Class 1 Merger Speculation

justalurker66 wrote:I don't buy the PR line.

Not really looking at the marketing aspects whatsoever.... I'm just looking at a somewhat natural, and possibly inevitable, business evolution. We saw huge consolidation about 30 years ago, and then a relatively stable time where nothing changed...

You've already got two Canadian carriers who can already go ocean to ocean in their own borders, and had marginal service to the heartland of the US.

And then one of them added Mexico to the mix...

At some point, you'd have to expect two of the remaining four to look at combining, followed by the other two.

justalurker66 wrote: ↑Mon Dec 02, 2024 6:53 pm It sounds like you guys have been listening to the PR departments description of merger benefits. At least scratchyX1 notes that the results may not match the promise.
Mr Harrison's "PSR" has become a virtual four letter word in the industry as he moved from railroad to railroad.

I don't buy the PR line.

After reading your misunderstanding around why Chicago rubber-tired intermodal crosstowns occur or what "truck like" actually and realistically means for rail in the marketplace, I'm not surprised by the misjudgement around what you consider PR.

When considering transcon merger operating and market benefits as a response if today's Class 1 growth efforts, including through better cooperation, don't bear enough fruit, best to pay attention to what's offered from the likes of Ms. Bailey's experience or Mr. Harrison's genius. It's also the better of 2 responsive options she's offering should growth not materialize, with the other about shrinking the Class 1 network by combining infrastructure cooperatively amongst themselves.

As it has in the past, bedrock "black diamond" coal traffic's condition underlies decline or growth and change in operations and industry structure, so in no small part its erosion drives the transition with Covid interrupting over the past decade and within the challenge to grow moving forward.

You still have not answered the question:
What does a merger do that better cooperation between eastern and western railroads would not do?

BTW: Hunter Harrison was not a messiah.

A merger vs. partnership would make it a lot easier to negotiate national contracts.

I'm sure it would cut down on dwell at the current transfer points, especially if you can route carloads to avoid choke points like Chicago, Houston, St. Louis, etc.

justalurker66 wrote: ↑Wed Dec 04, 2024 6:08 pm You still have not answered the question:
What does a merger do that better cooperation between eastern and western railroads would not do?

BTW: Hunter Harrison was not a messiah.

For starters, it would reduce those rubber-tired Chicago intermodal crosstowns that you incorrectly attributed to lack of cooperation, playing a part in reducing redundant costs and duplicate operations, while improving ease of doing business and reliability and opening up those so-called watershed markets in the mid/long-length of haul straddling the eastern and western carriers that one or both have no interest in otherwise. Take it from there.

BTW: who said Harrison was a messiah (though I do find myself seeking forgiveness for his crucifiers "for they know not what they do"! )?

What has been said is that he was an operating genius, certainly imperfect and incomplete, borne out over time in the disruptive transformation of 4 Class 1s from performance laggards to leaders and seen in today's influence in operations and leadership across the entirety of the N. American Class 1 industry, including in what the end-to-end CPKC merger as well Pan Am Railways and CM&Q acquisitions offer, in the pursuit of growth.

Volks, open up my urn to tell me about it, but an "East-West duopoly" is coming.

I foresee UP-NS (named Union Pacific); BNSF-CSX, and if Uncle Warren continues to own most if not all of the latter, why not Berkshire Hathaway Transportation? He already named his real estate brokerage businesses Berkshire Hathaway Home Services. So far as insurance goes, I think he should keep his retail lines as GEICO (and Gekko of course), but his commercial, General Re et al, Berkshire Hathaway Assurance.

Now so far as "The Gospel According To Saint Elwood", I respect the differences Messrs. Lurker and QB hold. But I think there are two distinct lines of traffic the railroad industry handles. First is the "captive" comprising Products of Mines and Products of Agriculture. If the roads can deliver this traffic as if it were a pipeline, so long as the shippers are afforded the lowest rate, who cares if operations are influenced by The Teachings (PSR)? Now the other traffic - high value Containers and Motor Vehicles to name two of such, that is where Teachings must be subordinated to service, i.e. the customer tells you when he wants his shipment picked up and on the move. All too much of The Gospel, I think, assumed that rail traffic is captive; true for much, but the stuff that enhances the bottom line (as distinct from this Operating Ratio, which has been around as long as I have been following industry affairs) moves at the discretion of the shipper, and the industry whose affairs we all follow here, had best be responsive.

