All Hunter, all the time

Posted by Fred Frailey
on Tuesday, October 21, 2014

First of all, to the Fraileyskeptics who said Canadian Pacific would get nowhere wooing CSX and that CP’s Hunter Harrison would slink away after being told “no” once: You were right, I was wrong. He did just that: got nowhere, slinked away. Not exactly slinked. Rather, he spent an hour and a half today talking to analysts and reporters about why he gave up the chase and about everything else that was on his mind. My question was never asked, so I’ll ask it now: Mr. Harrison, what do you want to accomplish holding court on this subject so long — to persuade CSX to change its mind? When it was over I felt I had just attended day one of a Hunter Camp.

But moments like this with a railroad CEO don’t come around often, so for those who had other things to do, here’s what I learned during those 90 minutes.

1. CP and CSX had “three or four” meetings to talk over a marriage and it was apparent they were not thinking alike on some key points. “We were not rebuffed. But it became evident we see the world a little differently.”
 2. It appears CSX was skeptical that the Surface Transportation Board would approve a merger of the two railroads. Harrison’s carrot to rail customers is a form of open access. To quote him: “If an impacted shipper is affected, we would always give him the right to bring in Brand X [another railroad] if our service or price is not what it should be. In my view that addresses the issue that the merger must be pro-competitive.” He also seemed to say that CP and CSX disagreed that CP’s management style would produce superior results if applied to CSX. To quote Harrison: “One place we differ a little bit is that we think we have a good model that produces good results. If we took our metrics to another railroad and execute that, you get some pretty powerful numbers. But that’s where you get a swing in views.” To those who say CSX or Norfolk Southern cannot achieve a low-60s operating ratio because of their many lines, Harrison said: “If you’ve got too much spaghetti, get rid of some of it.”

3. He scoffed at the idea that any Class I merger would result in short-term chaos. Canadian National absorbed the Illinois Central without confusion, and CN bought and absorbed numerous regional railroads, also without service disruptions, he said.

4. Chicago as a “pinch point” was much on CP’s mind while talking to CSX. “Chicago is fragile at best and not where it should be in providing service. In this case we could have taken a lot of traffic going over Chicago and taken it over the Great Lakes and used the Buffalo or Albany gateway.” That’s not going to happen while CP and CSX are separate companies because it is unlikely CSX would agree to be short-hauled, with the resulting reduction in revenue.

 5. The railroad network is approaching gridlock, and mergers are a way to create capacity. “We’ve got a real issue with NIMBYs. I’m talking CP. We’re trying to add infrastructure in certain markets where there are pinch points and people in those areas are resisting. At the same time they are asking for better service while the governments say to slow our hazmat and crude oil trains down. We are approaching a time when none of this works. We cannot continue to go down the road we are going down without having gridlock beyond anything we have experienced before.”

6. Harrison is not interested in approaching Kansas City Southern about a merger, despite the fact that their networks fit together nicely at Kansas City: “I don’t love the Mexico play, so you can draw your conclusion there. And KCS is expensive.

But at the end, I still wondered: Why are we doing this for 90 minutes? It is so uncharacteristic of any Class I CEO, including Harrison, to hold forth for 90 minutes of lecture and question-answering. Maybe Hunter is still trying to stir the merger pot. At any rate, I got a taste of his famous Hunter Camps.—Fred W. Frailey

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