Did UP+C&NW cause BN+ATSF?

[YoHo1975]

To be fair, I'm not much of a partisan for any of the routes, I'm playing devil's advocate and I generally assume management makes mistakes...see Milwaukee, Penn Central, etc.

I don't think anyone is arguing that advantages of the SP&S aren't there, but Cascade Tunnel poses a significant capacity restriction through the Cascades. A restriction that Snoqualmie with it's lowered tunnels does not have. Likewise, Stampede while needing tunnel work does not have the length of tunnel and attendant issues. Having said that, being able to judge the needs of Intermodal in the 70s and before is unreasonable, but the fact remains that Cascade tunnel in the year 2010 represents a capacity problem.

  I was not personally advocating for any of the routes east of the cascades as I'm less familiar with them.

[sandiego]

From Mark Meyer's message:

"Ruling grades, helper districts, and route mileage were the primary considerations in selecting the primary transcontinental route between St. Paul and Spokane.  The same criteria applied in determining the route over the Cascade Mountain Range in Washington State.  The consolidated company's route was recommended by the Wyer Report and was largely implemented."

Right on, right on, right on!

Back on page four of this topic are two lengthy messages I submitted that quote Robert W. Downing extensively on route selection for the merged railroads. He neatly summarized what Mark's very through analysis shows with the comment that the best parts of both railroads (GN and NP) were chosen, and the primary route ended up composed of about 75% GN and 25% NP trackage.

Judging by the lack of reaction or comment, it seemed that no one read those two messages, as the battle has raged between the GN, NP, and MILW partisans for four more pages without resolution.

Mark's detailed comparisons should certainly convince anyone that the best route was actually chosen!

Thanks again, Mark!

Kurt Hayek

PS:  When I worked for the BN on the Twin Cities-Twin Ports-Fargo-Willmar portion of the railroad I ran over both ex-GN and ex-NP lines; generally the ex-GN lines were better engineered with more favorable grades and less restrictive curvature.

[VerMontanan]

Murphy Siding

If fans of NP, or Milwaukee Road, or  Anti-fans(?) of GN want to believe that "They did it wrong",  I guess I'm OK with that.  I just haven't seen anything that would convince me of that.  So, back to my opinion- I just don't buy it.

 

Murphy,

 

You're not alone. 

 

With regard to whether the GN or NP route was the correct route to keep when/if the railroad became Burlington Northern, it's interesting that people question that decision now, when in years past, there really wasn't any doubt (and there isn't really any now, amongst those who operate the railroad, just on such forums, I suppose).  I think all that's really going on here is that challenging history in this manner shows how emotional people can get over "their" railroad when it was downgraded or abandoned.  But that still doesn't mean the right decisions weren't made or that the operating people didn't know which routes were superior to others all along.

 

For those that may have these books, or could find them, I have two that pretty much explain the constant that was the superiority of the GN route.  The book, "The Burlington Northern Railroad in 1993" by Robert Del Grosso and Patrick Dorin (published in 1994 by Great Northern Pacific Productions) has a rather lengthy article about the 1957 "Wyer Report" which was a study about a GN-NP-CB&Q merger commissioned by John Budd, president of the Great Northern, and Robert Macfarlane, president of NP.  An excerpt from the article is "Ruling grades, helper districts, and route mileage were the primary considerations in selecting the primary transcontinental route between St. Paul and Spokane.  The same criteria applied in determining the route over the Cascade Mountain Range in Washington State.  The consolidated company's route was recommended by the Wyer Report and was largely implemented."

 

The only major difference in the primary route structure actually implemented by BN was that the ex-NP route was kept between Spokane and Pasco, rather than the SP&S route, which Wyer suggested.  While I would guess that as far back as James J. Hill himself there was consideration to such a route consolidation, the Wyer Report definitively outlined the most efficient routes 53 years ago, and 13 years prior to actual merger.

 

"James J. Hill's Legacy to Railway Operations" is a self-published book by Earl Currie, who was once a very high-ranking officer on GN and later BN.  This book goes into detail about the operating characteristics of most of BN's routes (not just the transcontinental route, and not just comparing the GN with the NP, but also the other carriers).  He comes to the same conclusion.  And while there might be an inclination to suggest that a GN official would favor his own line, he also writes on the knowledge gained as Superintendent of BN's Rocky Mountain Division, headquarted in Missoula, squarely in ex-NP territory.

 

As for the statement about the greater population along the NP route, I would remind everyone that things are relative.  Clearly, Missoula and Billings are much larger than Whitefish and Havre, but really, there are no big cities in Montana or North Dakota.  Montana is nearly as large as California, but as of the 2009 Census estimate, has yet to reach a population of 1 million (California is about to hit 37 million).  Therefore, the best freight route across Montana is one that can move the freight from the Pacific Northwest to the Upper Midwest most efficiently, regardless of how it crosses Montana.  Being a Montana native, I have always wondered how Montanans can complain about the BN being a "monopoly" in their state.  Such claims were made at BN merger time, and again after the Milwaukee Road bowed out in 1980.  It's interesting that cities like Las Vegas, San Diego, and Albuquerque, or all of Southern Idaho or most of Florida outside of Jacksonville and West Palm Beach-to-Miami only have one railroad (and in some cases have always only had one railroad), and are as populous or much more populous than Montana, but their railroad monopoly doesn't seem to be an issue.

 

By far, the primary reason that the ex-GN route was chosen most of the way was grade.  The GN route did not exceed .65 percent either way between the Twin Cities and Havre, Montana (midway across the state).  Crossing the Continental Divide in Montana, the GN route was 1 percent westbound (with a very short 1.3 percent at Bison), and 1.8 percent eastbound.  Crossing the Cascades in Washington was 2.2 percent each way.

 

The NP route has numerous 1 percent climbs each way from about 50 miles west of Fargo, ND to Glendive, Montana.  Bozeman Pass in Montana is 1.8 percent westbound and 1.9 percent eastbound.  Winston Hill near Townsend is 1 percent in each direction, and crossing the Continental Divide in Montana is 2.2 percent westbound and 1.4 percent eastbound.  In Washington, westbound trains faced a 1.2 percent climb leaving Spokane, and 2.2 percent was the grade both ways over the Cascades.

 

The difference in cost between the two routes is dramatic even today.  For instance, a standard unit grain train consisting of 110 cars and 16,000 tons needs 5 road crews and no helper crews between Fargo/Dilworth and Spokane/Hauser when routed via the ex-GN route.  Via the ex-NP route between the same points, the same train needs 7 road crews and 2 helper crews, and consumes about 2,000 gallons more fuel.  (To cross the Cascades, most of these trains operate via Wishram on the ex-SP&S water level route rather than over the mountains.)  Where helper crews are used on the ex-NP route (Bozeman Pass and Mullan Pass), there is the additional cost of stationing helper power at all times, and delay cutting helper power in and out, and the potential cost of delay waiting for helper power to become available if the number of helper trains overtaxes availability.  In other words, the same helper power can only be used a certain number of times in any given day.  When train count exceeds that, more helper power must be created, or trains must sit waiting for what's available; regardless, it's an expensive proposition. 

BNSF routes coal trains from the Powder River Basin to the Pacific Northwest both via MRL (ex-NP) and via Great Falls and Whitefish (ex-GN).  The 125-car trains are powered with 4 AC locomotives in 2-by-2 configuration (2 on the head end and 2 on the rear).  The trains via Great Falls make the entire trip without any power modifications whatsoever; the trains via MRL receive a 3 unit helper (SD70ACs) at Livingston (which are cut out at Bozeman) and a 5 unit helper (again SD70ACs) at Helena (which are cut out at Elliston) along with the same 4-unit road power.  The Great Falls routing is about 95 miles more, but this shows that even with longer mileage, not requiring additional power en route can make it very cost effective compared to the shorter route.  With regard to the "tranncontinental" routing, the GN route had the mileage and grade advantage both.

