Railway Age, March 1997

Are You Prepared for the Conrail Merger?

There's been a lot of talk about the number of shortlines that lose a second class I connection in a merger. UP/SP saw seventeen so-called two-to-one (2:1) shortlines. CSX/Conrail will cost 18 shortlines a second (and only other) connection. Then there are the lines that will see customers go 2:1. Consider the line that has five major customers fed by itself and Conrail. A third of its business is connecting those customers with Norfolk Southern. Obviously, NS/Conrail could hit the top line pretty hard.

My January 1995 column, "Don't' Limit Yourself to Just One Class One" mentioned a handful of shortlines and what they'd done to add or protect a second outlet. The overwhelming consensus is: if you have competitive access already, by all means keep it. If you, don't have it, use trackage rights or line acquisition -- or even new construction -- to get it. But now, the reverse is true. You've fought to get and protect the second class I connection and now you're about to lose it. Or worse, lose your customers to a former friendly distant connection now in your face by dint of a merger.

In the current situation, Conrail wants to hook up with CSX. Norfolk Southern wants to buy Conrail. Whichever way it goes, if you're one of 150 or so Conrail shortlines, your connecting class I relationships will never be the same. Talk about being on the horns of a dilemma. First there will be questions galore. What's my next move? How do I position myself to maximize the gain and minimize the pain regardless of outcome? Will there be line segments up for sale and do I have the cash to play?

You may not have a choice in selecting the outcome, but knowing what you'll do before it happens is the only way to stay ahead. The temptation will be to wait and see how it shakes out. That'd be like waiting till you arrive on Omaha Beach on D-Day without a battle plan, waiting to see what the Germans do when they see you. If it's a CSX deal, you have a CSX plan which you put in place immediately so you don't waste time (a) figuring out your next move and (b) getting everybody -- including your customers -- on board. If it's a NS deal you have a NS plan. And so on.

Your plans have to address everything from the allocation of crews and locomotives to the necessary adminstrative support changes. Customers and employees alike will want to know what's going on and how the changes will affect them. You'll be busy enough forging new relationships with new management teams that you won't have time to spend on housekeeping. In short you'll need to address a bewildering array of what-ifs so you'll be in control when the inevitable chaos hits.

The Conrail merger carries more weight than perhaps any merger before it. Said Carl Belke, an executive with the former Delaware & Hudson (now part of CP's St. Lawrence & Hudson), "Everybody better be paying attention. This merger is far more significant than the ones in the west. This is the one that will set market controls for the Eastern United States."

Two decades ago, Congress created Conrail and expanded the old D&H Railroad, now part of CP Rail, to replace six bankrupt railroads and continue vital rail service to the Northeastern United States. Conrail was given a virtual monopoly by Congress, so the question now becomes should this artificial monopoly be preserved and strengthened?

On the one hand, the CSX proposal seems to say yes. It would create a system in which more than sixty markets including Philadelphia, Baltimore, Wilmington, Indianapolis, Pittsburgh and bout 60 more will lose their second railroad. Moreover, the New York City market, long a Conrail monopoly, will stay that way. As for shortlines, the Conrail website says, "Conrail's innovative feeder program will continue and will be extended to additional carriers." This appears to mean Conrail Express will be extended to the present CSX shortlines.

On the other hand, Norfolk Southern's merger proposal says not so fast. It's based in what it calls "Balanced Rail Competition" meaning two-to-one cities would be minimized and in some cases lines would be sold off to preserve a second carrier. The current map shows fewer than 40 cities losing a second railroad, absent some redrawing of the map. As for NYC, perhaps Norfolk's paper sums up their position best. "Competition on major corridors, such as New York/Philadelphia - Chicago, should be over owned routes. Trackage rights can and do work for short-distance industrial access, and as shortcuts between owned lines..."

The shortliner trying to figure out how to come out ahead in this deal needs to keep in mind that there are two parts to this transaction. There's the commercial side being played out in the stock market, and there's the regulatory side. I won't bore you with the details of the former, except to say Conrail's board forbids management from talking to any suitor other than CSX before January 1999, the so-called lock-out provision.

On the regulatory side, the Surface Transportation Board said the lockout "appears excessive on its face," and went on to add that the lock-out provision would not preclude it from approving any merger on its own schedule, meaning as much as a year before the end of the lock-out. In this regard, the STP noted, "A [railroad] cannot effectively preclude our approval of a transaction from going forward simply by entering into a contract that purports to prevent all alternatives to its own preferred outcome." In other words, if the STB doesn't like the CSX/CR plan, it can prohibit the merger. So if the companies merge anyway, we could Santa Fe/Southern Pacific all over again.

It's no secret that the STB is already getting pressure to provide open access, and politically-based hearings are taking place on the entire rail merger scene, so it could be neither CSX or NS will get Conrail. As a result, pieces of Conrail could be sold off to more than CSX and Norfolk Southern. And , as one of my correspondents put it, "Every shortline east of the Mississippi will be looking to pick the carcass clean."

As early as New Years Day the idea of a Conrail break-up seemed to be gathering steam. By the beginning of February, the Philadelphia Inquirer was talking about finding "a way to carve up Conrail's valuable northeastern monopoly and establish two competitive rail networks." Carve up? That's the first time that phrase has been used in polite conversation. But the message to shortlines is clear. If you don't want to become a 2:1 casualty in either connections or customers, you'd better have a plan.

And you'd better get it to your connecting carriers and the STB post haste. You've fought hard to gain and maintain the second class I. Don't let it evaporate for lack of action on your part.

This page maintained by Laura Blanchard