Highlights of STB hearing on rail mergers

Railroads Seek CN/BN Merger Delay 

WASHINGTON -- Major railroads asked regulators on Tuesday to delay a planned merger between Canadian National Railway Co. (CNR.TO) and Burlington Northern Santa Fe Corp. (BNI.N) while they resolve their own post-merger service difficulties, Reuters reported. 

Top railway executives said at a Surface Transportation Board (STB) hearing on the future of the rail network that the merger would plunge the industry into a further round of consolidations and distract them from reducing delays. 

But shipper groups, saying many customers were already served by just one railroad, said regulators should pay attention to allowing railroads to compete for each others business. 

"If they are going to provide better service by that merger then I think that gets a different sort of look," said Ed Emmett, President of the National Industrial Transportation League. 

Emmett said he was disappointed in the lack of testimony on the future of the industry from the other railroads. "What I heard was a food fight over one particular merger," he said. 

Linda Morgan, STB Chairwoman, opened the four-day hearing expressing reservations about permitting new railroad mergers when difficulties from previous mergers lingered. 

The 1996 merger of Union Pacific Corp. (UNP.N) and Southern Pacific Rail Corp. led to serious bottlenecks across the merged company's system in 1997. And despite strenuous efforts, the purchase and division of Conrail Inc. by Norfolk Southern Corp. (NSC.N) and CSX in the East saw widespread delays last year, with problems continuing to this day. 

"This announcement has come at a time when the rail sector is suffering from what I would call merger fatigue," Morgan said. 

But the top executives of Canadian National and Burlington Northern defended the timing of their proposed consolidation. 

"There is no bad time for a good transaction," Canadian National Chief Executive Paul Tellier said. 

The merger of Canadian National and Burlington Northern would create a network with almost 50,000 miles (80,500 km) of track, stretching from Halifax on the Atlantic coast to Vancouver on the Pacific, and southward to New Orleans and Los Angeles. 

Burlington Northern Chairman and Chief Executive Robert Krebs said future mergers should be held to the type of better service commitments the two railroad had already offered along with greater oversight during integration of operations. 

But other major railroads said now was not the time for another huge merger. 

"Our industry is plagued by instability today, and I firmly believe this transaction will very much add to that instability," said CSX Chairman and Chief Executive John Snow. 

Norfolk Southern President and Chief Executive David Goode said he knew all too well how confidence and planning for a big rail merger could quickly become frustration at the difficulties. "I am well qualified," he said. "A major merger could disrupt the entire industry for years." 

But Transportation Secretary Rodney Slater said his department would be concerned about the STB calling a halt to rail mergers. "We do not believe a moratorium on mergers is a reasonable response" to the problems, Slater said. At the same time, he urged "caution," because the railroad industry could be on the verge of a wave of mergers that could reduce the number of major railroads to two.

Remarks of John W. Snow, Chairman and CEO, CSX Corporation and CSXT 

WASHINGTON -- Following is the testimony of John W. Snow, chairman and CEO of CSX Corporation (NYSE: CSX), for yesterday's hearing on the proposed Burlington Northern Santa Fe-Canadian National merger and consolidations of major U.S. railroads: 

I want to thank the Board for convening this proceeding, and also for its decision to consider not only the proposed consolidation before you but the downstream effects as well. It is clear that the proposed transaction that prompted the convening of this session is a watershed event, and how it is treated will determine the future of our rail industry. 

CSX, along with the other major railroads represented here today, have made it clear that the CN/BNSF combination is an ill-timed proposal. The transaction, in and of itself, is troubling, but this hearing is wisely focused on the broader issues. 

I am deeply concerned about the present state of the rail industry. Our industry is plagued with instability today, and I firmly believe that this transaction will very much add to that instability. Even the threat of it has already been destabilizing. 

One only has to look at the stock quotes for railroads since the CN/BNSF announcement or read what the leading Wall Street analysts have written -- that this transaction will lead to other transactions, that reregulation will follow, and that the financial markets now distrust mergers -- to understand what this merger means to the financial health and future of the rail market. And those fears are echoed among our shippers, by public officials, and worst, by our very own employees. That means that even the prospect of this transaction will cripple our efforts to rebuild our railroads and destroy our ability to raise necessary funds to keep this industry healthy. 

Part of the concern about our industry comes from the problems that have occurred in connection with recent mergers. Unfortunately, much-publicized rail congestion and delays resulting from both eastern and western rail mergers -- in which I include my own railroad -- have shaken customer confidence. In our case, the difficulties of integrating our share of Conrail's system into our network serve as a prime example that extensive planning and significant capital spending do not guarantee instant success. 

