The Story

Updated March 19th

During early March hearings on the merger, two "Uniteds" came out against the merger: United Parcel Services cited the service breakdown following the UP/SP merger, and the United Transportation Union joined UPS' call for a two-year moratorium on big rail mergers. The UTU's bitter rival, the Brotherhood of Locomotive Engineers, supports the merger after receiving job protection assurances.

The UTU doesn't want BNSF, with whom it has poor relations, to gain more power over the rail market. BNSF is infamous among rail unions for their "availability policy", which the unions bitterly opposed and which BNSF dropped in the beginning of February. The Brotherhood of Locomotive Engineers alleges that the policy would have meant 360 hour months for some employees. That's equivalent to thirty, twelve-hour workdays in one month.

While the decision is clearly anti-competitive, letting BNSF and CN merge would doubtlessly be detrimental to the customers who must deal with the other railroads since they would be distracted by strategic planning.

Another opponent to the merger is Roquette America Inc. in Keokuk, Iowa. RAI is a corn processor, and they say that the BN-ATSF merger provided the rail operators with a revenue windfall due to less competition. A condition of the BN-ATSF merger was that BNSF let Southern Pacific (now Union Pacific, UP) have access to Keokuk, but UP has not pursued this opportunity. RAI say they have unsuccessfully tried to negotiate with BNSF on this issue, and are now asking the STB to reopen the merger. It is unlikely that the STB will do anything about RAI's predicament since it can't do any more than provide a framework for competition. If UP is uninterested in providing service to Keokuk, nobody can force them. The only thing the STB could do is check if UP and BNSF have been purposefully dividing up the market among themselves.

Like the BLE, the Wisconsin Central railroad has gained concessions from BNSF/CN and thus supports the merger. WC gets haulage rights over 16 100 route-km on the new network in Illinois, Indiana, Iowa, Michigan, Minnesota, Missouri, and Wisconsin, and Ontario. WC currently operates 4700 route-km of railroad in Wisconsin, northeastern Illinois, Michigan's Upper Peninsula, eastern Minnesota, and northern Ontario. There will be restrictions on WC's haulage rights for unit trains, intermodal traffic and the transport of agricultural products. The restrictions are a natural result of the business segments the three railroads operate in: big BNSF and CN are better at large-scale volume shipments, while little WC is more into smaller shipments and competes more directly with trucks.

Everyone Wants to Merge...

The competition is of course not sitting on its hands. UP, with operations west of the Mississippi, may choose to merge with CSXT or Norfolk Southern, both strong east of the river. Canadian Pacific is also a possible partner for UP, but CPR's actions and interests are not as easy to guess. CPR's owner Canadian Pacific may or may not want to sell CPR, which currently isn't a huge money spinner. Canadian Pacific also owns a hotel chain as well as oil and mining interests. CPR has operations in central and western Canada, and so does not really fit into the American railroad game. By effectively buying CN, BNSF gets access to both Canada and the east coast. But if UP were to buy Canadian Pacific, they would not get any "bonus points", just a bunch of snow and polar bears and hockey players, eh.

It is worth noting here that CN and CP had merger plans of their own a few years back. Realizing that a merger would be impopular with customers having access to two competitors, they watered down the plan to merging just in the east, where shorter distances and a focus on manufacturing rather than raw materials made them more vulnerable to trucking. Authorities would have none of it though, and since then, both railroads have bought strategic links southward and profited from the North American boom of the nineties.

Regardless of what happens north of the border, it probably wouldn't take long before UP and BNSF buy one eastern railroad each, and then North America will be dominated by two huge railroads. The question is whether or not this is a good thing, and if not, what can be done to prevent it.

... Just Not Right Now

The competition argues that mergers are a bad idea "at this time", as companies deal with merger complications. Linda Morgan at the STB bought this argument and the 15-month moratorium she imposed would let railroads concentrate on improving their services rather than finding merger partners. While this may have a certain stabilizing effect on the industry, it certainly isn't fair that BNSF/CN should be penalized and the others helped along. After all, BNSF/CN aren't being allowed to capitalize on their track record, and the others are being let off the hook for past sins.

Ms Morgan did say that this decision was the hardest she has had to make at the STB. Perhaps she did not have much alternative. While the decision is clearly anti-competitive, letting BNSF and CN merge would doubtlessly be detrimental to the customers who must deal with the other railroads since they would be distracted by strategic planning. Other railroads would also be keen to ink questionable deals quickly just to avoid being left out in the cold.

