PTC & Mergers

The United States railroad industry has just completed a protracted fight to extend the due date for PTC implementation.  Congress and the Federal Railroad Administration (FRA) stood firm on the December 31, 2015 deadline, and threatened to issue fines on a “per day, per incident” basis for non-compliance.  The railroads, government agencies and others argued that meeting this deadline was impossible.  Only after the rail industry threatened to shut down lines that carried passenger trains or toxic-by-inhalation chemicals, right up to the point of issuing service advisories to their customers, did Congress come to its senses and extend the deadline.  Now the due date is December 31, 2018, with an additional two years available at the discretion of government regulators.

Given the amount of work to be done, three to five years is not a long time.  There is a lot of testing to be completed, and the software failure rate is high.  Plus, there is a lot of equipment to be installed, and interoperability issues to be solved.  Although many railroads are about to begin the service demonstration mode, where PTC is active for revenue trains in certain locations, the outcome of that testing is uncertain.  Success will require the intense focus of all levels of management, as well as various operating crafts.  Time is ticking away.

Once the industry thought it could breathe just a bit after the deadline extension, here comes Hunter Harrison with chapter two of his “We need to do something with somebody” show, starring Harrison, Keith Creel and Bill Ackman, and aimed squarely at Norfolk Southern.  Having lost interest in CSX because Harrison and his team “were not treated well,” NS was inevitably the next target.  Perhaps NS could get some ideas from CSX on how to mistreat an unwanted suitor.

In addition to the many dubious claims and predictions in the CP+NS merger proposal, Harrison says, essentially, other railroads won’t care about what CP & NS are doing, and this merger will not trigger another, nor will the “final” round of rail consolidation result from it.  To my knowledge, one big merger like this one has always disrupted the industry as railroads across the nation married to ensure that they would remain competitive.  Look at the mergers in the 1960s & 1970s.  Look at the 1990s.  Not only did mergers occur, but with few exceptions, these mergers were fraught with many issues stemming from the work to integrate two companies that resulted in computer systems that couldn’t talk to each other, car routing problems, clogged yards and extreme customer dissatisfaction.  Do Harrison and Ackman have any insight into the history of rail mergers, or does their arrogance blind them to what would likely happen?

If another wave of mergers hit the industry, how will this impact PTC implementation?  Even with the new deadline, most railroads will meet it by the skin of their teeth.  If merger fights and merger implementations distract leadership, this will be a blow to successful PTC implementation.  How will the work that has been done by individual railroads be combined?  There will be some differences in how PTC was intended to work at each road – who will call the shots around PTC changes at the “losing” railroad, or among equal merger partners?

The answers to these questions remain to be seen.  One thing’s for sure, though.  If the industry dives into merger proceedings, senior leadership may find that it has bitten off more than it can chew.  Employee morale will be drop.  Folks working on PTC will wonder if what they’re working so hard on today will be thrown out tomorrow by a new management team.  Integration problems will be rampant.

Canadian Pacific needs to pack its bags and go back to Calgary.  The long-term health of the industry, which has its roots in the success of the thirty years since deregulation, has many challenges ahead; customer service must be improved, new sources of traffic must be developed to offset the dramatic loss of coal, and PTC must be implemented by 2018.  This is no time to be discussing mergers.