(The Canadian Press circulated the following article by Allan Swift on November 17.)
MONTREAL — A veteran railway consultant believes Canadian National Railway Co., which celebrates its 10th anniversary as a private company today, may be involved in consolidation in the North American industry.
Charles Banks said the industry has evolved since the U.S. Surface Transportation Board shut down the attempted mega-merger of CN and Burlington Northern Santa Fe in 2000.
“I personally believe there will be at least one and perhaps even two more rounds of mergers in the North American railroad field, which would of course include CN,” Mr. Banks, president of R.L. Banks & Associates Inc. in Washington, said in an interview Wednesday.
“The regulatory climate in the United States most recently has not been particularly friendly to mergers but there’s certainly going to be a push for it, and my guess is that it will be sooner than people expect.”
It was 10 years ago Thursday that Canadian National, historic symbol of nation-building, went up on the boards of the Toronto and New York stock exchanges, ending its status as a money-losing Crown corporation.
The initial investors have seen their stock grow nine-fold while employment at CN has been decimated. The now-profitable, Montreal-based railway now gets 23 per cent of its revenues in the United States, the same as in Canada, thanks to acquisitions.
The biggest revenue source is cross-border trade between the two countries, at 34 per cent, while the rest comes from the growing offshore traffic coming and going through the ports of Halifax, Vancouver and New Orleans.
Paul Tellier, who was at CN’s throttle when CN and Burlington Northern attempted to form the continent’s biggest railway, says the failed union, followed by an 18-month moratorium on mergers, cooled the ardour for further consolidation.
“I suppose that it’s going to come … but people would be timid, if not scared, to try to do it now,” Mr. Tellier, now a private business consultant and company director, said in an interview.
“I think all the key industry players saw what happened with the uncertainty and the unpredictability of the Surface Transportation Board when we tried to put these two companies together.”
Mr. Tellier said the dynamics have since changed, as CN has become the lowest-cost operator among the six major railways based on its operating ratio, a measure of costs per revenues.
“At this point in time, given the tremendous success at CN, it should be sought much more by the others,” Mr. Tellier said. “CN is a country mile ahead of everyone else.”
Mr. Banks said any new mergers among the six railways would be driven by cost advantages, and said the most logical partner for CN would still be Burlington Northern, based in Fort Worth, Tex.
“There was a previous marriage proposal between BN and CN … I see no reason to think it would be any different.”
Professor Robert Gagne agrees that Mr. Tellier, successor Hunter Harrison and other executives have done well, but he cautioned they started out on a good foot when the federal government erased much of the Crown corporation’s debt when it was privatized for $2.2 billion.
“Canadian taxpayers took a bath on this, because they let something go that was worth more, and they got stuck with the debt,” Mr. Gagne, director of the Institute of Applied Economics at the University of Montreal business school HEC, said in an interview.
“On the other hand, it was a company that was going nowhere, it was piling up losses, so at least the privatization stopped the hemorrhaging. Had they (CN) kept the debt, then they could have claimed it was a true success story.”
Mr. Tellier, who recalled fighting skepticism when CN went private in 1995, said CN’s turning point was the acquisition of Illinois Central in 1999 during the previous round of consolidation.
Some analysts wonder if CN can maintain the same momentum as in its first decade.
But Mr. Banks said the forces that helped the North American rail industry – such as rising fuel prices, which give rail an edge over trucks, and growth in international trade – are still present.
CN in particular “has been blessed with an extremely strong management team; they have a reputation for being among the very best, if not the best, in terms of their operating discipline.”