While we planned extensively, as did our competition, Norfolk Southern, we fell short of our goals. Some of the problems were unexpected as shippers made decisions to route traffic in ways that we simply failed to anticipate. Regrettably, many of the service problems were of our own doing. For this, I am truly sorry. I say this to the Board and the many fine shippers who in all likelihood will tell you about these problems. 

Unfortunately, at this time even without some of these problems, there might still be sentiment to reregulate the railroads if further mergers occur. The bloom of mergers seems to have somewhat faded across many industries. But whatever the cause, it is the shipper who has suffered. And the questions for the shipping community, and for the future of the rail industry as a whole, are ... what is the correct course ... what is in the "public interest" ... what "minimizes the need for federal regulatory control" ... what promotes a "sound" system? 

The Board will recognize those questions as echoing the policy of Congress set down in the statute that the Board enforces and administers. 

We need to fix the industry and I question whether this transaction will help to fix it or will it harm it. I believe it will harm it even though I have great respect for the two gentlemen who are proposing it. What the industry now needs is a period of time to focus on resolving merger-related issues, and on effectively bringing these most recent mergers to a successful conclusion, I have no doubt we will, but it will take time, and we need that focus. 

My number one priority has been to focus on our rail system, to fix it, and to deliver on the promises we made to you and the shippers many months ago. I have been spending a lot of time in Jacksonville and in the field, watching, listening and leading our recovery efforts. Our management and labor teams have been working extremely hard and there has been some progress. There are still real problems, but we are working to solve them. 

What is of great concern is that these dedicated employees, who are so critical to the needed improvement, are becoming distracted. Their concern and focus is shifting away from working to correct and fix the railroad to concern about this latest proposal. They worry about their future. 

Will there be another round of mergers? Who will be my next boss? What is happening to the value of my stock that I was planning to use for my kids' education? Will all my hard work be for naught if this industry is reregulated? Frankly, what is the future of the industry? We are beginning to lose some of our young and good people. People are working hard, but they are not taking risks that are necessary because they don't want to stand out in this time of uncertainty. 

We have talked about Wall Street. I also have spent time there and talked to institutional shareholders and analysts. It is a humbling experience. Fears of more mergers and reregulation have driven investors away from rail stocks. We need to worry that low stock prices will encourage a hostile tender offer from an entity not involved in railroading. Such a takeover could take place rapidly without intervention from this Board and most likely without raising issues under the antitrust laws. However well intentioned such an offer might be, it would destabilize the industry. 

In my mind, Wall Street has spoken on the issue of rail mergers now, and about the CN/BNSF deal. It doesn't like them. This means that we need to worry about our ability to raise capital, as share prices fall to new lows, and as merger problems result in weaker balance sheets. Overcoming service problems takes money, and even those railroads that have substantially worked their way out of their post-merger difficulties have done so at substantial cost, and this has depressed earnings and stock values. 

Service problems have driven shippers from the industry and lowered revenues. And the prospect of more consolidation has driven share values even lower and shaken Wall Street's confidence in our industry. We've been told that even if our current earnings return to normal, the merger "cloud" will keep share prices down. The market capitalization of the two large eastern railroads is less than half of what it was in June of 1999. Indeed, the market capitalization of all United States- based Class I freight railroads hovers at less than half of that of a single shipper, UPS. In some ways, that's a tribute to UPS, but mostly it's a sad commentary on the state of the rail industry. 

I have been admonished by counsel always to be cautious in my comments about further consolidations; it's part of our policy. I do not have a crystal ball, but history suggests that one transaction will lead to others, and that regardless of their desires, carriers will be forced into mergers by circumstances that may well be beyond their control. Wall Street seems to think that, and many shippers also echo those views and express deep concerns about future mergers. 

If there should be mergers now, and should those mergers include weakened carriers, shippers will argue the need for greater government supervision and regulation. This would lead to the further destabilization of the rail industry and the substitution of regulatory pricing for the free-market pricing which has benefited shippers and carriers alike since passage of the Staggers Act. In the CN/BNSF case, we have already heard some shippers promote huge regulatory changes from the industry as the price it should pay for consolidations. 

We need stability, and this or any other transaction at this time will only add to the current instability. It will keep our dedicated employees from doing what they need to do ... fixing the railroad. It will frustrate our ability to restore service and shipper confidence and to bring more freight to rails. It will keep us from shedding the tens of millions of dollars of extra costs that have crept into our systems because of merger problems. We will not be able to fix the serious earnings problems that plague us and restore investor confidence. Wall Street has spoken about this merger in the most pointed way -- by driving share prices down. Putting the industry on a stronger financial footing is essential if we are going to be in a position to make the capital infusions necessary to give shippers what they need and demand. 