 

Earl Currie's book offers this insight in the operations on the GN and NP: "Bob Downing, Executive Vice President of the Great Northern at the time of merger, recalls how Great northern officers would have the Operator at the interlocking plant at Casselton (ND) where the Great Northern and the NP crossed at grade (the Operators at "Cass Tower" were Great Northern employees since it was the "junior" road) report the time No. 603 (the NP hotshot freight train) passed Casselton.  Even with running a small, highly-powered No. 603, it took the NP four hours longer to make the run to Seattle..  As long as No. 97 (the corresponding GN hotshot freight, previously called First 401) would leave Casselton not more than four hours after No. 603 passed, the Great Northern would not be in danger of arriving in Seattle later than the NP.  These comments are not intended to downplay the capabilities of the NP management, its operating plan or its ability to run an on-time railway.  The difference lay in the difficulty the NP had in trying to compete with a railway having a shorter route with lower grades and less curvature that was severe enough to require speed restrictions."

 

The Milwaukee was in a similar disadvantage to the Great Northern.  Like the NP, which encountered its first 1 percent grade west of the Twin Cities in Eastern North Dakota, the Milwaukee's first such hill - and it was and still is a long one - in Eastern South Dakota at Summit (compared to west of Havre on the GN).  Within Montana, the MILW route was slightly better than NP westbound (1.4 percent at Loweth vs. 1.8 pecent at Bozeman Pass, and 2.0 percent at Pipestone Pass vs. 2.2 percent at Mullan Pass), but the Milwaukee's huge disadvantage was climbing the Bitterroot Mountains.  NP went from Missoula to Spokane and GN went from Whitefish to Spokane in both directions at a grade never exceeding 1 percent.  But the Milwaukee had a grueling 1.7 climb - both ways - over St. Paul Pass (on the Montana/Idaho border) that had, in addition, loads of curvature and slow running. 

 

In 1960, the Milwaukee Road's Olympian Hiawatha was scheduled to depart Missoula at 620 PM; NP's North Coast Limited was scheduled out at 621 PM, 1 minute later.  The NP route, since it went around the mountains and not through them was 20 miles further than the MILW from Missoula to Spokane, yet it was 1 hour and 22 minutes faster!  In Washington State, often touted is the Milwaukee's gentle (.7 percent) westward crossing of the Cascades (versus 2.2 percent on GN and NP).  But often overlooked is that the MILW had a westward grade of its own - 2.2 percent - leaving the Columbia River valley at Beverly, and two significant hills eastbound - 1.74 percent in the Cascades and 1.6 percent east of Kittitas.  Also often overlooked is that GN and NP both had a water level route through the Cascades in their subsidiary SP&S which allowed them the option to move heavy trains with minimal power on this route, which of course is how BNSF chooses to run most much heavier trains today.  The SP&S route was, of course, meant to be the GN and NP link to Portland, which in addition to being a major city in it own right, was the gateway to California via Southern Pacific (even though GN had its own route to California, and interchange with WP and ATSF).  The Milwaukee didn't serve Portland until 1970 as a condition of the BN merger, and when they did, they simply got trackage rights from the Kelso/Longview area to the north into Portland.  This meant, for instance, that while BN traffic to/from Portland going or coming from the east arrived via the water level SP&S route, the MILW had to haul it over its major grades on the mainline (2.2 percent westbound, and 1.74 and 1.6 percent eastbound), but westbound, also had the additional ridiculous grade of 3.0 percent departing Tacoma.

 

An example of the MILW handicap is this: By the 1970s, most wheat from Montana was shipped to the Vancouver, WA/Portland, OR area for export, as is the case today (though nearby Kalama, WA is another popular destination).  A car of wheat from Great Falls to Portland would traverse 869 miles on an all-BN routing, but 1219, or 350 more, on an all-MILW route.  The MILW train handling would encounter a steeper grade just between Great Falls and Lewistown (1.5 percent), than the BN train would for its entire trip.  Such was the disadvantage of the MILW's entrance into Portland.  (In reality, such grain from the MILW would be handed off to UP at Marengo, WA to use UP's water level crossing of the Cascades, and a route only 150 miles longer than BN).  In any event, it's almost impossible to envision a railroad with the profile of the Milwaukee in Montana and without a water-level route through the Cascades handling the very heavy trains of today.   Another good reason it's not with us.

 

In the case of the BN transcontinental route chose after merger, debating whether the merger was a success or not is kind of moot, since so much of it was the ex-GN route.  In other words, the GN route would have been the low cost routing regardless; it was then and is now, and those wishing to revise history really can't change that.

 

 

[CNSF]

I'm not saying the railroads feel that way today, in fact I'm quite certain they don't.  But back in 1970 I'm sure they did.  The rail environment then was at least as bad as the air travel environment today, if not worse.

[YoHo1975]

In the case of the airlines, remaining independent likely means at least one if not both of them will fail. At least in the current airtravel environment. Certainly the railroads may feel the same way.

[CNSF]

Good point, YoHo1975.  It's not just in the railroad world that mergers are routinely overhyped.  There probably isn't an industry out there where someone hasn't claimed that putting two so-so companies together will somehow create a world-beater.  In reality, most mergers (at least those in mature industries) are more defensive and reactionary than visionary.  As one poster explained quite well early on in this thread, size matters, and no one wants to be left out and wind up becoming the next Studebaker. 

No one expects Delta - Northwest or United - Continental to result in great airlines.  Yet at the same time, I doubt that, thirty years from now, anyone with a basic understanding of the business will be arguing that they would have been better off remaining independent.  Debating the fine points of how they realigned their combined routes and hub structures, or which computer system they kept, maybe.    

[YoHo1975]

On Merger skepticism, I'd argue that the world at large generally mimics Dilbert for it's opinion on Mergers. And as anyone who reads that comic knows, Dilbert is about poking fun of how, to put it bluntly, stupid the corporate world is.

And I mention that merely to point out that it is odd to hear people assume a merger is a good thing.

I'm no railroad man, I'm the fan, but in any other aspect of my life involving corporate intelligence and mergers, the popular sentiment is bumbling and mistakes. Why this isn't true in this thread is confusing to me. 

 

Also, please don't conflate my posts with ICLand's. It felt as if people might be putting my words in his mouth and I wouldn't consider that fair as I'm less articulate on the subject and certainly less nuanced. 

Interesting that GN dominated the merger team. That alone should make one question the neutrality of the group. 

 

To reiterate something I said last week. When discussing BN, through the lens of modern BNSF, you can't also forget the Frisco Merger which affected the way they are now both positively and negatively....popular sentiment suggests more negatively. 

[CNSF]

ICLand

 

Usually the best information came from competing railroads, which usually lined up to bury the proposed merger. It was a distinctly adversarial proceeding, which usually brought out the full story. Too, and as I have mentioned, these are SEC regulated transactions; make a "material misrepresentation" of fact that would have misrepresented the effect of a merger on the investing public, and bang, investigation, fines and possible jail time.

Saying "what a stakeholder" wants to hear can be a quick ticket to federal prison. To that extent, care had to be given to what was represented.

Absolutely, great care has to be taken, by both sides, not to lie in making their cases.   And yet... it remains, as you say, a distinctly adversarial process, and in such a climate, truth is often inflated, as you can see in any courtroom any day of the year.

