Fleet Management

New Rail Giant Targets Long-Haul Truckload Carriers

December 20, 1999

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A proposed merger between two railway giants could mean long-term increased competition for truckload carriers.

North American Railways Inc., the proposed parent of Burlington Northern Sante Fe and Canadian National Railway Company, would be North America's largest rail system with 50,000 miles of track covering the continent except the U.S. Atlantic seaboard. The new railroad would be a huge cross-continent and north-south single line service, posing a threat to long haul truckload carriers.
The north-south routes are on the Pacific Coast and the Mississippi. Midwestern and western shippers would get single line access to Halifax, the closest deep-water port to Europe.
The CEOs of both railroads told the merger announcement meeting that they expect to become more truck competitive and to begin to reverse their falling market share in transportation revenue. CN CEO Paul M. Tellier said that the railway share has fallen from 33% to 12% of North American truck/rail revenues since 1960.
How serious is this threat? Four recent big rail mergers all made the same promise but instead drove some of their existing customers from intermodal to truck with unreliable deliveries. Burlington Northern bought Sante Fe in 1995. Union Pacific bought Southern Pacific in 1996. Norfolk Southern and CSX bought Conrail in 1998 and Canadian National bought Illinois Central earlier this year.
Motor carriers should assume that the railroads will eventually learn to operate their merged lines as a single system and become more truck competitive. Investors appear to expect this to be a tough task to accomplish. Burlington Northern Sante Fe (BNI) shares fell more than 10% after the announcement. CN shares fell several percent on the Toronto exchange.
Robert D. Krebs, the CEO of Burlington Northern Sante Fe, said the partners had identified $7 billion of truck and rail freight they could divert to the new line. They expect to divert 10% of this quickly. This is an ambitious target. If they achieve it, this would be a $400 million shift from truckload carriers to rail, equivalent to about 8% of all U.S. truck tonnage shipped more than 500 miles. It would amount to about one-half of one percent of truckload revenues and would represent about one eighth to one tenth of the expected annual freight volume growth in the next few years.
Carriers have more than a year to get ready for this new intermodal competition. Regulatory review in both countries is expected to keep the merger on hold until the summer of 2001. It will be a long ugly process. Canadian nationalists, U.S. farm belt shippers and more than dozen labor unions will all try to extract some special privileges in the process. And U.S. regulators are nervous about another mega merger before shippers' complaints from the previous mergers are resolved.
The proposed merger signals that railroads still believe that they can take market share back from trucks as soon as they lean how not to lose track of their freight cars.

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