IN A MOVE that stunned the North American railway industry, the US Surface Transportation Board on March 17 ordered a freeze on all mergers of large railways. The decision followed a four-day hearing into the proposed US$6bn combination of Burlington Northern Santa Fe and Canadian National (RG 2.00 p66) during which most other railways and shipper representatives opposed the combination with a barrage of complaints based on the delays and disruption that have followed other recent mergers. Norfolk Southern President & CEO David Goode, for example, felt that ’a major merger could disrupt the entire industry for years.’

The board’s action drew an instant response from BNSF and CN, which in February had sent out letters to shippers insisting that the combination was ’unlike previous mergers or break-ups’, with guarantees that ’service levels will be the same or better.’ CN President & CEO Paul Tellier said the two would ’immediately initiate an appeal of the STB decision, and vigorously pursue all avenues that are open to us under applicable law.’ Robert Krebs, Chairman & CEO of BNSF accused the STB of punishing his company and CN ’because of the failures of other railroads’.

Yet the STB’s order was firmly worded and appeared to be well reasoned. ’Merger implementation has not typically gone smoothly, and indeed the railroad industry and the shipping public have not yet fully recovered from the service disruptions associated with the previous round of mergers’, the board stated.

The board - and the rest of the industry - will not forget in a hurry Union Pacific’s purchase of Southern Pacific in 1996, which caused massive delays and, at times, near paralysis of major routes. Last year’s division of Conrail by Norfolk Southern and CSX, while causing fewer problems, nonetheless generated severe bottlenecks, some of which have yet to be resolved. The STB indicated that the BNSF-CN proposal to form North American Railways with an 80500 route-km coast-to-coast network would cause similar disruption. It could also trigger a ’final round of major railroad mergers, involving possibly all six of the largest North American railroads’ that could result in having just two major transcontinental carriers serving the US and Canada. Morgan said this would require the board to establish new merger regulations, which BNSF and CN contended could be accomplished while their proposal was being considered. But the board disagreed, stating that ’the current problems facing the rail sector are so extraordinary that an unprecedented response is necessary.’ In fact, Morgan had wanted a two-year moratorium, but agreed to 15 months after Vice-Chairman Wayne Burkes said he believed the new policies could be developed more quickly.

Strong indications of industry and investor concern had been evident during January, when share prices for CSX and Norfolk Southern tumbled in the wake of the CN-BNSF announcement. For a short period the combined value of CSX and Norfolk Southern was more than US$500m below the $US10·3bn that the two paid for Conrail in 1997.