With all due respect, Mr. Norman, it all starts with rail's large appetite for capital to be invested in long-term assets competing against those with a smaller appetite for capital including assets that turn over at ~1/7th the time while operating with ~1/6th the organization within labor. Markets served are ultimately subordinated to the financial returns they can generate competitively within the market for private capital.

As such, and as an important market yielding mid-40's OR diminishes, there's been no evidence that Harrison's operating principles, which actually work to improve the long-unmet primary need for service reliability within carload networks, have otherwise diminished what is and what you consider high-value time-sensitive markets and among where one might find lower rates of financial return on investment.

Mr. QB, I think that the only difference we have on the points being addressed is that you hold The Gospel, the Teachings, PSR, whatever, can also be applied to the handling of high value traffic whereas I hold that PSR principles are fine for handling commodity traffic so long as a "pipeline" is filled.

While the provisions of such are within a bilateral contract, I'm certain that there are performance payments - and not just the "tokens" Amtrak has with their "hosts" - between JBH and Uncle Warren for handling the former's traffic. J B Hunt pays enough to have the BNSF lay down for the movement of their Intermodal Containers.

Not living on line (I did for a while in both Elmhurst and Wheaton during the '70's) I can't be sure if one Container shipper has "the other Uncle", Uncle Pete, in their debt to the extent JBH has Uncle Warren.

But I do believe that BNSF has adapted some of The Gospel. I'm "the victim" when I want to get from my side of my town to the other - and here comes a 150 car "manifest" operating at about 25mph (FRA Class 4 where Manifest MAS is 50, 60 Containers, 70 Passenger). Because the crew is "fresh" and Galesburg is only 162 miles away, why burn up all that gas to go MAS?. So there's me knowing why, but a whole bunch of other drivers much less patient than I "fuming".

Mr. Norman, what I hold is that Harrison's principles have been applied appropriately, even if not fully, to those markets whose value is high and among those high-value products that may or many not translate into high value for a Class 1.

Among containers, where there's a range of service requirements as well within returns on investment, though generally offering lower returns than other traffic, the principles of balance, steadying workflow, minimizing car classifications and use of general-purpose trains have been applied.

Among autos, the principles of reducing car dwell and classification as well use of general-purpose trains have been applied.

But, to the larger point, the biggest value to those real and perceived high-value markets will come from applying those principles more-fully to the non-dedicated or unit train general-purpose carload market for performance improvement to then cross-subsidize increasing the container market to its fullest volume possible where the biggest opportunity exists against stalled growth and as the lucrative cross-subsidizing bedrock bulk market in coal declines.

justalurker66 wrote: ↑Mon Dec 02, 2024 12:03 am I don't believe... What does a merger do that better cooperation between eastern and western railroads would not do?

Justalurker66, I absolutely agree with you that the biggest problem is that railroads need to focus on serving medium and smaller carload shippers better: not forcing them to use trucks for the last mile, or just ignoring them entirely. (I would say solving this problem actually increases the chance of east-west mergers, since it would partially eliminate shipper opposition.)

As for what I think an east-west merger would solve:
- Current cooperation between the Class Is does exist when it comes to unit trains, especially intermodal; however, that is because these trains are relatively simple. Carload traffic is a much different beast involving a lot more moving parts. Close cooperation on carload traffic would be very difficult, due to different mentalities of the railroads involved, and the atomized nature of the traffic in general. An outright merger would fix that by bringing everything under one roof.
- There is also a lot of carload freight traffic that currently crosses the divide at the Mississippi River, most of it going by truck. Due to the artificial barrier, these hauls are only a few hundred miles long for each railroad on either side. Such a merger would convent what are currently short/medium hauls into medium/long hauls, thereby making them much more attractive to the Class Is.
- General overhead and consolation of faculties in some areas, as others have pointed out.

Gilbert B Norman wrote: ↑Thu Dec 05, 2024 7:56 am I foresee UP-NS (named Union Pacific); BNSF-CSX, and if Uncle Warren continues to own most if not all of the latter, why not Berkshire Hathaway Transportation?

Such a merger could be instigated by BNSF. BNSF still relies heavily on Powder River coal traffic, but that's seeping away year-after-year. If BNSF wants to keep profits stable in the long run, they are going to have to find new traffic. They've done this to a large degree with their current network; however, we have seen hints that they are looking beyond. The CPKC hearing revealed that BNSF is looking at a possible Mexican concession, and it's safe to say the unnamed "third bidder" for KCS was probably BNSF. Not to mention Berkshire Hathaway has billions to throw around on any such deal.

