and its clientele. Citing projected growth in rail volumes in the coming years, he warned that fundamental change is needed to avoid serious decline in service levels. The expected rise in traffic could not be adequately met by beefing up staffing levels or the number of rail cars and locomotives, he said.
To avoid gridlock, significant investment in rail infrastructure is needed, but nothing has happened on this front and progress in the foreseeable future is blocked by public and official resistance to taking the necessary steps, Harrison argued. “No one wants the railroad run through their backyard, or their city,” he said.
Mergers would improve fluidity in the clogged rail system, diverting volumes from chronic bottlenecks, Harrison reckons. A marriage of CP and CSX would allow the pair to move traffic away from Chicago, a flashpoint of rail congestion. About one-quarter of the US freight volume of six rail companies moves through the Chicago area.
For the two Class One Canadian rail operators, flexibility has been hampered by increasing regulation. They are under a mandate from the government in Ottawa to move a minimum amount of grain each week in western Canada. At the same time, concern about the safety of crude oil shipments in the wake of a deadly train explosion in Lac Megantic, Quebec, last year prompted regulators to impose speed limits on trains carrying hazardous materials.
“The world has changed,” Harrison said. “We are still operating some old-fashioned models like we were still regulated.”
Crude oil shipments on Canadian rail carriers have gone through the roof in recent years, and opposition to new pipeline projects is expected to keep up that momentum. CP’s revenue from crude oil shipment surged 74 percent in the third quarter. Rival CN is expected to clock up some 130,000 carloads of crude oil this year. By some estimates, that could go up to 200,000 carloads next year and as high as 300,000 two years down the road.
A merger with CSX would have meant much-improved access to US oil refineries.
With CSX out of the picture – at least for the time being – Harrison regards Norfolk Southern as the most suitable partner for CP. A tie-up with Kansas City Southern, Union Pacific or BNSF would be less likely, he said.
Top brass of the large US railways have not indicated any interest in a merger. Still, Harrison reckons that “some of them clearly share the view that this agenda is the right one.”
By Ian Putzger
Correspondent | Toronto