All the mergers I was involved in were essentially end-to-end combinations designed to achieve economies of scale, extended reach and service offerings, etc.   The objectives were pretty straightforward and clearly laid out without much in the way of hidden agendas.  But still, if you study the details in the arguments justifying both sides' positions, you'll see it's entirely possible for management to somewhat overstate how good or bad they believe the near-term impacts will likely be, without going anywhere near a material misrepresentation of fact. 

For example, look at the Conrail carve-up.  Was it a material misrepresentation of fact to say that billions of dollars of new business could be diverted within a few years from the highways to new north-south intermodal services made possible by the proposed combinations?  I would say no, it wasn't a misrepresentation of fact; if everything had gone incredibly smoothly with the operation it's conceivable that management might even have tried to go after some of that.  But with hindsight we can see that not only did it not occur within a few years, but that at some level management probably knew from the outset it would likely take far longer to ever achieve than the application stated. 

Take CN-WC for another example.  Within a relatively short time, CN was running trains on its own rails between western Canada and Chicago, without a meltdown.  That was simply a strategic necessity for CN, particularly after they bought IC.  Therefore, the merger was successful.  Case closed.  It's picking nits to ask whether all the detailed benefits, financial targets, new services, etc. projected in the application were achieved as specifically as stated within the projected timelines. 

For the record, my bias is based on my surviving all those mergers plus the failed attempt.  CN-BNSF was rather hilarious.  On one side, a case for all sorts of wonderful benefits was strenously made by a management team that, below the very top level,  was... well let's just say less than enthused with the prospect.  On the other, a case against the merger that basically said "if you let them merge, then we'll have to merge again, and do you really want a repeat of our last merger?"

[ICLand]

Murphy Siding

 

ICLand:

Usually the best information came from competing railroads, which usually lined up to bury the proposed merger. It was a distinctly adversarial proceeding, which usually brought out the full story.

  Wouldn't competing roads have the very same inclination

I could have phrased that better. "Competing roads" in the context of a given merger proceeding are those railroads that file formal objections based upon the alleged impact that the proposed merger will have on their railroad company. Generally, these objections are filed as follows 1) the formal objection, 2) exhibits which are generally in the form of traffic studies showing traffic diversions, 3) request for relief.

In the Union Pacific/Rock Island merger proceeding, for instance, 15 or so railroads filed objections in opposition to the proposed merger. In general, of course, what they object to is the creation of a new competitor that enjoys a size advantage, able to offer greater marketing benefits (single line haul, better equipment utilization, consolidation of markets, etc). So, their incentive is to provide as much negative information as they reasonably can attempting to 1) defeat the merger entirely, or 2) elicit traffic concessions from the Newco.

Since the competitor roads probably know just about as much about your business as you do, it's pretty hard to gild the lily in any kind of effort to bamboozle the Hearing Examiner or the ICC, because EVERYTHING is subject to cross-examination by those competitor railroads, as well as by the DOJ, SEC, state attorneys general, shippers, cities and town, public interest groups, and stray dogs.

 

[Murphy Siding]

ICLand

CNSF:

 

 

Having been on the inside of a few mergers myself (BN+SF, CN+BNSF, CN-IC, CN-WC) I'm not sure I could say that even the applications to merge and supporting exhibits can in every case be trusted as a pure, unfiltered picture of why the applicants sought to merge and what they really expected in the way of results.  Remember that the applicants are primarily concerned with gaining support for the idea from a variety of stakeholders (legislators, regulators, shippers, communities) and have an incentive to say what they think those stakeholders want to hear.   Not that there were any major anti-public or anti-shipper objectives lurking behind the scenes in any of the aforementioned merger applications!  I'm just sayin'...

Usually the best information came from competing railroads, which usually lined up to bury the proposed merger. It was a distinctly adversarial proceeding, which usually brought out the full story. Too, and as I have mentioned, these are SEC regulated transactions; make a "material misrepresentation" of fact that would have misrepresented the effect of a merger on the investing public, and bang, investigation, fines and possible jail time.

Saying "what a stakeholder" wants to hear can be a quick ticket to federal prison. To that extent, care had to be given to what was represented.

  Wouldn't competing roads have the very same inclination

[BaltACD]

The major perception that gets disseminated about mergers from those that experienced them comes from a very simple reality....did they survive the merger still being employed by the surviving entity?  Those that didn't survive generally don't address the merger in glowing terms.

[ICLand]

Deleted duplicate post.

[ICLand]

CNSF

 

 

Having been on the inside of a few mergers myself (BN+SF, CN+BNSF, CN-IC, CN-WC) I'm not sure I could say that even the applications to merge and supporting exhibits can in every case be trusted as a pure, unfiltered picture of why the applicants sought to merge and what they really expected in the way of results.  Remember that the applicants are primarily concerned with gaining support for the idea from a variety of stakeholders (legislators, regulators, shippers, communities) and have an incentive to say what they think those stakeholders want to hear.   Not that there were any major anti-public or anti-shipper objectives lurking behind the scenes in any of the aforementioned merger applications!  I'm just sayin'...

Usually the best information came from competing railroads, which usually lined up to bury the proposed merger. It was a distinctly adversarial proceeding, which usually brought out the full story. Too, and as I have mentioned, these are SEC regulated transactions; make a "material misrepresentation" of fact that would have misrepresented the effect of a merger on the investing public, and bang, investigation, fines and possible jail time.

Saying "what a stakeholder" wants to hear can be a quick ticket to federal prison. To that extent, care had to be given to what was represented.

[CNSF]

ICLand

Murphy Siding:

     Could you recommend a book, or magazine article, or web article that would back up the idea that the BN folks got it wrong when they merged?

 

As I have mentioned, a useful place to start with the BN merger, or any other merger, is with the organic documents. Then line up the actual economic and operating results with the prospectus. The UP/CNW merger documents are more revealing, and UP/SP is really a ride.

BN just happens to be interesting because 1) the organizational side of it went very, very well, but 2) the operating results side of things really flopped along. What makes it distinctive is that difference: with most "failed" mergers, the failure is easy to blame on the organizational calamity that ensues. It makes it an easy explanation. BN is distinctive in that regard and therefore an outstanding case study, because it was different from the "usual" and what "went wrong" can't be blamed on any organizational overall gone haywire.

No, these aren't in a book, a magazine article, or a web article.

They are in the applications to merge, the hearing examiner's reports, the exhibits to testimony, the recorded testimony, and are often summarized in the Opinions authorizing any particular merger and  certainly in the annual reports.

These are far better sources than any book, magazine article or web article.

Why? Because the information is unfiltered by anyone's opinion, bias or, as often happens, the writer's lack of economic, financial, railroading or business background.

Having been on the inside of a few mergers myself (BN+SF, CN+BNSF, CN-IC, CN-WC) I'm not sure I could say that even the applications to merge and supporting exhibits can in every case be trusted as a pure, unfiltered picture of why the applicants sought to merge and what they really expected in the way of results.  Remember that the applicants are primarily concerned with gaining support for the idea from a variety of stakeholders (legislators, regulators, shippers, communities) and have an incentive to say what they think those stakeholders want to hear.   Not that there were any major anti-public or anti-shipper objectives lurking behind the scenes in any of the aforementioned merger applications!  I'm just sayin'...

[Paul_D_North_Jr]

     Good one ! 

Considering the source is a 'blog', that cover is dated Sept. 10th -16th, 1994, it's in an upload of March 28, 2010, and another apparent date of "2007/08" in the URL, perhaps you'll forgive me if I'm a little suspicious that it was 'Photo-shopped' or similar.  But even so, it's still pretty funny - and should have been an original - and better yet if it really was.  It deserves broader circulation, too - like in every proxy statement soliciting votes for a merger . . .   . . . and at least to the "Not Very Improved Humor" thread here. 

