Canadian Pacific’s Kansas City Southern merger does not solve railway’s decline

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Greg Gormick is a transportation analyst and policy adviser based in Oshawa, Ont., and Studio City, Calif. His clients have included CP, CN, VIA and politicians of four parties.

If the merger mavens at Canadian Pacific CP-T and Kansas City Southern have finished popping the corks on the champagne bottles following the U.S. Surface Transportation Board’s approval of their dream merger, they might ponder the hangover ahead.

Railway mergers aren’t new or necessarily bad. Consolidating local lines into regional systems brought expanded markets and financial strength during the industry’s pioneer period. However, mergers are now often substitutes for effective solutions to railroading’s pervasive problems. Railways lost their competitive primacy nearly a century ago, when governments started overfunding highways, aviation and inland waterways with public money without recovering even half of what is spent.

The result is railway companies have become asset strippers, shedding employees, light-density lines, low-yield traffic and other once-viable components of their systems. Mergers since the 1960s have masked this disease instead of curing it. Fusing weak railways into larger ones has often produced new railways facing the same unresolved funding imbalances that weakened their components.

The most infamous example is the three-railway Penn Central merger of 1968. Thirty months after the merger, it produced the largest U.S. bankruptcy prior to WorldCom in 2002. It also pulled down other wobbling railways in an interconnected, continent-wide system dependent on the health of each component.

Because the industry’s basic problems aren’t even being discussed, it’s difficult to believe CP’s nebulous promise to take 64,000 trucks off the publicly funded highways. That boast is difficult to swallow when the merged system’s deficiencies are considered. Its keystone is KCS’s Midwest-Gulf Coast route, which is inferior to CN’s former Illinois Central line from Chicago to Louisiana and Texas. The strongest KCS card is its Mexican main line, acquired in the 1996 privatization of Mexico’s national system.

CP previously botched the acquisition of two U.S. railways in 1991 and 2007, which might raise questions about its merger capabilities and its PR rhetoric. They have since sold off most of these acquired lines. CP began sinking unabatedly to operational depths after 2013, when the late Hunter Harrison became chief executive after his raucous term helming CN.

To the delight of investors and the anger of shippers and employees, Mr. Harrison brought along an oxymoronic operating plan he called precision scheduled railroading (PSR), which isn’t about running a precisely scheduled railway at all. Its hallmark is the operation of monstrously long trains to reduce “train starts,” meaning fewer locomotives and crews. It may temporarily delight investment advisers, but it wreaks long-term havoc by jettisoning valuable physical and human resources.

In their merger promotional campaign, CP and KCS ballyhooed their intention to maintain PSR. Meanwhile, it has been abandoned by CN and was never adopted by Burlington Northern Santa Fe, considered by many rail analysts to be North America’s best-run and maintained system. Norfolk Southern recently jettisoned PSR in favour of a service, productivity and growth strategy, leaving CP-KCS, CSX and Union Pacific as PSR outliers.

It’s time to ask some relevant questions, such as whose hand is on CP’s throttle? And what are their intentions – beyond short-term dividend generation?