If the history of railroad consolidation were an epic saga, we might be standing at the dawn of its next chapter. Picture this: as the sun sets over vast farmlands, a freight train loaded with cargo moves steadily along its tracks. Behind this seemingly ordinary scene could lie a tectonic shift in the industry's competitive landscape.
The recent comments from CSX Transportation CEO Jim Foote have added fuel to this speculation—he hasn't ruled out the possibility of merging with another Class I railroad. Like undercurrents beneath calm waters, his remarks suggest the U.S. rail industry might be heading toward another consolidation wave.
PSR Revolution: Who Will Lead the Next Round of Consolidation?
At Credit Suisse's Sixth Annual Industrials Conference, analyst Allison Landry posed a crucial question to Foote: Would CSX consider merging with Union Pacific or Norfolk Southern to help these railroads implement Precision Scheduled Railroading (PSR)? Foote's response carried significant weight: "I think we have to weigh the pros and cons and see if it ultimately creates real value. To do that, you need two willing dance partners."
When Union Pacific and Norfolk Southern announced plans to adopt PSR "principles," an important question emerged: Who would lead this transformation? Historically, every railroad implementing PSR required leadership from the late Hunter Harrison. He introduced PSR at Illinois Central, Canadian National, Canadian Pacific, and most recently, CSX. Notably, it was through an acquisition that PSR first entered the Class I railroad sphere—when Canadian National acquired both Illinois Central and Harrison, transplanting the smaller railroad's success to a major carrier's scale.
As remaining Class I railroads seek to adopt PSR, another round of mergers isn't inconceivable. Foote reflected: "I've been in this business a long time, and I remember when I started, there were 50 Class I railroads." He added that successive merger waves ultimately reduced the industry to seven major players, improving service, freight networks, and efficiency. "One could argue that, from a practical standpoint, another consolidation would be beneficial."
Talent Wars: Could Personnel Needs Drive Mergers?
Before raising the merger question, Landry noted that one major benefit of consolidation would be acquiring personnel from competitors. She pointed to the limited pool of executives with deep PSR experience, suggesting Union Pacific and Norfolk Southern might need mergers to access this talent. However, during recent earnings calls, Union Pacific expressed no concerns about personnel shortages.
Union Pacific CEO Lance Fritz stated: "When we consider our internal PSR expertise, we do have employees—some in senior roles like Cindy Sanborn, who will oversee our entire Northern Region network operations—and others within our operations, network planning, and optimization teams with PSR experience, in some cases extensive experience."
Sanborn, now Union Pacific's regional vice president, served as CSX's chief operating officer when Harrison joined the company. She was replaced by Foote in October 2017, who later became CSX's CEO. Union Pacific projects $500 million in productivity gains from its PSR transition, while Norfolk Southern plans to unveil its transformation strategy on February 11, 2019.
PSR: The Efficiency Game-Changer Reshaping Railroads
Precision Scheduled Railroading has emerged as North America's dominant rail operating philosophy. This customer-focused model emphasizes optimized schedules, reduced car dwell times, and improved asset utilization to boost efficiency and cut costs. The "precision" in PSR demands meticulous management of every operational component to eliminate waste.
PSR implementations typically involve sweeping changes: redesigned timetables, minimized unnecessary car movements, and streamlined terminal operations. The model also prioritizes data analytics, requiring railroads to monitor performance metrics, identify inefficiencies, and implement corrective measures.
While PSR delivers clear efficiency gains, its adoption presents challenges. Workforce reductions often spark employee discontent, and implementation requires substantial investments in technology upgrades and training. Railroads must carefully weigh these factors when deploying PSR strategies.
Merger Risks: Regulatory and Operational Hurdles
While Foote left the merger door ajar, he emphasized that any deal must create genuine shareholder value. Consolidation isn't a panacea—it carries significant risks.
First, mergers risk creating monopolistic power that harms customers. Combining two major railroads could enable price hikes and service declines, prompting strict antitrust scrutiny from regulators.
Second, cultural clashes may emerge. Different corporate cultures could collide post-merger, damaging employee morale and productivity. Successful integrations require careful cultural alignment strategies.
Third, operational disruptions could occur. Incompatible operating systems might create chaos, reducing efficiency. Meticulous integration planning becomes essential to prevent such breakdowns.
Potential Partners: Who Might Dance With CSX?
Should CSX pursue consolidation, Union Pacific and Norfolk Southern emerge as logical candidates. Both operate extensive U.S. networks with rich operational experience. Merging could expand CSX's market share, improve efficiency, and bring talent synergies.
However, challenges exist. Both railroads are implementing PSR independently, potentially creating operational conflicts. Powerful management teams might also spark post-merger power struggles. CSX would need thorough evaluation before choosing partners.
Kansas City Southern presents another option, offering access to Mexican markets through its cross-border network. However, its smaller size might limit the merger's strategic impact.
The Future: Continued Consolidation Inevitable?
Regardless of CSX's decisions, rail industry consolidation appears inevitable. Intensifying competition pressures railroads to enhance efficiency and reduce costs—objectives where mergers provide proven advantages.
Future years might see more Class I combinations creating larger, more efficient rail giants. These consolidated operators would wield broader networks, advanced technologies, and deeper talent pools—advantages that could translate into superior customer service and shareholder returns.
However, regulators must vigilantly oversee this process, ensuring competition protections and consumer safeguards remain intact. Policy frameworks should incentivize service quality improvements and fair pricing alongside efficiency gains.
Ultimately, Jim Foote's comments inject fresh uncertainty into the rail industry's trajectory. While mergers aren't the only path forward, they represent a strategic option railroads must seriously consider when pursuing growth and efficiency. The coming years may witness intensified competition and restructuring across the sector.