The Railroad Week in Review:
Week Ending May 23, 1998

Canadian National (NYSE: CNI) President and Chief Executive Officer Paul Tellier told a gathering organized by the Greater Memphis Chamber of Commerce that "CN's commitment to service is clear. Investments in equipment, technology and customer services prove how serious [we are] about delivering on shipper commitments." Tellier said the answer to the industry's service challenge is not re-regulation of U.S. railroads, noting "CN has seized on the strength of north-south traffic volumes. Already 38 per cent of [our] business depends on U.S. domestic or Canada-U.S. trade."

Meanwhile, former Illinois Central President Hunter Harrison, now Canadian National's executive vice-president and chief operating officer, is recovering from successful cardiac bypass surgery that was performed in Chicago on May 12. The press release is quick to note the operation was undertaken as a preventive measure. Mr. Harrison did not suffer a heart attack. CNI ended the trading week at 61 even, off 1% for the five trading days.

J.P. Morgan started coverage of Norfolk Southern (NYSE: NSC) with a BUY rating on Thursday. NS stock prices continued to move sideways last week, closing at 33 3/4, up an eighth for the week. I think a lot of observers are getting tired of waiting for the other merger shoe to drop, hoping to see the heralded merger synergies sooner rather than later. Also, there is lingering doubt that the merger will come off without some sort of glitch that would be a hiccup at best and a clear win for one side at worst.

CSX Transportation (CSXT) continues its program of line pre-merger capacity enhancement with five miles of rail installed on the old B&O main between Nappanee and Milford, Indiana. Some road crossings will be closed temporarily (can't they make some permanent?) as the work takes place. CSX finished the week at 51 7/8, off 4.6%.

The merger clock continues. The STB hears oral arguments June 3 and 4, 11 days from now. They vote on June 8 and issue the written version July 28. Officially CSX and NS get control of CR on August 22, just 90 days hence, though they can't operate the railroad until "split date." A working date is September 1, though conventional wisdom puts that day out to December or January. (For a fascinating read on a past merger, and one in which there are myriad parallels to this one, the reader would do well to peruse Erie Lackawanna: Death of an American Railroad by H. Roger Grant, Stanford University Press, 1994, esp. Chapters 4 and 5.)

In other merger news, The STB's Section for Environmental Analysis (SEA) has completed its final Environmental Impact Study (EIS). In it the SEA recommends that the Board require the Applicants to implement 65 mitigation measures to address safety and other environmental impacts in the Conrail transaction. For the first time in an environmental review, SEA recommends measures to address safety integration issues that could result from the merger. SEA's mitigation measures also address community impacts, such as noise and highway/rail at-grade crossing safety, in the communities that would be most affected by the proposed Conrail Acquisition.

Wisconsin Central (Nasdaq: WCLX) was very much in the news this week. On the home front, The Tellier release (above) says, CN reaches Chicago today "over its own network and in cooperation with other carriers." There seems to remain some speculation as to who those "other carriers" may be. An eastern correspondent offers, "CN has dumped the WC and are (sic) now working with the Burlington Northern to handle their trains from Superior to East Dubuque Iowa where the trains would be transferred to the [Chicago Central]. In fact, a news release was made available last week where the WC announced that they were laying off a significant number of employees due to the fact that they did not secure this contract."

I called WC about this and was told they were not aware of any press such releases and they are still negotiating with CN over the overhead merchandise traffic. Intermodal is carried under a haulage agreement, as noted in this space recently. Offshore, WC's Australian interests increased as Tranz Rail's 27%-owned Australian Transport Network purchased the Emu Bay Railway.

On the other side of the world, Ed Burkhardt's far-flung network signed a deal to buy 280 new freight locomotives for its English Welsh & Scottish Railway unit from a leasing company owned by Royal Bank of Scotland. Out of the 280 locomotives, 250 would be Class 66 diesel-electric and would be built by EMD in Ontario, Canada. The remaining 30 would be Class 67 locomotives to be assembled for EMD by GEC Alsthom Transporte in Spain. The first locomotive would enter service in June with deliveries expected over next two years. WCLX finished the week at 22 7/8, off 1 or another 5.7% as analysts wonder how low is low. Indicators are it's about here.

At Union Pacific (NYSE: UNP) the National Transportation Safety Board (NTSB) has ruled a dispatcher's mistakes and a lack of company workload-management policies caused the UP's four-fatality crash in Texas last year. The accident occurred in dark territory and the dispatcher -- located 850 miles away in Omaha -- had not accurately issued track instructions to a train crew before its locomotive slammed into another on the same track. Moreover, the NTSB found, the dispatcher also did not correct the train crew's repeat of the track instructions, and it faulted UP for qualifying unprepared apprentice dispatchers and assigning less-experienced dispatchers to territories with high-operating demands.

Meanwhile, Overnite Transportation, UP's Richmond (VA)-based trucking subsidiary is on the block via a 100% initial public offering. The parent company said proceeds from the sale - as much as $700 mm -- would be used to reduce its corporate debt. The sale will result in a significant second-quarter loss which will be recorded as discontinued operations. UNP closed the week at 52, off 3.5%, having begun he week at 53 7/8.

Westinghouse Air Brake Company (NYSE: WAB) Passenger Transit products group expects to receive orders of $20 million for brakes, couplers, doors, and HVAC equipment for 100 new heavy rail passenger vehicles for MARTA, the Metropolitan Atlanta Rapid Transit Authority. The Company expects the final contracts to be signed in the near future. The brake and coupler equipment will be produced at the Company's Passenger Transit Division in Spartanburg, South Carolina. The door equipment will be produced at the Vapor Division in Chicago. The HVAC equipment will be produced at the Stone Air Division in Plattsburg, New York.

Delivery of the equipment for the two prototype vehicles will be in the first quarter of 1999, with actual delivery to begin in the third quarter of 1999 through mid-2002. The new vehicles will be built by Breda Costruzioni Ferroviarie Spa of Pistoia, Italy. Breda intends to perform the final assembly of the vehicles in the Atlanta area. Breda has previously furnished transit vehicles to the RTA in Cleveland, WMATA in Washington, D.C. and the Red Line in San Francisco. Breda is currently supplying vehicles to the MBTA in Boston, Massachusetts. WAB closed at 27 5/8 Friday, up 2.3% for the week.

Trinity Industries (NYSE: TRN ) recently sold a portion of its investment real estate, proceeds to fund planned plant expansions in North and South America and will increase net income in the first fiscal quarter by approximately $15.0 million, or 34 cents per share. Elsewhere, FINA (Amex: FI) has ordered 850 new covered hoppers for plastics. The cars are huge, with 6,221 cu ft capacity and designed for 286,000 lb. gross weight. TRN closed at 49 13/16 unchanged for the week.

Greenbrier (NYSE: GBX) and Bombardier have formed a strategic alliance to build freight cars at a site about 50 miles out of Mexico City and which Bombardier had acquired six years ago. The operation is expected to open its doors in 4Q98 an turn out 3,000 conventional cars a year for the North American market. For what it's worth, Montreal-based Bombardier is the largest passenger car builder in North America and Number Two in the world. GBX closed at 17 5/8 on Friday, off 1 1/8 or 3.8% for the week.

--Roy Blanchard

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