Sorry for the late response, busy with college.

Good to see someone with a penchant for analyzing the business of railroads pursuing an education in logistics- keep up the good work! Reminds me of my own journey, including at that same stage thinking that the industry's biggest problem was the lack of short-haul intermodal service within the pursuit of growth, quickly dispelled in practice.

As I see it, today's industry challenges and opportunities toward growth are more fundamental, widespread, and nuanced than simply targeted mostly with small/medium carload customers or in how truck is used for the final miles. Within coal's decline in bulk unit train markets and intermodal's financial limitations, carload reliability in all forms and simply getting customers of all sizes to fully use and locate on rail are most fundamentally important to growth. For carload customers who aren't or where it does not make economic sense and those who don't need or prefer not to be on rail, transloading to truck is part of that strategy. That can be found in Ms. Bailey's offerings as well including, for example, its expansion among CSX's current strategy.

Should today's Class 1 growth strategies not bear fruit to the point where they might instead pursue the benefits of transcon merger, of course the costs have to be considered as well giving rise to debate. But, in terms of considering benefit between carload and intermodal, in that totality I think it's fairly equal including when considered against cooperation instead.

Within operations, though intermodal trains may appear simply unitized, the use of equipment designed to be "truck like" in ride quality and economics sensitive to how well space is utilized, reality including in interchange is more complex. So, the interchange of intermodal's steel wheel is like what is seen in carload with blocks or trains built/broken internally away from and run-through the interchange vs. where less volume density exists using rubber-tired crosstown truck like what is seen in carload classification occurring near or at the interchange location itself.

In transcon merger between 2 Class 1's intermodal traffic would aggregate, building lane densities toward greater use of steel wheel blocks or trains across what are existing or new gateways where east/west meets and in part from which a virtuous cycle might then be pursued, including for traffic moving within the limitations across today's watershed.

The railroads would need to maintain traffic to aggregate. At this point it would be better to step back from the panacea of mergers always improve performance and look at the root cause of the problems railroads are facing. If the problem is railroads losing business to trucking then one should look at why shippers are using trucks and not railroads.

A hundred years ago trains were the logical choice and long distance roads were barely passable almost to the point of being novelty transportation. As roads and road vehicles improved the distance a truck was the logical choice increased. Now (a hundred years later) we are in a situation where if you want to ship something trucking is extremely viable. Only bulk commodities have remained mostly rail bound.

Many railroad lines have been completely removed or minimized to the point where they can barely serve customers. Some remaining routes have been downsized since the peak of their construction. Three or four track mainlines reduced to two tracks because some smooth talker convinced the railroad that "CTC" would allow fast trains to pass slow trains and opposing trains to weave around others and not lose time. Some mainlines were reduced to single track relying on "CTC" and scheduling to have perfect meets for fast trains to pass slow trains and opposing trains to pass. There have been a few cases in the past few years where railroads have wanted to put the rails back (which I consider good) but with abandonment there are a lot of tracks that will never be rebuilt. Most of the "new track" projects I have seen are restoring a second track where tracks were removed and one track remained.

Expecting companies to build on rail served properties is a big ask when the railroads have reduced the number of properties they can serve by removing tracks and routes. Not to mention the challenge to get a railroad to actually serve a business near a railroad. If their calculations say that it is not worth putting in a spur or a loading track for an industry then even a rail adjacent property is not rail served thanks to the railroad refusing service.

The Class 1s seem to be more focused on bulk moves (an intermodal with hundreds of containers) than serving individual customers. Bulk commodity trains where they can pick up at least a few dozen cars at a time and take them all to the same destination are also acceptable. As are rare specialty loads that the trucking industry cannot easily handle. Where the railroads are losing is with loads that the trucking industry CAN easily handle.

The more railroads force shippers to put their load on a truck the more likely that the "first mile / last mile" service trucks provide will become a "first/last 100 mile" service or "first/last 1000 mile" service. Los Angeles to Chicago is about 2000 miles and a 29 hour drive (per Google). Lets make that 36 hours of driving to include rest breaks or three days of driving with plenty of rest (changing drivers would get the load closer to the 36 hours). A train could be competitive at that distance. Chicago to New York is about 800 miles (14 hours with breaks). The further away from the railroad the actual endpoints of the shipment are the more sense it makes to skip the intermodal part of the trip and keep the rubber on the road.

It seems that there are only two ways for a railroad to become more "truck like". The first is to build more intermodal centers along their main lines to reduce backtracking and provide more places for trains to be loaded and unloaded. The second is to buy a trucking company and run trucks instead of trains.

