DC Velocity - November 2014

The CEO of Canadian Pacific Railway (CP), E. Hunter Harrison, warned that his industry faces a difficult future unless it can conduct business, including the ability to merge, free of excessive government involvement.

In an extraordinary Oct. 21 solo conference call, Harrison said rail consolidation appears to be the only logical path to alleviating network congestion that will only get worse as volumes continue to grow. Harrison said he was receptive to alternate remedies to the bottlenecks that have plagued North American railroads for more than a year. However, he wondered if there was anything short of consolidation that would do the trick. “If service isn’t good right now, what’s out there to improve it?” he asked.

Harrison painted a picture of an industry beset by service difficulties in “pain points” like Chicago, by pushback from communities that have adopted a “ not-in-my-back-yard” attitude toward rail service, and by merger rules from the Surface Transportation Board (STB), the federal agency that regulates U.S. railroads, that make it tough for the industry to freely maneuver.

“We are quickly approaching a
time where none of this works,”
Harrison said, referring to the con-
straints on a continental network
that is simultaneously coping with
increasing demand, especially in
energy and grain traffic. “Soon, it
will be impossible.”
Harrison spoke the day after CP
terminated nascent merger talks
with U.S. eastern railroad CSX
Corp. Harrison said that CP had contacted
CSX about exploring possible opportuni-
ties and that the railroads had held three
or four meetings. CP never made a formal
offer, and CSX expressed no interest. No
further talks are planned.

Harrison said CP looked at CSX and the other eastern rail giant, Norfolk Southern Corp., adding that there was little difference between the two. He said a CP-CSX combination represented a tremendous opportunity to merge two complementary systems. The merger would have reduced the logjams in Chicago because of CSX’s sizable interest in a connecting railroad in Chicago that could have allowed CP to bypass the city and ease the pressure on the entire network, Harrison said.

WILLING TO GO IT ALONE

Harrison said CP wasn’t in the merger and acquisitions market at this time, saying he would be content if CP didn’t pursue anyone and chugged ahead on its own. On Oct. 21, CP reported the strongest quarterly financial results in its history, setting records in the third quarter in revenue and operating income. Perhaps most significant, CP’s operating ratio fell to a record 62. 8 percent, meaning that it cost CP only 62. 8 cents out of every revenue dollar to run the business. In the first quarter of 2012, when Harrison was coaxed out of retirement to assume the CEO post, CP’s operating ratio stood at 80.1 percent.

Harrison said it was unlikely CP would combine with either of the two U.S. western railroads, Union Pacific Corp. and BNSF Railway. Nor would it be interested in Kansas City Southern Railway, whose north-south network runs into Mexico, or any of the Mexican railroads. He said that a hostile offer is out of the question, but added that CP would consider a proposal to be bought out if the terms were in its shareholders’ best interests.

The CP CEO took issue with those who said that a combination would be counterproductive during a period of subpar rail service. “I’ve heard talk about ‘bad timing,’” he said. “When is it going to be good timing?”