Thanks for sharing that !

- Paul North.  

[ICLand]

bobwilcox

I did three mergers-CNW+MSTL, SP+DRGW and  UP+SP. The Economist summed it all up nicely in one cover photo: http://blog.titaniumdreads.com/wp-content/uploads/2007/08/economist_the_trouble_with_mergers.jpg

Well that was good for a belly laugh.

I think the perception regarding mergers in general is just about diametrically opposite between people who have experienced them, who have one set of opinions,  and people who think that just because they are done, they must be "good."

Experience goes a long way.

Now, that image is going to stay with me all day.

[bobwilcox]

I did three mergers-CNW+MSTL, SP+DRGW and  UP+SP. The Economist summed it all up nicley in one cover photo: http://blog.titaniumdreads.com/wp-content/uploads/2007/08/economist_the_trouble_with_mergers.jpg

[Paul_D_North_Jr]

Link to "In Memoriam" for Robert Downing -died August 2, 2010 - from Progressive Railroading's website, dated 08/06/2010:

http://www.progressiverailroading.com/news/article.asp?id=24033 

[Murphy Siding]

ICLand

Murphy Siding:

     That sounds very interesting.  In fact,  it's so interesting, that I'd like to read more about that premise that the BN meger was a failure, and the railroad folks that lined it up didn't know what they were doing, and got it wrong.   I'd really be looking for something more indepth than just messageboard forum chat between two railfans like you and me.  Something written by an author with some railroad background and business experience would be best..  Could you recommend a book, or magazine article, or web article that would back up the idea that the BN folks got it wrong when they merged?

 

..................BN just happens to be interesting because 1) the organizational side of it went very, very well, but 2) the operating results side of things really flopped along. What makes it distinctive is that difference: with most "failed" mergers, the failure is easy to blame on the organizational calamity that ensuses. It makes it an easy explanation. BN is distinctive in that regard and therefore an outstanding case study, because it was different from the "usual" and what "went wrong" can't be blamed on any organizational overall gone haywire........................

No, these aren't in a book, a magazine article, or a web article.

  OK   Thanks.

[ICLand]

Paul_D_North_Jr

Sadly, Robert Downing died recently - in or around August 2010, if I'm not mistaken. 

Oh my gosh. That's a real loss. I spoke with him last Christmas and he seemed to be doing pretty well.

[Paul_D_North_Jr]

Sadly, Robert Downing died recently - in or around August 2010, if I'm not mistaken. 

[ICLand]

Paul_D_North_Jr

ICLand:

  [snip]  Only two of the four principal architects of the BN merger are still alive and they are pretty well up there in age. I know their views well on the matter. 

  In the mid-1990's, just before the BN+SF merger (as I recall), there was an article in Trains that consisted of interviews with 4 former presidents of BN about the 1970 merger and subsequent events - at least Lou Menk and Robert Downing, and 2 of these 3 - Norman Lorentzen, Gerald Grinstein, Richard Bressler - as best as I can recall.

John Budd, Lou Menk, Bob Downing and Worth Smith were the driving forces on the merger; Dowing and Smith on the merger committee itself. Downing was replaced by Smith in 1968 when the go-ahead was finally given by the ICC to merge and Smith chaired the committee through "M" Day in March, 1970. I think Jerry Grinstein was at Western Airlines or some such place during the pre-Frisco days at BN. Last I heard he was living at Sun City, Arizona. Bressler came on later. Lorentzen was an NP hand; a very good railroad man.

In any event, Downing and Smith are still alive.

I knew Menk, and he wasn't doing well. Indeed, for the railfan who thinks someone would have written a book about it all if it were true, the following:

"By 1977, Menk, in the midst of another merger, this time with the Frisco, began to shed full responsibilities of leadership. Aged 59 in that year, he persuaded to Board to appoint Norman Lorentzen, age 60, another career railroad man and trusted colleague, to the position of president and CEO while Menk remained as chairman. A man of exceptional physical and emotional energy and personal charisma, Menk had nevertheless become worn down by the death of his wife, and, no doubt, by the apparent failure of the strategy of the 70s to yield acceptable financial results."

-- Gordon Donaldson, "Corporate Restructuring: Managing the Change Process from Within," Harvard Press, 1994.

As Donaldson notes: "only the most die-hard and introverted railroader could ignore the facts" regarding the BN merger during the 1970s. P. 47.  I would guess that Donaldson hadn't met some of the folks here!

[Victrola1]

If Perkins of the C. B. & Q. had gotten control of the A. T. S. & F. as he wanted, would James Hill have wanted that combination? Would we be having this conversation?

[Paul_D_North_Jr]

ICLand

  [snip]  Only two of the four principal architects of the BN merger are still alive and they are pretty well up there in age. I know their views well on the matter. 

 

In the mid-1990's, just before the BN+SF merger (as I recall), there was an article in Trains that consisted of interviews with 4 former presidents of BN about the 1970 merger and subsequent events - at least Lou Menk and Robert Downing, and 2 of these 3 - Norman Lorentzen, Gerald Grinstein, Richard Bressler - as best as I can recall.  I skimmed through it over the weekend - I was looking for something else - but I did note that one of them remarked that the CB&Q line to Guernsey [sp ?] was not in near as good a condition as was expected.  Nothing jumped out at me as any of them saying that the merger was a failure or disaster, or had unexpecetd challenges to overcome, etc. - but then, what would you expect them to say for attribution in an industry-wide publication ?  Nevertheless, that article might be worth re-reading to see if there are some subtle clues that - at a simplistic, summary level -  corroborate or refute what ICLand seems to be saying here. 

But as he has noted, the best evidence would be to get and study the primary sources, and then do a detailed study, comparison, and narrative summarizing the trends and results.  As he also said, that's at least a Master's and perhaps a Ph.D. level project.  Perhaps when I retire in 15 or 20 years, if no one else has done it by then and if I have nothing better to do with my time . . . .

- Paul North.

[ICLand]

BaltACD

The one thing those with the ego's involved to pull off mergers and regime changes overlook about the overtaken property in the merger is that one size doesn't fit all....at least not without a lot of work being undertaken.

 

 

And I think this is the realistic view that diverges significantly from what is, I guess, represented on this Thread as the railfan's view.

These organizations are not a perfect synthesis of highly educated, fully functional executives with plenary experience and infinite knowledge. There are competing ideas, different and often conflicting experiences, sometimes the ego wins over the experience, and sometimes "vision" sinks practical experience. The "turf wars" can be debilitating, older executives sometimes don't appreciate the new ideas about networking and node management, and sometimes it just gets back to what was referenced earlier about misunderstanding the role and purpose of IRR.

And of course that's the whole point of reviewing these actions, to see what went right and what went wrong. It is beyond my experience and education to presume, ipso facto, that "because they did it, it must have been right" which appears to be the prevailing rail fan opinion I am guessing from the comments posted.

Of course, even if there is a fully useful review of success and failure, then the problem is that the next generation of "merger gurus" have lost the institutional memory of the last round, and which is why the same problems seem to crop up over and over with merger efforts and I think you probably hit the nail on the head: there is an ego involved with creation of something bigger than what existed before. Oh, and bigger salaries too. And the golden parachute if it all falls apart. Well, oops, this is bringing out the cynic in me, and that  serves little purpose, so, good day on an interesting point raised.

[Paul_D_North_Jr]

BaltACD's lengthy post above echoes Railway Man's recent remark in another thread here that "All railroading is local".