We can make this a healthy and vibrant industry again. CSX will deliver on the promises that we made for our merger. Rail is a wonderful way to move freight, and CSX has a great system. I promise you that, but we need to keep our employees focused, restore shipper confidence, and restore investor confidence. And I don't see how we can do that if we have this merger to confront at this time. There are alternatives to mergers ... cooperative ventures and alliances ... that are far less drastic and can be quite beneficial. The industry is distracted from exploring them now. Before we take the giant step of a CN/BNSF merger, we should look at those less drastic steps ... and before we decide to take any giant step, we should finish what we have started, learn the lessons of our mistakes, and only then proceed. 

The Board can take encouragement in the way it is proceeding in this matter from a speech delivered by Robert Pitofsky, Chairman of the Federal Trade Commission, on February 17 -- after this Board had broken new ground in this case, and perhaps influenced by this Board. Chairman Pitofsky said that in passing on mergers, the FTC's "responsibility is not just to examine the merits of a particular transaction, but to take into account where the industry, as a result of similar transactions, might be going." The Board's Decision No. 1 in the CN/BNSF case and its launch of these proceedings reflect that wise approach. 

So, the real question before this body is, would approval and consummation of the CN/BNSF transaction, or any other transaction at this time, cause even greater destabilization of an already fragile industry? My view is yes. 

The authorization of a destabilizing transaction, and the encouragement of additional destabilizing transactions, would not be in the public interest. 

Collectively, we owe it to our customers, our employees, our shareholders and the public to get this one right. I again want to commend the Board for setting the ground rules for the debate and for taking into account the potential wide-ranging implications of the proposed transaction and placing it in the wider context of the future structure of America's rail industry. 

I would prefer to stay here for this whole proceeding, but I believe I need to go back to continue the process of fixing the railroad. I will review the shipper comments and, of course, I take them seriously. 

Thank you.

CPR Says BNSF/CN Merger Will Set Off Another Round of Rail Mergers

CALGARY -- A merger of Burlington Northern Santa Fe and Canadian National railroads will set off another round of mergers in the rail industry, and risks disrupting service for shippers, CPR's president and chief executive officer, Robert Ritchie, told U.S. regulators yesterday. 

Appearing before the Surface Transportation Board in Washington, Mr. Ritchie said previous mergers created severe service disruptions. "Shippers suffered through the last wave of rail consolidation and are still suffering the after-effects in terms of their markets."

The interdependence of the North American Rail industry means that service problems created by mergers are felt across all railroads, not just the merged companies. "Whether or not we participate in the next wave of mergers that will follow a BNSF/CN merger, it will affect our customers." 

He said railroad management must focus on solving the current service problems. Instead, a BNSF/CN merger would divert attention to a competitive response risking even more service problems. 

He said the North American rail industry had reached a competitive equilibrium with two large, strong carriers serving the eastern U.S., two serving the western U.S., and two serving Canada, with large important regional carriers serving niche markets. A BNSF/CN merger will upset the current equilibrium, leaving other railways no choice but to propose responsive mergers. 

Mr. Ritchie said he is not seeking the STB's protection from a BNSF/CN merger. "Our railway is running well. Service reliability is good and improving. Having said that, we -- and our customers -- have been adversely affected by the service problems created by the recent mergers of other railways." 

"I believe that the best course would be to defer big mergers at least until the situation is more stable." 

He added that if a BNSF/CN merger goes ahead, other railways will have no choice but to propose responsive mergers despite the risk of additional service problems.

Norfolk Southern Chairman: 'Now is not the time'

WASHINGTON, D.C. -- Norfolk Southern Corporation (NYSE: NSC) Chairman, President and Chief Executive Officer David R. Goode today told the Surface Transportation Board (STB) that now is not the time to approve a rail merger. 

Speaking during the STB's public hearing on the proposed combination, Goode said, "Today, our customers and investors clearly are telling us that the rail industry needs predictability not uncertainty, stability not turmoil. A major merger like BNSF-CN could disrupt the entire industry for years." 

Goode said the proposed combination might upset the industry's current competitive balance; set off another round of mergers; divert resources from daily operating, service and marketing issues; hinder cooperative industry-wide improvement efforts; increase pressure on Congress to change the current regulatory scheme; and, in the case of Norfolk Southern, delay delivery of the Conrail transaction benefits.           

The full text of Goode's remarks can be found on Norfolk Southern's web site, www.nscorp.com.

Statement from Robert D. Krebs, Chairman and CEO of BNSF 

WASHINGTON -- Several people testifying at the Surface Transpiration Board's (STB) hearing yesterday provided reasons why the STB should plan to review, without delay, the filing of the application by Burlington Northern Santa Fe Corporation (NYSE: BNI) (BNSF) and Canadian National Railway Company (CN) to combine their companies, Robert D. Krebs, BNSF Chairman and Chief Executive Officer, pointed out following the first day of a four-day hearing on the present and future structure of the railroad industry, a company press release said. 

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