The odds of a transcontinental railroad merger gaining regulatory approval — which were already slim to begin with— got a whole lot smaller on May 3. That’s when Canadian Pacific Kansas City pulled the plug on Kansas City Southern’s information technology system. The cutover to the Canadian Pacific computer system in KCS territory in the U.S. did not go well.
Unforeseen data issues meant CPKC lost visibility into car locations, particularly at customer facilities. Cars bound to or from interchanges couldn’t move until their data was massaged by hand. And shippers and train crews had trouble creating work orders. All this led to congestion, delays, and missed switches in Louisiana, eastern Texas, and Mississippi.
CPKC was still digging out eight weeks later, prompting Surface Transportation Board Chairman Patrick Fuchs to demand answers as some chemical shippers had to divert shipments to trucks to keep their plants running. An apologetic CPKC said it expected service to return to normal by late July.
If this sounds familiar, that’s because it is. Computer glitches brought Norfolk Southern and eventually CSX to their knees when they split Conrail in 1999. Less publicized was the chaotic IT cutover at BNSF after the Burlington Northern-Santa Fe merger.
The Conrail boondoggle came on the heels of the 1997-98 operational meltdown that followed Union Pacific’s 1996 acquisition of Southern Pacific. So when BNSF and Canadian National sought to merge in 2000, the STB said “Whoa!” The board imposed a merger moratorium while it drew up new review rules.
The 2001 rules put a much higher hurdle in front of a merger involving two giant systems — so high, in fact, that none of the Class I railroads have sought to create a coast-to-coast railroad. (KCS had an exemption from the new rules, and CPKC was judged under the old, merger-friendly regulations.)
Which brings us to today.
A combination of lackluster stock performance and a lack of volume growth have prompted some of the Class I railroads to reconsider mergers. A transcontinental system, the thinking goes, would improve service, unlock new markets, and allow railroads to capture freight lost to trucks.
Thanks to Republican control of the White House, Congress, and the STB, merger proponents on Class I boards and in executive suites contend that the political climate may be right for the end-to-end combination of an Eastern and Western railroad.
Also in their favor: The fact that the CPKC merger had gone smoothly was proof that not all Class I mergers invariably lead into the operational ditch.
Until now. Give CPKC credit for taking a delayed, deliberate, and phased approach to its IT cutover two years into the merger. A flawless cutover is as rare as hen’s teeth, and limiting the switchover to KCS — without touching CPKC de Mexico — was wise.
But CPKC’s tech-related operational problems in a three-state area raise the specter that a transcon merger could lead to trouble spanning the East, West, or both. CPKC Chief Operating Officer Mark Redd, speaking to an investor conference this month, lamented how the best-laid tech plans can go awry. “Imagine that on a larger scale,” he says.
You can bet that regulators and shippers already are imaging just such a scenario, particularly since Redd’s larger scale would include not one merger but two. A first transcon merger proposal inevitably would spark a second in short order.
Whether regulators and rail customers will take a broader view — that a pair of U.S. transcontinental systems could dramatically reduce interchange headaches, improve service, and help railroads grow, despite the potential for short-term integration issues — is an open question.
Earlier this month, former STB Chairman Dan Elliott told investment firm TD Cowen that the odds of a transcon merger getting a regulatory green light were 20% to 25%. CPKC’s stumble likely diminishes those odds. And that makes you wonder if rail executives ultimately will conclude that a final round of mergers is simply not worth the risk.
You can reach Bill Stephens at bybillstephens@gmail.com and follow him on LinkedIn and X @bybillstephens
There’s something I simply don’t get. When we were kids, it took several railroads interlining to get a shipment from northern Maine to Southern California. Ditto, a movement from South Carolina to Montana. Somehow it got done, in the days of primitive IT systems, telephones or telegraph, and pencils writing on clipboards. Also, these were the days of more shippers and more loose-car railroading.
Today, the same movements require two railroads, not several railroads. But the two railroads and their roomfuls of computers can’t figure out how to interline a load, so they need to merge?
CR Split, NS upgrade prior to split had flaws that were not noticed until cuttover, then they failed. CSX problem was taking on too much business from the NS problems, the cratered under too much unplanned business
Dipping into ancient history, how about PRR + NYC as the mother of them all?
What a surprise…IT systems not working properly when a combination or upgrade is involved.
Maybe they should try to unplug it and plug it back in.
CPKC’s stumble may be embarrassing, but it’s far from the only argument against a transcon merger.
Railroads have had 150 years to figure out how to interline a shipment. If they can’t do that now with decades to prepare and all the IT and communications systems money can buy, a merger won’t help.