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A Railroad for the NAFTA Age -- If Politics Doesn't Derail It The proposed megamerger of Canadian National and Burlington Northern-Santa Fe would create transcontinental rail service, and more Thanks to some aggressive Canadians, the U.S. railroad industry is being pulled into a second round of consolidation -- one that will likely lead to the creation of some transcontinental giants before it's over. But a deal to put together the Canadian National and Burlington Northern-Santa Fe railroads, announced on Dec. 20, may face a bumpy ride. Shippers and unions as well as regulators on both sides of the U.S.-Canada border have to get on board to make the deal happen. And all three groups are already feeling burned by recent rail mergers. The CN and BNSF executives "have a very big sales job ahead of them," says Jill Evans, an analyst for J.P. Morgan. If they can pull it off, the combination would create an unequaled giant in the business, with 50,000 miles of track stretching across Canada and 28 U.S. states. Under the name North American Railways, the new railroad would join both Canadian coasts to the U.S. West, South, and Midwest. Through links with Kansas City Southern, it would tie Mexico more tightly into the U.S.-Canadian system, in effect creating the first railroad to mirror the North American Free Trade Agreement. With combined revenues totaling $12.5 billion, North American Rail would move an enormous amount of freight. It would ship cars from Ontario and Detroit as far south as Alabama, Mississippi, and Texas. It would move grain from Canada and the Midwest all over the Continent. Its coal trains would travel the length and breadth of North America. Some analysts expect the giant would take freight off the highways as well as from its rivals, forcing them to consider mergers of their own. FEW JOB LOSSES? Operationally, the agreement should raise fewer objections than prior rail deals. As an "end-to-end" merger, it would join two carriers with separate and noncompeting territories, instead of requiring the elimination of parallel lines of track. That means shippers, for instance, wouldn't lose a competing alternative service. Job losses, too, should be relatively modest. The merged outfit will likely consolidate the head offices and information technology staffs, but unionized crew jobs should be fairly secure. Indeed, both BNSF chief Robert D. Krebs and CN chief Paul M. Tellier told reporters and analysts in separate conference calls that employment would likely grow over five years. Still, the deal could face an uphill fight in Washington and Ottawa for political reasons rather than the nuts and bolts of the arrangement. For one, the U.S. Surface Transportation Board is still reeling from a storm of criticism leveled at it for approving earlier deals, particularly the Union Pacific and Southern Pacific merger which led to costly delays for shippers. Says analyst Evans: "Shippers and the government are going to be looking at this very closely." CANADIAN TILT. The cross-border deal could also run afoul of national pride and trade politics. Though structured as a merger of equals, Canadian National is clearly the dominant party. North American Railways would be based in Montreal, and its board would be dominated by Canadians. That may assuage nationalist concerns in Canada, but it could also spark opposition in the U.S. Congress. Already, some on Capitol Hill have raised objections to CN's purchase of the Illinois Central line, which CN began integrating into its system in July. Despite the Canadian tilt of the deal, CN managers have to sell Canadians on the idea, too. One potential sore spot: More Americans than Canadians will wind up holding shares in the merged North American Rail. The deal would also accelerate consolidation in the rail industry. Union Pacific, the big Western carrier, would likely have to do a deal to create a transcontinental line with either CSX or Norfolk Southern, just as those Eastern carriers are busy integrating the former Conrail into their systems. Such a second transcontinental line would likely be seen in Washington as an important balance to the new North American Rail. Already, at least one rival is showing coolness toward the plan. UP issued a statement saying that it intends to meet with customers to see what it can do to "protect their interests, particularly in those areas where competition would be adversely affected by the proposed connection." For their part, the CN and BNSF managers argue that the deal would be good for the rail industry generally because it will bring business back off the highways after years of market-share decline. The Canadian and American rail chiefs expect that the deal will take up to two years to pull together. If they get through that stretch safely, they'll realize a dream long-cherished by rail enthusiasts -- a single-line transcontinental carrier in the U.S. But they have many hills to climb before that happens. By Joseph Weber in Toronto
EDITED BY PAUL JUDGE
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