The Railroad Week in Review:
It's over. On Monday the STB unanimously (two-to-zip) approved the Conrail transaction with more than 40 conditions regarding "service levels, competition, labor rights and other issues." The STB itself said its statutory function in reviewing rail mergers is to balance the benefits of the merger against any competitive harm that cannot be mitigated by conditions. It found the benefits were "substantial." (N.B. The entire listing of Conditions may be had at the STB web site, http://www.stb.dot.gov/NewItems.htm.)
The conditions imposed are in large measure designed to be sure the applicants keep the promises made in their filings. Readers will recall there were no such controls in UP-SP, and as it turned out UP was unable to deliver on commitments made in its filing. This time, writes the AP, "Rail regulators mindful of the service meltdown that followed a 1996 merger in the West have crafted an early-warning system for two carriers breaking up and absorbing Conrail routes. In approving the $10 billion transaction Monday, the STB required CSX Corp. (NYSE: CSX ) and Norfolk Southern Corp. (NYSE: NSC) to submit monthly, weekly and daily reports detailing on-time performance, inventory and other issues affecting rail operations."
Small railroads made out very well, with ten shortlines named and several others by inference. The biggest winner was RailTex (Nasdaq: RTEX) with its New England Central, Indiana & Ohio, and Indiana Southern units gaining new access. Genesee & Wyoming (Nasdaq: GNWR) scored a victory regarding paper barriers at an interchange with privately held Livonia, Avon & Lakeville Railroad.
As for Buffalo and east of Hudson, the STB found "shippers throughout the East will have more options than they have had in many decades, and more competitive service than they have ever had before." Instead of the shared- access area sought by businesses for Buffalo, the STB's staff recommended broader application of a $250-per-car reciprocal switching fee and a three- year study by the board of rail rates in the area. The $250 fee is less than half the rate now charged.
The staff also recommended CSX be required to participate in the New York City area in restoration of cross-harbor float service as an alternative to serving the city by truck from rail yards in northern New Jersey. This could be good or bad for Bob Crawford's NYRR, depending on whether the move is to use his outfit or build new with later technology, as has been sometimes suggested.
CSX also would be required to give the Canadian Pacific Railroad haulage rights between Queens and Albany. (That much we knew already). Also formalized was last summer's agreement between CSX and Providence & Worcester regarding service over trackage or haulage rights from Fresh Pond to New Haven, CT, focusing on operational and ownership impediments related to service over the line.
The usual labor protections that accompany mergers ("NY Dock," e.g.) will be imposed as the STB recommended against any overrides of union contracts that were requested by the railroads. Seniority rights can't be switched to other cities unless jobs were being offered in the new locale.
The acquiring roads will be able to take over freight contracts, even if shippers held non-assignment clauses, but only for 180 days from Day One, the actual start of the merger. After that interval, shippers could continue service with the successor -- or begin negotiations with a new carrier. The Board specifically noted that the class 2 and 3 lines are to be party to this condition, which means some opportunities in 1:2 situations where the shortline gains access to a second class 1 carrier.
When exactly is Day One? Norfolk Southern has been working with a hypothetical split date of September 1, 1998. CSX is leaning toward 4Q98. The decision allows the acquiring lines access to Conrail shipper info before Day One, so for the next five months or so NS and CSX will be busily forming shipper and shortline strategies.
Short takes: Gruntal this week reiterated its strong buy rating on UNP. Analyst Steve Lewis cited underlying value and earning power approaching $7 a share as a result of merger efficiencies beginning to kick in. For the week UNP was up 75 cents closing at $47.125...Conrail's senior operations officer, Ron Conway, will join CSX in June in a similar position, replacing Carl Taylor, who is retiring. Conway will be in charge of all operations on the combined companies' 22,000-mile network.
Continuing the span of control thread developed of the past couple of weeks, a dear friend of more than ten years wrote with his take. Here is a chap with more than 30 years' experience in both shortlines and class 1s, so he knows whereof he speaks. He writes, "I agree that as a railroad gets larger it becomes more difficult to manage, however it is not size that is the problem but rather the expanding circle of potentially conflicting interests that have to be served. Over the years I've noticed that what may be the right answer when viewed locally, can be very wrong when viewed in a larger context.
"One must keep in mind that Kent Healy's work dates from the pre-Staggers era of total regulation. This era only ended when the nation was faced with the financial collapse of the carriers in the Midwest and the Northeast. These properties, when freed of the burden of regulation but lead by the same management cadre, have created a rail renaissance. It is hard for me to say that any one size property is the ideal size given all that has happened to our industry.
"We often see the implication that a lot of the things that small railroads can do, like more personalized service, fall by the wayside as carriers get bigger. This observation overlooks the great growth in productivity in the rail industry at a time when rail rates have been substantially in real dollar terms.
"Further, it overlooks the high degree of consolidation which is taking place within the shortline community as well as the increasing participation by the general public through stock ownership. If investor expectations are in direct competition with local or internal demands will the small carriers still be able to provide the present level of service?
"You've pointed out repeatedly in your Week in Review that some small carriers do not appear to be reinvesting in their properties. Yet the globalization of the transportation marketplace requires that our industry continuously prepare for even greater demands. it's a given that 286,000 lb. gross weight loads are a here and now thing. How many small railroads have prepared for this development?
"I am increasingly concerned that large and small carriers are not looking at the same scene from opposite directions but, in actuality, looking at different scenes. I sure hope that is not the case." Thanks, friend, for an eloquent commentary on some major trends that concern us all.
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