Joseph C. Hinson

The blockbuster Burlington Northern Santa Fe-Canadian National merger has been placed on hold just three days before the railroads could officially file their merger application. Surface Transportation Board Chairman Linda J. Morgan on March 17 announced that major railroads will not be allowed to merge for 15 months while the board adopts new rules covering merger proceedings.

That means BNSF and CN won't be able to create the continent's largest railroad until late 2002 at the earliest, considering the merger time-out and the usual regulatory review process.

"Merger implementation has not typically gone smoothly, and indeed the railroad industry and the shipping public have not yet fully recovered from the service disruptions associated with the previous round of mergers," said the STB, which last week held four days of hearings on the future of railroad consolidation.

"Additionally, the testimony at the hearing confirmed the board's perception that a BNSF-CN combination would more than likely instigate, in the very near future, responsive mergers involving each of the other four large railroads," the STB said. "Therefore, the board, like numerous parties that testified before it during its hearing, concluded that it needed to revisit its merger rules in light of the current transportation environment and the prospect of a North American transportation system composed of as few as two transcontinental railroads."

BNSF and CN say they will appeal the STB's ruling. "We strongly disagree with the STB's decision that attempts to impose a 15-month delay in the consideration of the proposed CN/BNSF combination," CN Chairman Paul M. Tellier said. "We believe that the STB decision, which is unprecedented, is contrary to the public interest in efficient railroad transportation.

"The effect of the STB decision is to deprive CN and BNSF of their statutory right to a prompt and fair hearing," he added. "We will immediately initiate an appeal of the STB decision, and vigorously pursue all avenues that are open to us under applicable law. There is no justification for the STB to refuse to review the CN/BNSF combination promptly on its merits. CN's and BNSF's service levels are the best in the industry; both have recently successfully completed mergers without service disruption; they are the most efficient carriers in the rail industry and their respective financial positions are strong."

The response from BNSF Chairman and CEO Robert D. Krebs was strong. "We are extremely disappointed with the STB's decision ... While Chairwoman Linda Morgan's action may be well-intentioned, as it stands, it has the effect of denying our proposed combination with (CN) before receiving our application and giving it a proper review."

Krebs said that if the STB decision survives judicial review, the result will be to "penalize" BNSF and CN for the failures of competitors "whose mergers have resulted in debilitating and costly service failures for shippers."

Krebs indicated that "BNSF will thoroughly review today's decision to determine what appropriate legal action we can take. If (this) radical decision stands, the effect would be something unheard of in any industry: For a period of 15 months, industry participants will be denied the opportunity to realize service and efficiency improvements that a carefully conceived and well executed combination can provide shippers, shareholders, employees and the public."

In contrast, response was swift and positive from Union Pacific, CSX, and Norfolk Southern, all three of which have had difficulties in their recent mergers.

In a statement, Union Pacific said, "In our view, today's decision was made in the best interest of the railroad industry, and fairly reflects the testimony given by more than 150 customers and witnesses at the STB hearing ... The STB decision takes a big step toward stabilizing the industry. Union Pacific plans to actively participate in the rulemaking proceeding.

"In the meantime, all employees of Union Pacific will continue to focus on what really counts the most for determining the future of our company and our industry--improving customer service."

Echoing these comments was CSX chairman and CEO John W. Snow. "Today's decision by the Surface Transportation Board is a recognition of the fact that the proposed BNSF-CN merger, or any other rail merger for that matter, is not in the public interest at this time," said Snow.

"By announcing a rulemaking proceeding at this time, the Board has accomplished two very important things," Snow said. "First, it has recognized the need to assess and update the standards by which mergers are reviewed by the STB given the current state of the nation's freight railroad industry, and second, to apply those standards to any future rail mergers. Although a longer pause would have been preferable, the board's action clearly reflects the unstable nature of the industry and the overwhelming concern expressed by rail customers, railroad employees, the financial community and the public--all of which are so dependent upon a financially strong and stable freight rail system."

In a statement, NS said: "Norfolk Southern commends the Surface Transportation Board for its timely action to defer further rail merger activities until the board has adopted new rules governing merger proceedings. The rail industry needs time to achieve the public benefits of the balanced North American rail system created through recent consolidations. NS will continue to give full attention to building customer and investor confidence by establishing good service at rates that permit continued investment in the rail network."
 

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