Is the IHB Hunter's real target?

CP owns nearly half of the Chicago bypass railroad; NS, CSX own the rest
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Is the Indiana Harbor Belt’s 54 miles of mainline track a key component of the proposed 33,700-mile merger of Canadian Pacific and Norfolk Southern?

Quite possibly.

The IHB, whose main line circles Chicago and could link CP lines in the Midwest with NS lines to the East and South, is an integral part of CP’s strategy to ease congestion in Chicago, the delay-plagued railroad capital where all six of the big Class I’s interchange traffic.

A combined CP-NS system would build through trains to bypass yards in Chicago and then interchange with CSX Transportation, BNSF Railway, and Union Pacific at more fluid points outside the Windy City, CP spokesman Martin Cej says.

“You’d take the Indiana Harbor Belt around the city and keep on going,” Cej says. A merger with NS would give CP a controlling interest in the IHB, the Chicago switching line that is currently jointly owned by CP (49 percent), NS, and CSX (25.5 percent each).

CP contends that by moving as much CP and NS classification, switching, and interchange away from Chicago as possible, it would reduce congestion and create more capacity for other railroads.

“A combination would alleviate the long-standing issue of congestion in Chicago, which seized into gridlock in the winter of 2014 and hobbled economic growth,” CP said in announcing its plan to combine with NS. “By channeling rail traffic away from Chicago, CP would create fluid routes through under-utilized hubs and free up much-needed capacity for other railroads that pass through the city, providing them with new, efficient and competitive service options for their own customers.”

Of course, none of this is new.

When CP CEO E. Hunter Harrison was in charge at Canadian National, he wanted to buy IHB but CSX and NS said, “no deal.” CN instead purchased the outer belt line Elgin, Joliet & Eastern for $300 million in 2009, creating its own congestion-free way around Chicago. As Chicago congealed in 2014, CP proposed taking over management of the IHB or buying out CSX and NS. Again the answer was no. And CP would have gained control of IHB through a merger with CSX, which it proposed last fall.

So call CP’s latest plan Harrison’s IHB, Version 4.

But as a major transaction in the eyes of regulators, there’s a catch. Under the Surface Transportation Board’s merger review rules, which were made more stringent in 2001, the board must consider whether the claimed benefits of a merger could be achieved instead through cooperative agreements between railroads.

So why couldn’t CP and NS work together to coordinate Chicago traffic without a merger? “Theoretically, that cooperation is the right thing to do but it’s hard to accomplish in reality,” Cej says.

Harrison has said as much about efforts to clear out Chicago congestion, including CREATE, or the Chicago Region Environmental and Transportation Efficiency Program. CREATE aims to to bring all freight and commuter railroads to the table with government, fix persistent choke spots, and find solutions for the Windy City’s woes. But its efforts have been limited by a lack of funding.

“I think CREATE was broke when it started and it’s been broke ever since, and it’s created zero value in my view,” Harrison said during CP’s earnings call in the first quarter of 2014, when winter weather blasted Chicago and froze rail traffic in its tracks. “You know, it’s hard enough to get two railroads to agree on something much less seven or eight.”

The IHB could provide a combined CP-NS system with an easier way around Chicago. CP currently sends 10 or so trains per day through Chicago in order to link its routes from the Midwest to its Eastern lines at Windsor, Ontario. This traffic runs over NS via trackage rights between the Chicago and Detroit areas.
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