Following a period of relative quiet over the Christmas holiday, Canadian Pacific’s endeavor to acquire Norfolk Southern has picked up steam with issuance of a white paper, “A 21st Century Railroad for a 21st Century Economy,” in which CP argues that “a change in the railroad industry status quo is necessary to support continued growth in the North American economy.”
Following is the full text of the white paper. A PDF version can be downloaded by clicking HERE.
Continued growth in the U.S. economy is dependent on North American rail service meeting current and future demand. In order to meet that demand, the railroads must add capacity. The question of how to create additional capacity to accommodate growth is a critical one. Adding infrastructure and building more track has become increasingly difficult, if not impossible.
Additionally, the demands of the common carrier obligation must be taken into consideration. Specifically, all Class I carriers must transport goods tendered to the railroad, no matter how dangerous. This comes into direct conflict with staunch resistance from communities of all sizes to add infrastructure in the form of new tracks and terminals. The prospect of increased traffic is also unpalatable in many instances, even if it improves the overall efficiency of the broader transportation network.
The solution lies in adding capacity without adding infrastructure, increasing the efficiency of the overall network and addressing critical issues, such as congestion in Chicago.
Canadian Pacific believes that industry consolidation offers the best opportunity to improve efficiency of the existing network and creates much needed incremental capacity without adding infrastructure, all while improving service for shippers.
CP is pursuing a combination with Norfolk Southern Corp. (NS) that it believes will:
• Enable far better utilization of existing infrastructure.
• Introduce alternative options for re-routing traffic around areas of congestion.
• Create new opportunities to generate the most efficient route for rail shipments.
• Allow CP-NS to provide end-to-end service to customers, without hand-offs and interchanges, which improves safety.
• Improve overall service for shippers of all sizes across the network.
The status quo is not an option for North American rail. Change is necessary to support continued economic growth, and that change needs to happen now.
Rail: A Proud History of Delivering Public Benefits
Since the deregulation of the U.S. rail industry in 1980, the industry has undergone a renaissance and is now, once again, the backbone of the North American economy. Demand for rail service has grown significantly and is expected to continue to do so.
The growth in demand for rail service has delivered—and continues to deliver—numerous public benefits. An efficient railway network:
• Is the most environmentally friendly and economically efficient long distance land transportation option.
• Reduces highway congestion by taking trucks off highways, which in turn reduces fuel consumption, noise pollution, tax-payer funded highway maintenance and construction costs, and lost productivity due to traffic.
• Improves safety for the transportation system in general.
• Does not require public funding.
However, to meet current and future demand for rail service, railroads must add capacity. The service disruptions stemming from the severe winter weather of 2013-2014 proved that the rail network is vulnerable. An unexpected surge in freight volume during the period pushed the rail supply chain to the upper limits of its track capacity just as the weather turned. The combination wreaked havoc on rail operations, particularly in Chicago. The severe weather lasted well into the spring of 2014 and service disruptions were felt into the fall of 2014.
Traditionally, railroads have primarily relied on adding new infrastructure to increase capacity. Building new track or sidings for passing, expanding rail yards to accommodate more cars or longer trains, and adding new connections to facilitate more efficient routings have all been important tools for expanding rail capacity. While railroads continue to reinvest record amounts of capital to add capacity, it is becoming increasingly more difficult to add physical infrastructure. Local and state opposition to building new infrastructure is more prevalent and vocal than ever before. This is especially true in urban areas where many rail customers are located and where many railroads interchange traffic.
Addressing Congestion in Chicago
Nowhere is the need for additional infrastructure more critical and the ability to add it more difficult than in Chicago. With six major Class 1 railways and a significant Amtrak and commuter train presence, Chicago is the most critical hub within North America's rail system. In 2014, roughly 25% of all rail traffic traveled through Chicago. In short, what happens in Chicago affects the entire network.
Although substantial effort has been made to improve infrastructure in Chicago, those efforts have fallen short. The CREATE project, for example, which was designed to invest billions of dollars into critically needed infrastructure to improve Chicago's congested transportation system, including freight rail infrastructure, has been largely unsuccessful. A multitude of stakeholders with various competing interests make it difficult, if not near impossible, to achieve consensus and identify a path forward. As a result, very little has been accomplished to improve the freight and passenger rail congestion issues in Chicago in a meaningful way.
Today, the rail supply chain and Chicago are fluid and the system is performing well. This is largely a function of a weakened economy, lower shipments and favorable operating conditions. But we are living on borrowed time. The time to act is now. The rail industry cannot wait until factors converge again and gridlock resumes. It is imperative for the economy and the public interest that we take steps now to unlock additional capacity.
