Time to get back to business

    When Canadian Pacific announced on Monday that it was suspending efforts to acquire Norfolk Southern, you could hear a collective sigh of relief from rail headquarters, many shippers, and government agencies around America. No more do we need to worry about a nasty proxy fight at the NS shareholders meeting. Worries are also over about reactive mergers that would have totally disrupted the industry in the unlikely event that CP+NS was approved. The collective wisdom seems to be that the U.S. Department of Justice and the Department of Defense coming out against the merger were the final blows that convinced Hunter Harrison and company to throw in the towel. Of course, there was political lobbying by Norfolk Southern opposing the merger, including early engagement of stockholders and shippers. However, the reasons for Canadian Pacific to have gone after CSX and Norfolk Southern over the past couple of years, and the terse discussions between CP and the two major eastern carriers, are not the most pressing issues at the moment. That analysis is best left to regulators and historians.

   What is pressing is that the railroad industry gets back to business. Not that uncertainty about the proposed merger, and potential reactionary mergers, prevented railroads from doing business, but I am hard pressed to believe that the uncertainty didn’t significantly affect the mindset of and distract the entire industry, from those in train and engine service right up to the CEO suites.

    Although one can debate the priority of the industry’s various issues, the following three are, in my view, are at the top. First, PTC. The relief provided by the extension of the PTC deadline was, to me, overshadowed by merger worries. While Class I railroads continue to make progress on system development, there is still a lot to do. The official deadline is Dec. 31, 2018, two and a half years away, but many roads say that they’ll need until 2020 to complete the rollout. The installation of roadside, back office, and locomotive equipment should not pose a major issue. What will be more of a challenge is getting all of the systems that make up PTC to talk to each other, then testing and fine-tuning all of the software components to ensure that everything is working properly and safely.

   The second greatest challenge is to overcome the loss of energy traffic, namely coal and oil. While some commodity groups are holding steady or showing growth in 2016 — including chemicals, grain, motor vehicles and parts, and intermodal units — the drops in crude by rail and coal have hammered the industry’s financials. The Class Is need to work more aggressively with shortline partners to generate more carload traffic, continue to grow intermodal, and look for other traffic sources. Who knows what will happen with the crude oil market, with prices being influenced by so many domestic and international factors. Coal, I’m afraid, will continue to slowly decline. Even though it may plateau for a few years, the environmental and regulatory challenges ensure that lost coal traffic is gone for good.

    A third key area is cost control. This is always a difficult subject, because all businesses should be focused continuously on cost control, and not be forced to use it as a reactionary measure. Technology can help, but technology does not automatically ensure lower costs. Moreover, cost control can be a fine balance. For example, the workforce should not be cut to draconian levels, as a railroad could find itself in the position it was in two years ago, where crew and locomotive shortages slowed train movement significantly. Indeed, the problem was so severe that industry leaders said that a small amount of overstaffing might be needed to ensure the industry wasn’t again caught with more traffic than it could handle. Maybe that’s not the appropriate action at the moment. However, the industry must guard against a repeat of key resource shortages.

    The merger talk of the past two years has diluted the industry’s focus on basic blocking and tackling, along with the significant challenges posed by the PTC implementation. The industry needs to clear the fog of merger hangover and focus on leveraging its strength and competitiveness. There is much to do, and those leading and working in the industry need clear heads to get it done. Now is the time to really move forward.