- Paul North.

[ICLand]

Murphy Siding

     That sounds very interesting.  In fact,  it's so interesting, that I'd like to read more about that premise that the BN meger was a failure, and the railroad folks that lined it up didn't know what they were doing, and got it wrong.   I'd really be looking for something more indepth than just messageboard forum chat between two railfans like you and me.  Something written by an author with some railroad background and business experience would be best..  Could you recommend a book, or magazine article, or web article that would back up the idea that the BN folks got it wrong when they merged?

Well, there's more than a little "word putting in mouth" here.  And I'm glad to join the ranks of railfans I guess, but if you ever catch me out watching trains for the h*** of it, good luck. I've never done it. I "think" I understand it -- maybe not the self-assured attitudes that railfans sometimes absorb, somehow -- but it just doesn't tilt  my boat to stand there and do it.

As I have mentioned, a useful place to start with the BN merger, or any other merger, is with the organic documents. Then line up the actual economic and operating results with the prospectus. The UP/CNW merger documents are more revealing, and UP/SP is really a ride.

BN just happens to be interesting because 1) the organizational side of it went very, very well, but 2) the operating results side of things really flopped along. What makes it distinctive is that difference: with most "failed" mergers, the failure is easy to blame on the organizational calamity that ensues. It makes it an easy explanation. BN is distinctive in that regard and therefore an outstanding case study, because it was different from the "usual" and what "went wrong" can't be blamed on any organizational overall gone haywire.

No, these aren't in a book, a magazine article, or a web article.

They are in the applications to merge, the hearing examiner's reports, the exhibits to testimony, the recorded testimony, and are often summarized in the Opinions authorizing any particular merger and  certainly in the annual reports.

These are far better sources than any book, magazine article or web article.

Why? Because the information is unfiltered by anyone's opinion, bias or, as often happens, the writer's lack of economic, financial, railroading or business background.

I would hesitate to suggest that I had an opinion, pro or con, that was uninformed by reference to that detailed factual record.

And that's just an exercise of caution insofar as credibility of offering opinions on complex economic topics because I don't see the point in having an opinion just because everyone can have one.

Only two of the four principal architects of the BN merger are still alive and they are pretty well up there in age. I know their views well on the matter.

[BaltACD]

The one thing those with the ego's involved to pull off mergers and regime changes overlook about the overtaken property in the merger is that one size doesn't fit all....at least not without a lot of work being undertaken.

Railroad operations evolve out of the physical constraints of the physical plant, the traffic base and labor history of the areas involved.  The operations that exist TODAY are the best efforts that that carrier could muster with the tools and finances that it has possessed up to today.

When the 'top dog' leadership does not take into account what transpired to get the 'bottom dog' partner in it's current position it generally dooms itself to short term failure.

After a merger/acquisition a management team implemented a operating plan of 'fewer bigger trains' as that plan had worked well on the property they were familiar with.  What that plan overlooked was that the part of the property they were not familiar with did not have the terminals that could handle the larger trains, either receiving them or dispatching them, as a result trains were held from getting into terminals account the terminals were full of traffic that was waiting outbound movement because the plans train size minimums had yet to be met...in very short order the entire system collapsed.  The wrong plan for the wrong property.  The operation of major terminals on any carrier is all about juggling the space available in the terminal with the movement of traffic through the terminal.  A 50 foot car, will ALWAYS occupy 50 feet of track space....a 5000 foot train, will occupy 5000 feet of track space in the terminal, no matter if the train is assembled or not...it can be 5000 feet in the receiving yard, 5000 feet in the departure yard or 5000 feet distributed through the bowl tracks during the switching process.....but it will ALWAYS occupy 5000 feet of track space.

When you try to operate 9000 foot trains in & out of terminals designed for 5000 foot trains you will pay the consequence in requiring more than one track to initially yard the train and more than one track to ultimately depart the train.  The way many terminals are physically configured, switching cannot take place while trains are being yarded or dispatched account the inbound/outbound trains fouling the leads as they perform their multi track moves.

To be effective the operating plan MUST be tailored to the physical facilities that are being used to implement it.  If the 'new' management doesn't feel that the facility is efficient enough....the facility must be changed so that it can handle the 'efficient model'.  If you want to run 9000 foot trains....configure the receiving and departure yards to handle those size trains without fouling out the switching leads.

If you want to 'Run the Plan' you must have facilities that can facilitate running the plan.

ICLand

 

It did not go smoothly.

If someone does a book on the subject some day, it would be interesting to read a developed history and context of why BN and its successors generally managed the organizational aspects of mergers quite well, and why Union Pacific generally didn't.

[Murphy Siding]

ICLand

Murphy Siding:

     If fans of NP, or Milwaukee Road, or  Anti-fans(?) of GN want to believe that "They did it wrong",  I guess I'm OK with that.  I just haven't seen anything that would convince me of that.  So, back to my opinion- I just don't buy it.

 

I'm not sure how the "railfans" all of a sudden got drug into this.

It's not really a railfan issue and I sure wouldn't make my opinions based on what your select group "wants to believe." These are fact issues and while I don't see much use of them in discussion like this, they are still the key to any analysis. In the case of railroad mergers, there are well developed records of expectations that preclude just making up a personal judgment. An opinion without a reference to those well-developed records is well short of useful.

Generally, the record of "business mergers" is also quite well developed. There are books all over the place on the topic. Generally, they fail to meet their goals. A reasonable first opinion, then, on any given merger would be to take a skeptical attitude, simply because that reflects the informed and experienced judgment of history on the topic.

   well. OK.  But I guess if you put words in my mouth, you kind of miss what I'm trying to say.  Let me try again.

     You are saying that the BN merger, in particular was a failure.  You say that the proof of that, is that the numbers going into the merger point out that it was going to be a failure.  You say that none of the numbers after the merger lived up to those put forth before the merger, and therefore, by definition, it was a failure.  Have I portrayed your thoughts correctly?

     That sounds very interesting.  In fact,  it's so interesting, that I'd like to read more about that premise that the BN meger was a failure, and the railroad folks that lined it up didn't know what they were doing, and got it wrong.   I'd really be looking for something more indepth than just messageboard forum chat between two railfans like you and me.  Something written by an author with some railroad background and business experience would be best..  Could you recommend a book, or magazine article, or web article that would back up the idea that the BN folks got it wrong when they merged?

-Thanks

[henry6]

I've been through a few (non railroad) mergers and acquisitions and it ain't easy.  One set of rules and theories clash with a different and opposite set.  Then personalities clash, All communication and understanding is lost followed by employees and then customers.  The "we've always done it this way so that's the way' we'll continute to do it no matter what you say" attitude is as defeating as, "now I'm in charge and you'll do it my way."  Why a surprise that it happens when different railroads and railroad companies merge or acquire?  EL, PC, UP-SP, BN-SF, SF-SP, ACL-SBD, oh, I could write the recipe for alphabet soup here and none of it would ever taste good!

[ICLand]

PNWRMNM

The consensus of what got reported is that the CNW merger did NOT go smoothly.  If ever there was a merger that should have gone smoothly the UP-CNW was it.  The only thing UP really cared about was getting from Fremont/Omaha to Chicago.  In retrospect it was an indication of what would come in the SP merger which basically was to ignore, run off, and fire the incumbent middle management.  UP made its own unnecessary messes in both cases.

It did not go smoothly.

If someone does a book on the subject some day, it would be interesting to read a developed history and context of why BN and its successors generally managed the organizational aspects of mergers quite well, and why Union Pacific generally didn't.

