Lessons for a modern mega merger

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BNSF No. 1474 still carries its experimental paint scheme, dating to the BNSF merger in the mid-1990s, in 2014.
Brian Schmidt
WASHINGTON – A key question in the discussion of possible rail mergers during the past two weeks has been whether or not the U.S. Surface Transportation Board would bless a merger of two Class I railroads, were it presented for approval. While no one will know the answer until such a merger application is submitted to the Board, it is instructive to look back to 2000 when Burlington Northern Santa Fe and Canadian National applied for merger approval.

The BNSF-CN merger was not approved by the STB. There were two key reasons given by the Board for not approving the union. First, the Board felt that it would not be wise for it to act on this merger because it had not yet developed formal rules for approving a merger, much less one of that magnitude that would likely spawn the “final round” of rail mergers. In 2000, the STB was only four years old, having been founded on January 1, 1996 as part of the Interstate Commerce Commission Termination Act of 1995. The second reason was that the STB was concerned about the “aggressive consolidation” of the industry in the 1980s and 1990s, and the resulting drop in service levels as a result of some. Specific reference was made to Union Pacific’s acquisition of Southern Pacific, the BNSF merger, and the split of Conrail between Norfolk Southern and CSX Transportation.

The STB pointed out that it had received significant testimony from shippers and other parties complaining about the service problems of the earlier mergers, and those who had testified were concerned that BNSF-CN would set off another round of mergers that would only make things worse. Not only would the operating stability of railroads be threatened, but diminished investor confidence was also a worry.

The STB’s decision, issued on March 17, 2000, was to place a 15-month moratorium on large mergers, after which it published its final rules governing major rail consolidations on July 11, 2001. Robert Gallamore, author of the recently published “American Railroads,” points to the section of his book where he discusses the STB’s action in this case. “While other Class I railroads applauded the STB’s decision, BNSF and CN were furious,” Gallamore says. After a failed appeal by BNSF and CN, the two railroads dropped their merger plans on July 20, 2011

Does the STB’s decision in 2000 have any relevance for us today? Although 2014 is a different world than 2000, there are useful comparisons. Tony Hatch, a prominent rail analyst and consultant, says, “Concern about post-merger service levels are just as strong today as they were in 2000.” He adds, however, that software advances in the industry could lessen the severity of any drop in service levels. Yet, if a merger were to be approved today, “other rail CEOs would not be happy about it.”

Gallamore again points to his book, where he says, “Talk of future transcontinental mergers – combination of either of the two western railroads (BNSF or UP) with either eastern road (NS or CSX) to produce two rather than four US giants – persists. But talk aside, transcontinental mergers are unlikely because, quite simply, they are not needed. Today’s industry structure is likely to be the one that serves our grandchildren.”

While the STB is a much more mature organization, and the merger-induced service issues from the late 20th century have been resolved, the combination of a major traffic surge and capacity shortages leave the industry with different, but similar problems today. Time will tell how best to resolve these.

NEWSWIRETrains News Wire

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