Why railroads will keep merging

My colleague Don Phillips, writing in the August issue of Trains magazine, is of the belief that railroad mergers have one or two more rounds to go. Don was taken by the statements from Warren Buffett and Charlie Munger, chairman and vice chairman of Berkshire Hathaway, owner of BNSF Railway, that end-to-end mergers still make sense and that the resulting companies would be manageable. Phillips then bounced this off “four of the smartest guys I know in the railroad game,” which cannot possibly be true because he never called me. Anyway, these gray beards essentially agreed.
 
I agree, too, but for reasons not brought up in Don's column. As railroads have folded into one another the past 40 years, they have struggled to remain manageable. Remember that Conrail started life in 1976 with some 100,000 employees. Small wonder they couldn’t run trains on time! Management controls didn’t exist then to efficiently run a railroad of that size.
 
A lot has changed since then, starting with employment. The four big U.S. Class 1 freight railroads today employ 139,000, not that many more than Conrail did 34 years ago. The biggest employer is Union Pacific, with 43,000; in 1996, 67,000 were on its payroll. Despite taking on half of Conrail in 2000, CSX slashed its workforce from 48,000 in 1996 to 30,000 today.
 
So while railroads are more spread out than industrial companies, with shrinking numbers like these, it’s far easier to reach, motivate and listen to your workforce than it was only a few years ago.
 
The other problem in times past was optimizing the various routes and classification yards, so as to get carloads where they needed to go the quickest, cheapest way, without overloading key yards and subdivisions. Look at Union Pacific: It resembles a spaghetti bowl, going everywhere in the West and sometimes getting there two or three different ways. A decade or more ago, it was getting beyond the ability of the human brains to optimize schedules and train destination blocks on U.S. railroads, because our railroads had gotten so large and complex. Now, thanks to breakthrough technology from the likes of Multi-Modal Applied Systems, you can do it in a few minutes on a laptop computer. Multi-Modal revolutionized service design, making sense of the most complex railroads and saving the industry hundreds of millions a year in costs.
 
The point I’m making is that it would be so easy today to put together a UP and CSX, or a CSX and BNSF or even (and I like this one) a BNSF and Norfolk Southern and Canadian National and manage them rationally. Whatever the combinations, there would be political problems to overcome. As always, you'd need to reprogram the computers of the merged railroads to speak to each other. But running the merged railroads, however they are thrown together, would be a piece of cake.
 
I’ll close with a prediction. I sense that the CEO with the moxie to try getting the ball rolling is none other than Matthew K. Rose, the potentate of BNSF. His owners have already said publicly it’s a good idea. Who do you think Buffett and Munger talked to before coming to their conclusion? You get 10 points if you guessed MKR. Plus, Matt is still young, he has BNSF running very nicely, and is probably yearning for a challenge. We may not have long to wait.—Fred W. Frailey