[ICLand]

Murphy Siding

     If fans of NP, or Milwaukee Road, or  Anti-fans(?) of GN want to believe that "They did it wrong",  I guess I'm OK with that.  I just haven't seen anything that would convince me of that.  So, back to my opinion- I just don't buy it.

I'm not sure how the "railfans" all of a sudden got drug into this.

It's not really a railfan issue and I sure wouldn't make my opinions based on what your select group "wants to believe." These are fact issues and while I don't see much use of them in discussion like this, they are still the key to any analysis. In the case of railroad mergers, there are well developed records of expectations that preclude just making up a personal judgment. An opinion without a reference to those well-developed records is well short of useful.

Generally, the record of "business mergers" is also quite well developed. There are books all over the place on the topic. Generally, they fail to meet their goals. A reasonable first opinion, then, on any given merger would be to take a skeptical attitude, simply because that reflects the informed and experienced judgment of history on the topic.

[ICLand]

Murphy Siding

YoHo1975:

 

Murphy Siding:

     But why can't we make the assumption, that they knew what they were doing? 

 

 

So again, why would you "assume" they knew what they were doing. The record will illustrate that they did or they didn't. 

     Fair enough question,  I suppose.

     My thought is this:  These folks were running the railroads in question at the time.    Who better than them, knew the ins and outs of traffic, maintenance costs, operations, etc.  on their own lines?  They had all the information.  They were already  running the railroads in question.  ...

 

Well, if the Penn Central wasn't an object lesson on this, perhaps there can be no lessons from history ...

Any given merger occurred, of course, because of the presumption that "they knew what they were doing."  One of the good studies done by the old ICC showed that "mergers rarely achieved their goals," and this was, of course, troubling to the regulatory agency tasked with approving such mergers, when the records of implementation was quite poor.

And of course, that begged the question: was it the caliber of the officers implementing the mergers, or was it an intrinsic weakness in the concept of "merger" itself?

I tend to take the latter view: mergers don't fix problems, they obscure them.

Of course, that underscores my earlier point: there are tangible metrics by which to judge a merger: the pro forma projections created by the "folks running the railroads at the time." That is, the explicit reasons given for the merger.

And, for those paying attention to those, I think the opinions on the relative success or failure of a merger is at least informed by something other than something happening to a different company, under different economic circumstances, under a different regulatory scheme, forty years later.

Daimler Chrysler is a very good case study for anyone that gets too enamored of "mergers". The most profitable American car company at the time (!) combined with a company with a solid engineering tradition, combining some of the best and most experienced automotive industry brains in the business world and advised by the best merger experts money could buy.

[Paul_D_North_Jr]

Link to photo (not mine) clearly showing 'notching' at top arch of the Cascade Tunnel at Stevens Pass to provide sufficient clearance for double-stack container trains:

http://www.railpictures.net/viewphoto.php?id=111611 

There used to be more and better photos of that on the PR.net site, but they seem to have disappeared . . .

For a fair depiction of a 'lower-height' double-stack train at the portal, see also:

http://www.photographersdirect.com/buyers/stockphoto.asp?imageid=700430 

- Paul North. 

[ICLand]

YoHo1975

The Current tunnels on Steven's pass have always had their current dimensions, so that was a benefit to the line, but the Tunnel is so long that it restricts movement. Steven's is still a problem for the railroad.

Oh gosh, no. In order to fit COFC, BN had to go in and "notch" the upper sides of the tunnel curvature. It is a very tight clearance for COFC,and it required weakening the tunnel concrete arch. This caused more water flow into the tunnel, which degrades the ties and ballast more quickly. In order to "lower" the tunnel floor, ties made of a specific Brazilian hardwood, which allowed the ties to be about 3" shallower and about 6" broader, had to be installed throughout the entire length in order to allow modern freight through. This special hardwood accommodates the lower drainage  capacity and higher moisture levels, but oh my goodness, they are expensive pieces of wood ....and then there are the two full-time 645 engines running to power the blowers,on 2.2% grades in both directions, so generally, BNSF utilizes the 533 mile "detour" for heavy trains.

That's a 533 mile detour to achieve "efficiency."

And that's simply a close look at "merger planning" at any given merger -- did they really seek to maximize "efficiency"? I  would say that had to be the objective objective.

Was that the result? That's a tougher answer based on 1) misapprehensions about what that meant, 2) internal politics, 3) irreversible historical decisions.

And, "for the record," personally, the NP was not the "better route" objectively, but historically NP had put more money into ties and rails, and in some respects had better capacity because of its lack of long tunnels with heavy grades compared to GN.  The GN people dominated the merger committees, however.

Between the three northern tier routes, GN, NP, MILW, straightforward econometric analysis provides the authentic comparison and an analyst would need to refer to those metrics before making a conclusion. However, the original BN merger was driven entirely by internal dynamics and like many such undertakings, the final result was imperfect not because of implementation, but because the raw material was not perfect in the first place, i.e. first rule of business.

Insofar as NP/GN/CBQ or UP/SP were more dependent on internal, not competitive considerations, they had to work with what they had, not what they wished they had.

[The Butler]

Mac,

Thank you, I remember hearing SP was a delicate balancing act that UP didn't care about and insisted doing things their (UP's) way the instant the sale was completed.  I did not know it went that way with C&NW.

[PNWRMNM]

James,

The consensus of what got reported is that the CNW merger did NOT go smoothly.  If ever there was a merger that should have gone smoothly the UP-CNW was it.  The only thing UP really cared about was getting from Fremont/Omaha to Chicago.  In retrospect it was an indication of what would come in the SP merger which basically was to ignore, run off, and fire the incumbent middle management.  UP made its own unnecessary messes in both cases.

Mac

[The Butler]

Could someone remind me, did UP+C&NW go smoothly?  I do not remember a SP like meltdown.  The company my father worked for was a C&NW customer and I remember hearing complaints about how car request rules changed overnight.

If it did go smoothly, could that have been justification for the Feds. to allow following mergers whose results are now infamous?

[CNW 6000]

Falcon48

Ignore the last two paragraphs of my post of a few minutes ago, which are a bit of gibberish.  I meant to delete them, but forgot to do so before I posted the note (there no longer appears to be a way to edit posted material or, if there is, I can't figure it out). Of course, you may not be able to tell the difference between the gibberish in the last two paragraphs and the other gibberish in the post which I actually meant to send.

On the post, click the "More" tab on the right side.  There should be an option to edit.

I also wanted to say this is one of the better threads in a while.  Thanks to all involved for their insights!

[YoHo1975]

Murphy Siding

YoHo1975:

 

Murphy Siding:

     But why can't we make the assumption, that they knew what they were doing? 

 

 

 

So again, why would you "assume" they knew what they were doing. The record will illustrate that they did or they didn't. 

     Fair enough question,  I suppose.

     My thought is this:  These folks were running the railroads in question at the time.    Who better than them, knew the ins and outs of traffic, maintenance costs, operations, etc.  on their own lines?  They had all the information.  They were already  running the railroads in question.  They weren't in the same condition as competitor Milwaukee Road.  Their railroad is still here 40 years later.

       I've never read anything that said these men weren't respected individuals in their field at the time.  I've never seen a book or magazine article that says "They did this wrong.  They should have done this......"  (If such a book or magazine article exists,  I'd surely like to read it to learn more.)   The only place I've ever seen it suggested, or assumed that they "Did it wrong" is on internet message boards- specifically this one.

     If fans of NP, or Milwaukee Road, or  Anti-fans(?) of GN want to believe that "They did it wrong",  I guess I'm OK with that.  I just haven't seen anything that would convince me of that.  So, back to my opinion- I just don't buy it.