Even if it turns out that the STB doesn't have the authority to impose the merger moratorium, customers like UPS and RAI may take comfort in that BNSF and CN have agreed to guarantee that service will be equal or better than today once the merger goes through. Moreover, they have promised a service alternative for the very few shippers who would otherwise have one rather than two railroads to use after the merger takes effect. But skeptics will wonder what the guarantee would look like in practice. An unhappy shipper could hardly return the unused portion of the merger and be fully refunded.

Another of CN's and BNSF's pro-merging arguments is equally laughable: CN CEO Paul Tellier says that "absolutely nothing about our transaction requires the structure of the industry to settle into only two transcontinental North American railroads, or even to change from the current structure of two major western and two major eastern roads in the United States..." But CN-BNSF would by far be the biggest North American railroad with the farthest reach. Other railroads would be foolish not to explore options to become as big and formidable.

Despite some of the shrill rhetoric though, the merger does make a lot of sense, at least for CN, BNSF, and many of their customers. The combination will not eliminate a parallel competitor, or divide an existing railroad, or result in drastic layoffs. This makes it low-risk.

CN wants to serve its customers better, and combining with BNSF is a way of doing that. Trade is vital to Canada's economy - 42% of the nation's gross domestic product is exported, CN says, and 85% of its trade is with the U.S. Significantly, rail moves 40% of Canada's exports. These realities, along with the 10% to 15% annual increases in Canada-United States-Mexico trade, demand CN serve customers with facilities increasingly located throughout North America. Of CN's top 20 customers, 14 have facilities in at least two of the three NAFTA countries. Just six have facilities solely in Canada.

CN's and BNSF's strategy appears to be to deny that their merger may well spark another round of consolidation, and that that consolidation may have negative and almost irreversible consequences. Perhaps it would be better to instead focus on the advantages of merging. Maybe, in today's Nafta world, bigger really is better for railroads. If it is for BNSF and CN, maybe it is for the other railroads too.

The Background

Burlington Northern Santa Fé and Canadian National are combining their operations but keeping separate identities, and exchanging stocks to put their money where their mouths are. The combined operation will stretch from Los Angeles to Halifax and from the Gulf of Mexico to Vancouver. BNSF's current network comprises 56 300 route-km, while CN has 26 800 route-km.

The two companies want to position themselves to take a bigger share of north-south Nafta trade, which the railways say is growing more than 10% annually. The combination will happen formally through an exchange of every CN share for 1,05 BNSF shares, which will be exchangeable for shares in North American Railways Inc., a new holding company. NAR will be 70% owned by BNSF's shareholders. The deal must be passed by authorities in both Canada and the US.

BNSF had 1998 revenues of $9,1bn, 44 500 employees, 5000 engines and 90 000 freight cars. CN grossed $998m and had 23 500 employees, 1650 engines and 85 000 freight cars, also 1998.

NAR's headquarters will be in Montréal, and the company will have a majority of Canadian directors, since this is required by the 1995 law governing CN's privatisation. The law also says that nobody may own more than 15% of the company, but there are no restrictions on foreign ownership. About 60% of CN's shares are currently owned by Americans.

The railways hope to save between $500m and $600m in three years through more efficient use of locomotives and cars, by melding administrative functions, and other synergies. An operating ratio of 70% will be reached at once, and this will improve with time. This means that for every dollar of revenue, only 70 cents are spent producing the service.

BNSF and CN must be careful not to repeat the mistakes that have given railroad mergers a bad name in the US. Shippers have fresh in their memories the problems which followed the UP-SP and Conrail-NS/CSXT mergers. Even though these mergers have, in the end, lived up to expectations of improved efficiency, they were problem-plagued in the beginning and any successes have been helped along by the longest and strongest upwsing in the American economy in decades.

Bickering about competition issues started right away in December, when BNSF and CN announced their plans.

It's a double-edged sword, says the Canadian Industrial Transportation Association which represents 400 shippers across Canada. It'll be seamless transportation from Halifax to Long Beach [Los Angeles], but you'll have no choice but to use it.

The biggest obstacle for the merger will be the US Surface Transportation Board, which is responsible for making sure that business has access to a functional surface freight transport network which is well-suited to its purpose. As a result of the problems following in the tracks of previous mergers, but also because North America is running out of railroads, the STB is studying the merger extra carefully. Not only is the STB looking at the immediate effects of the merger, it will also be hypothesizing on the possible reactions of other railroads ie which railroad Union Pacific, currently North America's largest railroad, might merge with if BNSF merges with CN.

The sources for this article are The Globe and Mail, the Washington Post, TRAINS Newsline, Cargoweb News, and press releases from companies and organisations involved:

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