CP says NS merger would improve Chicago operations; officials from other railroads disagree

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CP and NS power teams up on a westbound NS freight in Northwood, Ohio, near Toledo.
Michael D. Harding
CALGARY, Alberta – Canadian Pacific’s contention that its takeover of Norfolk Southern would ease congestion and create capacity in Chicago has operating officials from other railroads scratching their heads.

Trains News Wire interviewed several current and former operations executives about CP’s plans to divert traffic away from Chicago. Not one of them sees how it is possible for a CP-NS merger to reduce congestion or free up capacity in Chicago in any meaningful way. And they all say that nothing CP is proposing would require a merger to accomplish.

Everyone agrees that operational problems in Chicago – which handles a quarter of the nation’s rail traffic – must be addressed. But CP is the only railroad pushing a merger as one of the solutions.

“Improving Chicago is a key objective of this transaction and one of the many ways it is in the public interest,” CP CEO E. Hunter Harrison said last week in a letter to members of the Illinois congressional delegation, who had written to the Surface Transportation Board to express their concerns about a potential merger. “You can fully expect that this will be a major component of a compelling case to the STB.”

About 37,500 freight cars pass through Chicago every day, according to the Association of American Railroads. CP hauls about 2,500 of those cars, and about 20 percent of those – or 500 cars – could be diverted out of Chicago via other gateways on a combined CP-NS system, CP says.

That amounts to little more than 1 percent of Chicago’s total daily traffic.

“They are overselling Chicago,” says Mark Hinsdale, who was a general manager for CSX in Chicago, served as a network strategy executive in CSX’s headquarters, and was the railroad’s representative on the Chicago Planning Group from 2004 through 2011.

“They don’t run enough trains in Chicago compared to the other players,” Hinsdale says. “If they diverted every train they ran it wouldn’t do that much.”

Over the past year or so, a group of retired railroad executives has looked at ways to relieve congestion in Chicago. Mergers were not among their recommendations, according to a person familiar with the group’s report.
Canadian Pacific's Chicago area yard is in Bensenville.
Michael D. Harding
A current operations executive from a Western railroad said that a lot can be done to untangle Chicago without merging railroads. “CP’s acquisition of NS would have no meaningful impact that wouldn’t be achievable otherwise,” he says. “The railroad does not have to merge...to help things in Chicago. Like NS said, there’s very little traffic that flows from CP to NS and vice versa.”

NS CEO James Squires said earlier this month that less than one trainload of CP-NS traffic could be efficiently rerouted around Chicago per day – a drop in the bucket compared to the 500 or so freight trains that run through the Windy City on a typical day. The operations officials contacted by Trains agreed with Squires’ assessment.

Last week, Union Pacific said that it’s possible that rather than reduce congestion, a CP-NS merger could create more gridlock if the combined system used its Chicago routes to favor its own trains at the expense of other railroads’ traffic.

“The railroads have made great strides to increase network fluidity in Chicago without a merger by revising the Chicago Planning Group congestion alert plan from being consensus-based to metrics-based,” UP said in its letter to investors. “The railroads also established a joint operations center in Chicago in which CP elected not to participate.”

CP disagrees.

“We don't think we are overselling Chicago,” says James Clements, CP’s vice president of strategic planning and transportation services. “Twenty-five percent of all U.S. rail freight touches Chicago and it remains a fragile gateway that is potentially one snowstorm away from another significant issue. Any car that can avoid Chicago helps.”

In its preliminary analysis, CP believes it can get 120,000 car handlings out of Chicago annually through the use of bypass or run-through manifest blocks destined for interchange with CSX, BNSF Railway, and UP at alternative gateways. “By diverting hand-offs, each car is an extra car of capacity for all other users of the Chicago network,” Clements says.

CP’s supply of automotive railcars is highly dependent on Chicago. “By sourcing railcars in Kansas City and/or St Louis, a combined network would be able to supply Southern Ontario without touching Chicago,” Clements says, noting that this would remove another 20,000 cars from Chicago annually. Plus, NS’s former Wabash route linking Kansas City with Detroit is 10 percent shorter than CP’s current KC-Chicago-Detroit routing that’s used to supply automotive assembly plants in Ontario.