 

I've seen too many people that were, lets say middle management, that knew the roads much better at a more personal level that have had bad things to say.

On top of that, yes, BNSF is still with us and that seems to indicate they did right, but that doesn't really follow. The Frisco Management team that came into BN was widely considered horrible and yet BN survived...at great cost, buying back Stampede pass. Recreating and upgrading track, because other track had been removed. Supposedly BNSF is still would like to kick MRL out and get that track back. They are paying a lot of money to move trains over that line and they have minimum movement required. Prior to Frisco, they had Snoqualmie too. A route that would have already been able to move doublestacks without the literally suffocating cascade tunnel.

I've heard it attributed to Matt Rose that when he went to work for BN, his comment was "What have you done to this railroad?!?" 

 

Also, a note on the Milwaukee,

There was major track work in '71 and '73. The real distruction of the line was in the horrible winter of '77-'79.

Also, there were system and division timed freights not just  261/262 and those 2 ran more often as extras as noted. The line wasn't dead.

[sandiego]

Mac

Thanks for the fill-in on the west end; I mentioned some of the changes in the Twin Cities and Twin Ports area in my previous messages but said someone more familiar with the western portion of the GN/NP/BN should explain the situation there.

Kurt Hayek

[PNWRMNM]

YoHo1975

So, I hate to ask people on the Day before Thanksgiving to devote time to educating little ole me on the internet, but I'm curious to see a bit more debate on the GN vs. NP routing. It seems that in fact the merger team spent the better part of a decade if not longer figuring out which route would result in better efficiencies, but that maybe all of that was based on a false assumption?

YoHo,

I spent about an hour explaining the planning on the west end but exited before positing, In error.  It would be nice if this site had a scratchpad for long responses.

The GN, NP and SP&S had more infrastructure across the state of Washington than was necessary for the traffic of the late 1960's.  Puget Sound was where big traffic volumes originated and terminated.  East of Spokane GN and NP each had routes to the CBQ at Laurel Montana and to Minneapolis/St Paul and on to Chicago.  The obvious solution was to route long east, St. Paul and Chicago, traffic via the GN and Denver, Kansas City & St Louis traffic via the NP.  The GN branch between Cut Bank and Laurel could be reduced to local service only, as could the NP main line east of Laurel for about 1,000 miles.

In the Puget Sound region both NP and GN extended from Canada to Portland, Oregon.  The NP had a double track main line between Portland and Seattle which was used by GN and UP on trackage rights.  NP's origin point for eastward trains was Auburn.  NP served Tacoma, Seattle, and Everett from Auburn by turnaround jobs from Auburn to each of these "outlying" points.  NP also had a pair of time freights between Auburn and Sumas.  At Sumas NP interchanged with BC Hydro and CPR.  NP also built an intermodal yard at South Seattle in the 1960's.

GN's trains originated at Balmer Yard/Interbay in Seattle.  The GN main ran north 30 miles to Everett before it turned east, so thru traffic was set out and picked up at Everett.  The GN had two north/south lines north of the main at Everett.  One ran up the waterfront and the other was on the east side of the hill Everett sat on.  This line passed by Delta Yard and the then largely inactive shops there.  The two joined just north of Everett and continued to Bellingham WA, New Westminster BC and Vancouver BC.

The SP&S and NP had yards in downtown Portland, and at Willbridge, and used the Portland Terminal's Lakeyard.  SP&S had its big yard at Vancouver WA.

GN and NP crossed the Cascades via Stevens and Stampede Pass respectively while the SP&S went up the Columbia River Gorge.  The GN and NP lines both had several miles of 2.2% ruling grade in both directions.  Both lines had summit tunnels.  The GN tunnel was long and the NP tunnel had tight clearances.  SP&S was .2 or .3%  ruling grade between Vancouver and Pasco.  GN was 330 miles between Seattle and Spokane, while NP was 390 miles.  SP&S was 370 miles between Vancouver and Spokane.  With each line doing about three pairs of freight trains per day the obvious solution was to shift the NP traffic to the GN and SP&S routes.

Major changes were needed to blend and then separate the traffic flows somewhere in the Spokane area.  This was accomplished by the new Latah Creek bridge which connected the GN main to the NP main at the west edge of Spokane.  At Sandpoint Idaho a new connection was required between the NP and the GN.  The prefered Seattle to Chicago route thus became GN to Spokane, NP between Spokane and Sandpoint, and GN east of Sandpoint.  The GN line was rendered surplus between Spokane and Priest River Idaho and portions were ultimately abandoned.

The City of Spokane wanted the GN off Havermale Island and the UP/MILW off their joint route thru downtown Spokane.  The NP had a double track elevated grade separated line thru Spokane.  BN built the bridges abandoned the GN main thru town and sold Havermale Island to the City for the site of Expo 74.  The UP moved over to the NP through Spokane.  The City got its wish and the BN got some cash to pay for its new bridges and associated line changes.  The BN also had to revise the connection between the NP at Yardley and the GN at Hillyard to maintain access to the GN's Kettle Falls branch lines.  Hillyard shops and yards were eliminated with the work shifted to Yardley.

That was the plan and what was done in terms of main lines.  Of course as time went on additional changes were made but that is another story entirely.

Mac

[Murphy Siding]

YoHo1975

Murphy Siding:

     But why can't we make the assumption, that they knew what they were doing? 

 

 

So again, why would you "assume" they knew what they were doing. The record will illustrate that they did or they didn't. 

     Fair enough question,  I suppose.

     My thought is this:  These folks were running the railroads in question at the time.    Who better than them, knew the ins and outs of traffic, maintenance costs, operations, etc.  on their own lines?  They had all the information.  They were already  running the railroads in question.  They weren't in the same condition as competitor Milwaukee Road.  Their railroad is still here 40 years later.

       I've never read anything that said these men weren't respected individuals in their field at the time.  I've never seen a book or magazine article that says "They did this wrong.  They should have done this......"  (If such a book or magazine article exists,  I'd surely like to read it to learn more.)   The only place I've ever seen it suggested, or assumed that they "Did it wrong" is on internet message boards- specifically this one.

     If fans of NP, or Milwaukee Road, or  Anti-fans(?) of GN want to believe that "They did it wrong",  I guess I'm OK with that.  I just haven't seen anything that would convince me of that.  So, back to my opinion- I just don't buy it.

[Murphy Siding]

Falcon48

Ignore the last two paragraphs of my post of a few minutes ago, which are a bit of gibberish.  I meant to delete them, but forgot to do so before I posted the note (there no longer appears to be a way to edit posted material or, if there is, I can't figure it out). Of course, you may not be able to tell the difference between the gibberish in the last two paragraphs and the other gibberish in the post which I actually meant to send.

     The edit function now hides behind the "more" button at the upper right of the text box.  Click on the arrow, and there is a drop-down list of options.

-Norris

[YoHo1975]

Which is exactly my point.

[Anonymous]

YoHo1975

Pennsylvania and New York Central was filled with professionals who knew what they were doing....

I'd probably say that is open to debate.

 

 

[Falcon48]

Ignore the last two paragraphs of my post of a few minutes ago, which are a bit of gibberish.  I meant to delete them, but forgot to do so before I posted the note (there no longer appears to be a way to edit posted material or, if there is, I can't figure it out). Of course, you may not be able to tell the difference between the gibberish in the last two paragraphs and the other gibberish in the post which I actually meant to send.

[Falcon48]

henry6

Transcons were scary to many back then... Still are today in this country for some reason...only the Canadians understand and are not fearful!  EL and SFe was bantied about at CR time, too.  I think the MLW was spoken of because both were in similar financial situations and the concept was that two minuses make one plus (which doesn't make sense to me either!).

