CP Rail CEO says rail industry needs mergers to address gridlock threat

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The chief executive of Canadian Pacific Railway Ltd. says the industry needs mergers to address the growing threat of rail gridlock, and he wouldn't rule out CP as a takeover candidate.

"I think there might be a lot of companies out there that might want some of our talent," CP's CEO Hunter Harrison said on a conference call Tuesday. When asked if the 133-year old railway would be a seller or buyer, he replied: "Both work."

Mr. Harrison's comments came a day after CP said it had dropped merger talks with Jacksonville, Fla.,-based CSX Corp. That tie up would have given Calgary-based CP badly needed rail lines to major oil refineries in the United States. Mr. Harrison said there were "three or four" meetings with CSX executives at which a merger or takeover was talked about, but no offer was made after it became clear CSX was an unwilling partner. He declined to speak for CSX, and said he wanted no part of a hostile takeover, given the tensions and clashes that involves.

CSX had no comment.

During the call, Mr. Harrison said the North American rail network is headed for gridlock as freight volumes soar at a time of increasing regulation and public resistance to new rail infrastructure. Railway mergers would increase network fluidity and ease bottlenecks in major rail hubs, he said. "There's a desire to put more tonnage on the rail. At the same time, governments are saying that we want to slow you down because of [hazardous materials] and crude. There's no more infrastructure [being built]. No one wants the railroad to run through their backyard, or their city."

"I've been doing this 50 years and I don't know how you do that," Mr. Harrison said

He said there were no more talks planned with CSX, but he did not rule out a later deal, with CSX or another carrier. Indeed, he said the industry is slowly realizing mergers are required if railway congestion is to be overcome. "We tried and there were some issues where we didn't see the world the same," Mr. Harrison said, adding that he sees other railways, such as Norfolk Southern, as a good potential partner. However he threw doubt on a possible deal with Kansas City Southern and the two "western big boys;" Burlington Northern Santa Fe and Union Pacific.

Mr. Harrison said that while he has not spoken to the heads of other railways, "my sense is that some of them clearly share the view that this agenda is the right one."

His call got some backing from Claude Mongeau, the CEO of Canadian National Railway Co. During a conference call on Tuesday to discuss CN's quarterly earnings, Mr. Mongeau said if there were mergers, they would likely happen in the U.S., with that country going to four major railways to two. "The key word is hypothetical," Mr. Mongeau added.

CP executives have repeatedly pointed to the congested hub at Chicago as the main reason mergers are needed. The Midwestern city's rail yards handle a quarter of the U.S. freight carried by six railways. Mr. Harrison and other railways' leaders have complained that poor communication among the various stakeholders compounds inefficiencies and slows the movement of cargo through Chicago. CN found a way around Chicago in 2007 by purchasing the Elgin, Joliet and Eastern Railway, a suburban line that skirts the congestion.

Clogged rail lines and poor service have gripped the industry in the past few years. Rising crop yields and oil production have sent freight volumes soaring. Both CP and CN are under Canadian government orders to move a minimum amount of grain each week in Western Canada. At the same time, the fatal derailment in Lac-Mégantic, Que., last year pushed regulators to restrict speeds on trains carrying hazardous cargo.

The U.S regulator, the Surface Transportation Board (STB), is believed to pose a major hurdle to any consolidation among the six major railways. More than a decade ago, the regulator blocked a merger between CN and Burlington Northern. The STB also toughened the standards it uses to judge proposed mergers, requiring them to enhance competition and not simply preserve it.

CP's third-quarter results underscored the rise in rail freight. The company said revenue from crude oil shipments rose by 74 per cent in the quarter, year over year, while grain revenue rose by almost 20 per cent. The company reported a 26-per-cent rise in profit to $400-million and total revenue rose nine per cent to $1.67-billion.

CN reported a 21 per cent jump in third-quarter profit to $853-million. Revenue climbed 16 per cent to a record $3.1-billion.