Consolidating CP and NS intermodal operations would eliminate two cross-town train movements per day. And by using alternative gateways east of Chicago – such as Detroit and Buffalo – a combined CP-NS system would remove another train per day from the Windy City.

All this would benefit customers on the combined system, CP contends.

“Over 40 percent of traffic that CP interchanges to another carrier is interchanged in Chicago. The changes to movements described above are a significant portion of our total Chicago interchange traffic,” Clements says. “The changes...will make a positive improvement in the transit performance of the traffic of hundreds of customers.”

There may be more opportunities, Clements says, but CP can’t determine what those might be until it can sit down with NS – something NS has so far refused to do as it seeks to remain independent.
NS intermodal 26N crosses the Indiana Harbor Canal at Hick Tower, in East Chicago, Ind.
Eric Powell
The current and former operating officials who spoke with Trains said there were several steps CP could take to improve its ability to get through Chicago, including increasing its use of the Indiana Harbor Belt or considering directional running over the IHB and Belt Railway of Chicago.

CP owns 49 percent of the IHB. Conrail – which is owned by NS and CSX – owns the other 51 percent. But because of the way the IHB ownership is structured and held at Conrail, CP cannot get a controlling interest in IHB by acquiring NS (or, for that matter, CSX).

“They don’t use the Harbor as much as you would think a 49 percent owner would,” Hinsdale says. The IHB has been improved through the Chicago CREATE program, including new connections, more double track and signaling that have allowed higher speeds. But railroads, including CP, have chosen to use lower-cost routes instead.

“We do believe that the transaction gives us more influence on the IHB in the future and more flexibility,” CP’s Clements says. “We would use that influence to improve the efficiency to the benefit of all traffic moving to/from or through Chicago. We currently work with all the options in Chicago today in terms of routing traffic and use the various options as appropriate for flows, volumes, details of various agreements, and overall Chicago network health.”

Operating executives questioned how diverting interchange to lesser-used gateways around Chicago would work. There’s not much additional capacity available at the alternate gateways, either in terms of trackage or crews, they note. And other railroads have been reluctant to divert traffic from Chicago if it reduces their length of haul.

CP said a merger would allow it to divert traffic from Western Canada to the Detroit and Buffalo and Albany, N.Y., gateways to connect with points on the NS network. Sending this traffic north around Lake Superior, however, is 1.5 percent longer than a Chicago routing and takes three additional crews. But CP says it can be more consistent – and even faster – than fighting Chicago congestion. “The increased speed and fluidity more than makes up for the few extra miles,” Clements says.

“We believe gateways such as Buffalo and Detroit, which on a combined network would just be stations on the new network, not interchange locations for NS traffic, have the capacity to handle the volumes,” Clements says.

Why not divert this traffic now?

“Many of the diversions are not taking place today as each individual carrier is optimizing the haul on their network and not taking a system view,” Clements explains. “A combined network changes the perspective.”

Chicago has long been the Achilles heel of the CP system.

Unlike rival Canadian National, CP has lacked its own route from Ontario to the Windy City. Instead, CP runs 10 trains or so per day between Detroit and Chicago over trackage rights on NS and must contend with clearance issues in the Windsor Tunnel, which can’t accommodate full domestic double-stacks. CP also lacks an efficient way through Chicago – something CN gained with its 2009 purchase of the Elgin, Joliet & Eastern.

On Monday, CP emphasized the need to improve fluidity in Chicago and criticized CSX, NS, and UP for their plans to shut down for Christmas. CP will continue to operate during the holiday.

"Our economy runs year round and shippers must be able to get their goods to market in a timely fashion, regardless of the date or the amount of snow on the ground," said Keith Creel, CP’s president and chief operating officer.

NEWSWIRETrains News Wire

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