US rail mergers point to four giant systems
Like a freight train going over a wobby trestle, the railroad merger movement may have slowed down a bit. But it is expected to continue its journey. Last week's annoucement that the Santa Fe and Southern Pacific Railroads had called off merger talks leaves nine major railroads in various stages of the merger process that -- if all are approved -- will give the United States four huge railroad systems, plus these two unmerged lines. The quartet of merged systems, along with the federally funded Consolidated Rail Corporation (Conrail) , will be responsible for at least part of the trips of almost all long-distance rail freight. The Santa Fe-Southern Pacific merger would have handled most of the rest.
In the East, two mergers are planned: between the Norfolk & Western Railway and the Southern Railway, and between the Chesapeake & Ohio and Seaboard Coast Lines.
In the West, the merger between the Burlington Northern and the St. Louis-San Francisco Railway has already been approved by the Interstate Commerce Commission (ICC), but is awaiting the outcome of a lawsuit by another railroad. The proposed merger between the Southern Pacific and Santa Fe Railroads was called off Sept. 12, but no reason was given.
Finally, in the largest of them all, three railroads, the Union Pacific, Missouri Pacific, and the Western Pacific, have begun the process that would end in a 22,700-mile system stretching from Chicago to Brownsville, Texas, from St. Louis through Denver to San Francisco, and from Los Angeles to Seattle.
Already nicknamed "Mop-up," the system would be an "end to end" merger, with very little parallel trackage involved. The ICC is thought to favor this type of merger, as it fits in with a so-far unstated policy of letting the railroads survive and prosper through mergers, increased pricing freedom, and reduction of less-used branch lines -- and not through government subsidy.
If some of their systems are merged, railmen argue, they can dramatically improve on one of their more serious drawbacks: poor on-time delivery. While estimates vary, trucks are believed to deliver some 90 percent of their cargo on time, while railroads can only manage to do this about two-thirds of the time.
The railroads also believe that moves to remove pricing regulations mean mergers make even more sense, to prevent price undercutting that could reduce profits needed for upgrading and maintaining rail lines and equipment.
This does not mean, ICC Commissioner Thomas A. Trantum points out, that the commission will "rubber stamp" all these mergers. "I want to know from the railroads if we can achieve the same purposes of a merger in a less anticompetitive way," Mr. Trantum says.
Current ICC and congressional moves to free the railroads from many of their pricing restrictions may make some of the mergers unnecessary, he adds. "Let's say Railroad A merges with Railroad B," Mr. Trantum explains. "I don't want Railroad B coming back to us five years from now and saying, 'Gee, I wish you had told us more about deregulation. We could have made a lot more money without merging.' I want to avoid that."
Mr. Trantum is also concerned that some of the railroads may be merging because others are doing it, and wonders, "Are they [the mergers] occurring as a knee-jerk reaction to new competition?"
Some rail analysts believe that the Santa Fe-Southern Pacific proposal would have gotten into trouble with the ICC because several of the routes of the two systems are close enough to being parallel that the commission might have ruled the merger anticompetitive.
The railroads whose mergers fit the end-to-end description are more optimistic of approval. The merger "will give us more responsibility over longer movements and more efficient interchange of cargo," says Lewis Phelps, spokesman for the Norfolk & Western, which will form the northern part of the merger with the Southern Railway.
Merged railroads, Mr. Phelps adds, will also permit more long-distance freight runs -- especially of commodities like coal, which is a primary cargo for the two railroads. If they are merged, he said, it would be easier to put together 100-car "unit trains" to haul the coal throughout the East.
Mr. Phelps says he believes that once the benefits of these mergers are seen, there will be more. "In five years I expect to see another wave of mergers," possibly leading to a single railroad reaching across the entire US.
But others are not so sure of the potential benefits. "I think the large mergers will have a small impact on the costs of railroad operations," says Carl D. Martland, research associate with the Center for Transportation Studies at the Massachusetts Institute of Technology. "The railroads are not too small for the areas they're trying to serve."
He is also concerned about the amount of time the railroads spend applying for the mergers.Because an application prepared this year has to be based on figures for the last fiscal year, "they've got hundreds of people looking at 1979," instead of planning strategies for the future. "There's a tremendous opportunity cost lost on this, when you have 10 major railroads giving so much effort to mergers. . . . This is a tremendous drawdown in the railroad industry , right now."
Mr. Martland suggests that what the railroads need -- instead of bigger systems -- is more coordinated marketing. "In the long term, what the industry needs is a nationwide marketing group." He also maintains that greater pricing freedom would enable the railroads to improve and maintain service without merging the railroads.
Others are concerned about the effects that large "mega-railroads" could have on smaller, neighboring systems that are not involved in mergers.
Aware of this possibility, some of the nonmerging railroads are taking steps to blunt the effect of extra-large rail systems in their areas.
"We have been consolidating our position in the Midwest," says Joseph Marren, spokesman for the Chicago & Northwestern Transportation Company. Already the region's largest corn handling railroad, the company is moving to expand its coal hauling capacity -- and is carrying almost as much coal as corn, bringing the coal from Wyoming to the Mississippi River.
This does not mean the Chicago & Northwestern opposes mergers, Mr. Marren adds. In fact, it would be willing to merge, too, "if the right partner came along."
One group that probably will not be happy to see mergers grow is the small towns and rail customers situated on money-losing branch lines. Unable to provide enough business to keep such lines profitable, these customers can expect to see many of these branches abandoned by the larger railroads. Trucks have already taken over service to almost all of these smaller towns, and many factories can be moved.
"Instead of spending millions to keep a branch line open, we should see if we can move the plants closer to the main line," Mr. Martland says. "They would get a newer, more efficient building and better service as well."
While the ICC is expected to approve most of the proposed mergers, it is encouraging other alternatives, spokesman Larry Lesser says. These could include: the sale of a single line from one railroad to another, more liberal trackage-rights agreements to permit the traffic of one railroad to travel on the tracks of another, and more run-through trains going long distances and avoiding time-consuming switching yards.