Traffic & Market Trends
  Industry Indicators
    Traffic Originated
    Projected Railcar Deliveries
    Traffic Trends
  Railway Market

In This Issue
  BNSF+CN: Colossus of roads?
  Passenger rail: Strong, stable, secure
  Railroader of the Century
  ECP Brakes

Commentary
  From the Editor
  Commentary of the Month

Mixed reactions
Constituencies from shippers to labor unions to politicians reacted to the proposed transaction with a mixture of concern, caution, and in some cases, negativism. The Brotherhood of Locomotive Engineers said it will fight to protect the interests of all railroad operating employees as it monitors the proposed merger. "Railroads always say there will be no job losses in megamergers of this type, but history has taught us otherwise," said BLE International President Edward Dubroski. "While we have yet to do so at this early stage, we look forward to meeting with leaders of BNSF and CN to protect the rights and jobs of our members." Dubroski speculated that the merger could negatively impact railroad workers in Chicago and Memphis, where BNSF and CN operations have the most overlap.

National Industrial Transportation League President Ed Emmett spoke on behalf of many shippers when he said, "Coming so hot on the heels of two other difficult rail mergers, this will be perceived as a kick in the gut for shippers." Sen. Charles Grassley (R-Iowa) expressed concern about the possible negative effects of the merger on midwest grain shippers. He noted that many are worried about the potential impact on UP and its ability to transport their products. Grassley pointed out that many of his constituents have had service problems since UP's acquisition of Chicago & North Western in 1995.

The initial reaction in the investment community was negative, as both BNSF and CN stock prices fell in the days following the announcement. Investors have heard railroads talk about the long-term benefits of mergers before, so they tend to take such pronouncements with a grain of salt. Also, this merger involves two very large railroads that operate tens of thousands of miles in two countries, so the review process is expected to be long and contentious. Those conditions don't appeal much to the investment community.

The merger announcement prompted the Surface Transportation Board-which has been taking lots of heat this past year from shippers and unions on merger-related issues-to make an unprecedented departure from established practice. Noting that "other carriers will likely respond to this proposal with similar proposals of their own" and citing "recent experience with post-merger rail service disruptions," STB said it was scrapping its long-standing policy of reviewing merger applications on a "one at a time" basis, and notified CN and BNSF that they "will be expected to address the effect of the proposed transaction, and any likely subsequent transactions, that would produce further significant consolidation in the industry."

STB said CN and BNSF "will be expected to submit evidence on the cumulative impacts and crossover effects that are likely to occur in the wake of the proposed transaction, should it be approved." STB further said that "interested parties will be entitled to submit, in their comments filed in response to the application, evidence addressing these points."

Other railroads are watching the situation closely. Kansas City Southern Railway President and CEO Michael R. Haverty said a combination of BNSF and CN "is an important development at a critical period in the history of the industry underscoring KCS's long-held conviction that NAFTA-generated economic growth will play a significant role in determining North American freight transportation patterns in the 21st Century." KCS has a marketing alliance with CN/Illinois Central to grow cross-border traffic in Canada, the U.S., and Mexico.

UP, currently the largest railroad in North America, said it was "studying the implications of the CN/BNSF announcement. An immediate area of concern is how this will be viewed by rail shippers who have already expressed strong reservations about further rail mergers. We will be meeting with our customers to solicit their views and decide what UP can do to protect their interests, particularly in those areas where competition would be adversely affected by the proposed connection. Once we have received this input from our customers and completed our own review of the transaction, we will finalize our position."

In the East, Norfolk Southern described the proposed combination as "untimely." NS said: "Each of the major rail systems has undertaken major expansion in recent years. NS has been working hard to consolidate those synergies, invest in plant for capacity and service, hone our operations, and improve margins. Another huge restructuring while the nation's rail service is still absorbing the most recent changes would complicate these efforts. It could divert all of us, CN and BNSF included, from the first order of business, which is establishing good service at rates that will permit investment in the 21st Century rail network."

J. Reilly McCarren, president and CEO of Wisconsin Central's North American operating subsidiaries, declined to comment on the merger until management had more time to talk with customers. WC, located where both CN and BNSF already have a strong presence, connects two gateways that would be served by the merged railroad: Duluth/Superior and Chicago.

Suppliers, unsure of how a BNSF/CN combination will affect capital investment, are also taking a wait-and-see attitude. BNSF's Krebs said there are no plans for major capital projects at gateways or other areas at this point, but the improved cash flow in the new company would mean more money available for tie, rail and other capital projects across both systems. "We should make our suppliers very happy," he said.

What it all could mean
Boiled down, what government, shippers, unions and other railroads are saying is that they were caught flat-footed and need some time to come to a conclusion. A few questions-and a few predictions-come to mind:

• It's a good bet shippers and unions are going to vigorously oppose the merger unless BNSF and CN can persuade them otherwise-and it won't be easy. Shippers recovering from the UP/SP service meltdown were hard to convince that the Conrail split was a good idea. With service problems persisting on NS and CSXT, it's a strong possibility shippers will use their clout to try to halt this merger or at least let it pass only after it's heavily burdened with conditions.
• Rail labor and BNSF have a colorful and quarrelsome history. BNSF and its unions are going round-and-round on fatigue issues that show no sign of a quick solution. So-called "cram-down" practices following a merger are still a hot-button issue for unions, and a merger this size won't do anything to ease concerns. And no union leader who expects to win another term in office will go along with anything that costs members' jobs.
• Do UP and the two eastern U.S. Class I's feel they can compete successfully with a transcontinental, Halifax-Los Angeles carrier? Will CP want to stand alone in Canada? Will UP and one of the eastern carriers will attempt marriage? Will UP make an unfriendly run at BNSF or CN?
• The mega-mergers of the late 1990s showed that it's almost impossible to effectively manage a huge railroad system from one central point, so count on "decentralized management" to become an industry buzz-phrase.
• Also count on "election-year blues" in 2000. Regulatory matters will move very slowly this year due to this fall's Presidential election. If the Republicans take the White House and gain a larger majority in Congress, the BNSF/CN deal will have a much better chance of approval than if Democratic control returns to Congress. Right now, it's too early to forecast.