Canadian National’s latest smart move: Trucking

Over the years some Class I railroads have viewed the acquisition of trucking companies as the road to intermodal riches. Instead, all they did was prove that the best way to make a small fortune is to start with a big one.

Consider the experience of Norfolk Southern and Union Pacific. In 1984, NS acquired North American Van Lines for $315 million. Fourteen years later, NS sold North American to an investment firm for $200 million. UP shelled out $1.2 billion for Overnite Corp. in 1986. The railroad spun off Overnite in a 2003 initial public stock offering that netted just $620 million. Ouch.

In both cases, the “expected synergies” between a trucking company and its railroad parent never materialized. Neither railroad really understood what to do with a trucking company. And because of that, both railroads kept the trucking companies at arm’s length.

Now along comes Canadian National, which aims to convert over-the-road freight to domestic intermodal in Canada by acquiring trucking companies. TransX, a Canadian trucking firm that specializes in temperature-controlled shipments, became part of CN in late March. A second acquisition, of the intermodal division of Alberta-based H&R Transport, is pending.

Here we go again, you say? No, don’t bet against CN. In fact, there are several reasons why this is a good strategy – and why CN will make it work.

For starters, CN isn’t buying trucking companies willy-nilly. Potential acquisitions need to check off four boxes: They must be able to create rail volume, bring new expertise to CN, provide complimentary services, and extend CN’s commercial and physical reach. Clearly the TransX and H&R acquisitions hit all four bullseyes, otherwise CN would not have done the deals.

Creating volume growth is key. “What we’re looking for is a one plus one that’s more than two,” is the way Janet Drysdale, CN’s vice president of financial planning, explained it at the railway’s investor day in June. “So in our hands, how do we create incremental volume?”

One way is cross-pollination, by combining the expertise, best practices, and customer contacts of both TransX and CN’s intermodal people. It’s already working: Thanks to TransX, CN has landed the less-than-truckload domestic intermodal business for the Hudson’s Bay Co., the large Canadian retailer.

There are operational benefits to CN’s buy-the-trucker strategy, too, including dispatching rigs and making more efficient use of equipment in first- and last-mile service. The more density you have, the better off you are. None of this is entirely new to CN, which has long had its own truck line, CNTL, to pick up and deliver intermodal loads. 

CN sees intermodal as the key to its future in Eastern Canada. The vast majority of CN’s industry-leading growth has come in Western Canada, where it has more traffic than it knows what to do with thanks to booming international intermodal, bulk, petrochemical, and energy-related traffic. That’s not the case in the east, where CN’s main routes are underutilized.

What Eastern Canada lacks in carload traffic it makes up for in millions of consumers in Toronto and Montreal, the two biggest markets in Canada. “With the growing consumer economy requiring more sophisticated transportation solutions, CN’s strategy is to offer more end to end rail supply chain solutions to a wider range of customers,” CEO Jean-Jacques Ruest said in announcing the H&R deal.

In other words, CN wants to be able to play more effectively in more intermodal markets. Hand it to CN for coming up with a way to broaden its exposure to the consumer, whose spending drives the economy.

Will other railroads follow CN’s lead? Probably not.

Canadian Pacific, which like CN has a retail domestic intermodal operation, rules it out. “We're railroaders,” CEO Keith Creel said in response to an analyst question during CP’s second quarter earnings call. “We're going to continue to play to our core strength.”

And it’s unlikely you’ll see one of the U.S.-based Class I railroads acquire trucking companies. The main reason is because it would put BNSF Railway, CSX Transportation, NS, and UP in the awkward position of directly competing against their biggest intermodal customers, the trucking and intermodal marketing companies that provide domestic intermodal loads.

That’s not to say it can’t be done. “The idea that a railroad can’t operate a truck line, or can’t successfully own a truck line, is a fallacy,” says intermodal analyst Larry Gross. Indeed. Regional Florida East Coast relies on its trucking company to feed the 351-mile railway with intermodal loads from points across the Southeast. It gets more volume that it otherwise would, and at a much longer haul since it pockets the revenue from dock to dock, not just the rail portion.

So skeptics beware. The early indications are that CN has found yet another way to grow.

You can reach Bill Stephens at bybillstephens@gmail.com and follow him on Twitter @bybillstephens