Adding Capacity Through Efficiency
Unfortunately, recent government regulations have reduced capacity. For example, regulations have been imposed that restrict train speeds for certain commodities in certain areas. While these regulations are intended to increase safety, reducing train speeds reduce system capacity. Some have suggested that the capacity problem can be addressed by adding more trains. When the physical operating footprint of a railroad line or yard is constrained and near its sustainable capacity, introducing additional locomotives and rail cars into the system is the wrong answer. It is like adding more cars to a highway blocked with rush hour traffic.
At CP, we have successfully added capacity by improving operational efficiency. CP has improved asset utilization significantly by cycling railcars faster and decreasing dwell time for locomotives and railcars at terminals. Between 2011 and 2014, CP's network speed increased 19% and terminal dwell time dropped by 20% (excluding winter of 2013/14). While we continually strive to be more efficient, the law of diminishing returns applies and we need to find other ways to address capacity issues.
We have also added capacity by making record levels of investment, but are finding it increasingly difficult to do so. Efforts to add physical capacity, particularly in key choke points such as Chicago, St. Paul, Minneapolis and in other cities and communities is often greeted with considerable local opposition. Often, we find ourselves struggling to protect existing capacity as municipalities increasingly seek to encroach on our rail right of way and passenger rail and commuter rail consume increasingly more railroad capacity.
If we are to meet the challenges of today and tomorrow, something will have to change.
How Rail Consolidation Adds Capacity, Optimizes Existing Infrastructure
CP believes that industry consolidation offers the best opportunity to increase capacity without adding infrastructure, which is why we believe consolidation is inevitable and why we are pursuing a combination with NS.
Consolidation enables far better utilization of existing infrastructure. For example, trains interchanged in Chicago today must be broken apart and rebuilt in yards within the city and then delivered to receiving carriers. The process involves multiple interchanges between multiple carriers in multiple yards. A merger would allow these activities to be performed elsewhere so that trains moving through Chicago can move smoothly through the city without exiting the main line.
An expanded network also introduces alternative options for re-routing traffic around areas of congestion and creates new opportunities to generate the most efficient route for rail shipments. For example, a large amount of agricultural shipments from the Upper Plains states move through classification yards, over connecting carriers to milling markets east of the Mississippi. This traffic could move in a more expedited manner over alternate gateways in seamless, single-line movement. Likewise automotive traffic currently moving over Chicago could be expedited through other gateways, significantly reducing automobile companies' inventory costs.
A merger would allow CP-NS to provide end-to-end service to customers, without hand-offs and interchanges. Reducing these disruptive activities can significantly improve velocity, lower costs, and enable the combined company to move more goods more quickly without increasing rates. Faster single line movements, which remove inefficient handlings, would improve the bottom line for all customers, especially those that own their own railcars.
Additionally, if Chicago becomes gridlocked as it did in the winter of 2013-2014, a combined CP-NS would have greater expanded routing optionality that would allow our customers' products to get from origin to destination without having to suffer through extended delays in a gridlocked Chicago.
Tangible Benefits to Shippers from a CP-NS Combination
Clearly, industry consolidation can improve service and efficiency over the existing rail footprint. And while a CP-NS combination would not reduce rail competition as our two networks are end-to-end (they do not overlap), in order to address competitive concerns, assure regulatory approval, and because we are confident we can improve service, CP proposes adopting competitive enhancements that shippers have been demanding.
For example, the new company would give shippers the choice of where they can connect with another railroad along its network, bringing an end to the practice of "bottleneck pricing" in the U.S., further enhancing competition. Currently, railroads are not required to quote separate portions of haul when there is only one single carrier operating on a particular segment. We also see significant opportunities to improve operating efficiencies on NS' system, unlocking additional capacity while providing faster and more reliable service to NS served customers.
Second, in terminal areas, the combined CP-NS would allow another carrier access to its railway to serve CP-NS customers if the new company is not providing adequate service or competitive rates in those areas.
Additionally, we do not believe that a CP-NS combination would spur additional transactions in the industry. The CP proposal will enhance competition, not diminish it, which is good for customers and competitors alike. A more fluid Chicago, for example, provides other carriers with new opportunities to provide enhanced services to existing and potential customers. And with no overlap between the CP and NS networks, no shipper loses a transportation option.
Change in Rail is Necessary to Support Continued Economic Growth
Despite these pro-competitive initiatives, shipper and public interest benefits, the clear and immediate need for added capacity, and public opposition to physical expansion, some have voiced opposition to further industry consolidation, which raises the question: What are we to do? The status quo is not the answer to this question.
Serious consideration must be given to this innovative option if the industry and economy is to grow and prosper, even as the opposition to building new infrastructure is more prevalent and vocal than ever before.
Ironically, some have voiced concerns that consolidation will lead to service disruption. The fact is, merger-related disruptions are not inevitable, as current CP management demonstrated in the CN-IC combination.
Without industry consolidation, however, future service disruptions are a certainty.