Using rubber tire cross town transfers as "classification" highlights another problem that the railroads have created for themselves. Closing humps and hump yards and moving to flat switching is a reduction in service. The concept of attaching a load on the next train toward the destination without regards to other loads and letting the next yard sort it out is a problem. Instead of using a classification yards to build blocks beyond the extent of their railroad, railroads are content to sort only by where the load leaves their rails. That is where cooperation between railroads would help. CSX or NS delivering a string of intermodal cars where all of the loads are going to the same destination on BNSF or UP instead of forcing their partner to resort the loads. But the "let the next yard sort it out" problem is not unique to loads transferred between railroads - cars can be classified multiple times even without leaving the railroad they started on.

If there is not 100% cooperation within a railroad to prevent creating issues at the next yard down the track asking for cooperation between railroads to provide pre-classified trains becomes a bigger ask. It also demonstrates that even when the same railroad owns both yards there is no guarantee of cooperation.

The only merger that I can see that would make a Class 1 more truck like would be merging a Class 1 with a trucking company. Merging one western company with one eastern company will just lead to the other two companies merging and a duopoly that will charge higher pricing and lose more business to the trucking companies.

It all flows from the most fundamental through to the particular. As private businesses railroads must generate value for their owners competitively against other options. That is underpinned by the underlying economics of rail's technology, but distorted across US freight transportation by the history of our public policy around infrastructure ownership, in meeting/competing for demand that is derived from other economic activity.

From this each mode brings competitive advantages: for rail it's in the niche across 4 primary characteristics of "heavier weight"; "farther distance"; "higher volume" and "safer". Rail has 3 general service products where each's differing competitive advantage strength translates not only into where railroads must be more "truck like" but importantly into differing strength in financial performance, strongest to weakest: bulk (weight & volume); carload (weight and mix safety/distance/volume) and intermodal (distance & volume). Interchange is a service and cost disadvantage where it is far more prevalent with rail than with truck. The markets are managed in combination to achieve overall results demanded by ownership.

Railroads are well-managed. What you see is the response to the bigger and underlying dynamics driving the business. As bulk traffic suffers a serious weakening with coal diminishing, time to eliminate or mitigate competitive disadvantages around reliability or ease of use in carload to replace its support of intermodal where the competition is strongest but the volume opportunity greatest. One important way in improving that reliability comes from reducing the frequency of classifications executed through blocking techniques.

Mergers as a way to improve competitively as well in financial performance has been one lever among many, including the opposite in spinoffs, in the on-going fight against truck, barge, ship and pipeline. Intermodal is another to overcome the basic disadvantages of rail technology when there is no weight advantage, the poorer financial performance found around light density, and the disadvantages when classifying in hump/flat yards.

I agree with the multi-modal ownership idea, but that was effectively killed when government policy began highly regulating against it then subsequently invested in public ownership of highways and waterways.

A lot of truck traffic isn't single origin to single destination, but is single origin to multiple desintations (e.g., if a shipper has 16 pallets to ship to 16 customers that results in one truck (Amazon, FedEx, XPO, SAIA, etc) at their dock, taking that freight to a local trucker owned distribution center, and then that trucking firm moving those those pallets on the correct trucks to their destinations. But it's also entirely possible that a broker or logistics company is handling that on behalf of the shipper, so the shipper of those 16 pallets worked with some company other than the operator of the truck that showed up. Some of those firms will even break up the pallets for the shipper to send individual parcels onward, and some allow the shipper to deal with one firm to make international shipments.

The railroads used to handle that kind of traffic as well, but having exited that business (either forcibly under the USRA or voluntarily by joining the Railway Express Agency), found themselves handling containers or trailers from those LTL companies when they carry cargos that are more price / less time sensitive than needs to stay on the truck the whole way. It should be noted that in 1969, only 10% of REA's traffic was handled by railroads, the majority by truck, and the remander by airlines. It seems to me that NS is the only railroad that still provides door-to-door LTL transportation, albeit in limited markets.

Railroads were out of the LCL - Less Than Carload - business well before I hired on after Graduation June '70.

Railway Express Agency, which was one of these entities unique to the railroad industry that had no profit or loss (others were Pullman Company, Chicago Union Station Company), and which changed their trade name to REA Express during '60. It eventually folded during '75, moving at "the end" nothing over the rails.

Amtrak had their various "misadventures" handling packages and freight, but that's a whole different story.