 I think the reason a true transcon is "scary" to many railroad managements may be that they don't feel that such a merger, once everything shakes out, will leave them better off than before the merger.  Right now, you have some parity between east and west - two big western roads and two big eastern roads.  The eastern roads are largely neutral about which western road they interchange with, and vice versa. 

 Now what happens if, say, BNSF were to merge with NS?  You can bet it would be quickly followed by a merger between, say, UP and CSX.  The next thing that would happen is that the merged systems would internalize their transcontinental traffic routings as much as possible.  For example, traffic that BNSF used to interchange with CSX would, instead, be handled by the combined BNSF-NS system wherever possible.  Ditto for UP-CSX.  So each of the merging roads would a greater share of the transcon traffic of their merger partner, but would get a smaller share of the traffic from the rival partners.   In other words, the traffic effect could be very nearly a wash. Add to that mix the likelihood that the price for such a wave of mergers, at least for the foreseeable future, would likely  be a substantial amount of re-regulation, probably in the form of so-called "open" access.  It's an open question whether this would make either of the merged roads any better off than the current system, particularly since most U.S. rail traffic doesn't move transcontinentally.  

 

itto for follwedThe first thing that would happen BNSF would turn CSX into a relatively hostile connecting road.  Sure, CSX would with the combined BNSF-NS if there were no other way to handle the traffic, but it would no longer be neutral.  Same theing would happen in the west, where UP would no longer be a friendly connection. 

The next thing that happens in response to a BNSF-NS merger, of course, would be that UP and CSX merge.  The effect of the two mergers is to cause traffic to stay within the merged systems to the extent possible - so BNSF-NS   

[JimValle]

Once BN and SF had merged anyone who could read a map could see that UP was surrounded, so to speak, and having CNW in its pocket did nothing the break the encirclement.  Only the acquisition of SP would allow UP to break out of the stranglehold created by the formation of BNSF.  Fortunately for them, the SP was  vulnerable because it was a very rundown property with excellent routes but desperately in need of a massive cash infusion to revive it..  UP did just that although it chose to obliterate the SP's corporate pedigree in the process..

[YoHo1975]

Murphy Siding

     But why can't we make the assumption, that they knew what they were doing?  They were professional railroaders.  They had time and resources to check out all the angles.  They had absolutely nothing to gain by picking either the NP or GN mainline.

     I'd suggest that they did their homework, used the information available at the time, and made the best decisions they could,  based on what they knew at the time.  The conspiracy theories about GN being "chosen"  over NP or Milwaukee Road by those mysterious powers that be seems like like wishfull rewriting of history by fans of NP and Milwaukee Road.  I don't buy it.

 

Frisco Management were professionals as well. Most seem to suggest that they ruined the BN.

Pennsylvania and New York Central was filled with professionals who knew what they were doing and yet Penn Central was by all accounts a mistake.

The corporate world is littered with the ruins of companies run by professionals who knew what they were doing. 

I'd reverse the question why would anyone assume that anyone knew what they were doing unless the results back them up? That's just blind faith. 

 

And at this point, this thread seems to be about weeding out the fact from fiction surrounding this. And only by doing that can you know.

So again, why would you "assume" they knew what they were doing. The record will illustrate that they did or they didn't. 

[henry6]

Transcons were scary to many back then... Still are today in this country for some reason...only the Canadians understand and are not fearful!  EL and SFe was bantied about at CR time, too.  I think the MLW was spoken of because both were in similar financial situations and the concept was that two minuses make one plus (which doesn't make sense to me either!).

[Murphy Siding]

     But why can't we make the assumption, that they knew what they were doing?  They were professional railroaders.  They had time and resources to check out all the angles.  They had absolutely nothing to gain by picking either the NP or GN mainline.

     I'd suggest that they did their homework, used the information available at the time, and made the best decisions they could,  based on what they knew at the time.  The conspiracy theories about GN being "chosen"  over NP or Milwaukee Road by those mysterious powers that be seems like like wishfull rewriting of history by fans of NP and Milwaukee Road.  I don't buy it.

[Anonymous]

I have also read that a merged Erie Lackawanna and Milwaukee Road could have offered great potential as a transcon.

[CNSF]

Paul_D_North_Jr

Was this based on - and/ or are you familiar with - the paperbound booklet Profit Management Systems; Key to Stronger Railroads by Edward C. Christ (of ConRail), published by Simmons-Boardman, New York, in 1977 (86 pp.)  ?  That described and advocated a similar cost-accounting system that would yield similar decision and results. 

See also "RAIL PROFIT RESPONSIBILITY AND PROFIT MEASUREMENT: REORIENTING DEPARTMENTAL STRUCTURES AND INFORMATION SYSTEMS TO THE COMTEMPORARY DEREGULATED RAILROAD ENVIRONMENT" by M. B. Lawrence and R. G. Sharp, Journal of the Transportation Research Forum, 1989, at -  http://tris.trb.org/view.aspx?id=302482 

Can't say, as I'm not familiar with either of these publications, but I'd say Santa Fe was certainly very successful in working along those lines.  Every sales rep had access to excellent decision-support information right at his/her fingertips, and if you had questions, the people generating the data were accessible and helpful.  When I later moved to CN, they had a similar costing system but the information was not nearly as accessible.  As a result I used it less and can't vouch as much for its quality.

 

[henry6]

A point not specifically discussed here but alluded to is the fact that the operating business model being adopted over the past 30 or so years has leaned to the economy of moving freight from point A to point Z with no consideration for stops between from B to Y along the way if at all possible.   American invstors moved so many industrial jobs out of the country there was no need to stop in many places, But whatever line avoided congested areas of population was favored. ( I almost believe the EL merger was the last one that chose routes through instustrial cities instead of leaner trackage.  Not only did that backfire on them but CR also demoted, detached, destroyed, and dismantled much of the route when it got hold of it causing further industrial erosion along the route.)  The NS and CXS acquisition recognized the high terminal costs of congested areas like NJ and Michigan and thus Conrial Shared Assets was formed.  Similarly there are many terminal lines in and around Chicago co owned by the big guys but designed to absorb the costs of terminal operations.

[YoHo1975]

jrbernier

 

The NP was in much better shape, but again had too many mountian grades/helper districts.  The GN 'highline' was devoid of population centers, but only had one real helper district(Marias).  ...

...

  Remember, it's not how many trains you run or the tonnage - Did you make any money doing it?

Jim

 

The Assertion earlier in this thread was that the NP made more money moving trains over it's "too many mountain Grades/helper districts."

 

That the notion that the NP route was too winding to be profitable is hogwash. 

I'd suggest that stating it is not an assumption we can make in this thread. 

 

[CNSF]

And it's interesting to note that Hunter Harrison  was a key part of that Frisco management team...

...just stirring the pot

[YoHo1975]

OK, I'm sorry to spam the thread, but a few things I've learned.

 

The Current tunnels on Steven's pass have always had their current dimensions, so that was a benefit to the line, but the Tunnel is so long that it restricts movement. Steven's is still a problem for the railroad.

They've done the survey work to "fix" stampede. Just waiting on the money and being told to start.

 

Also, BN did the preliminary work to connect Snoqualmie to the Stampede Pass Line. Snoqualmie had it's tunnel floors cut down and widened in the 1960s in anticipation of new services. So in fact, Snoqualmie would have offered the best root for modern traffic types. 

 

Finally, I was reminded that between the formation of the BN and the merger with SF, BN absorbed Frisco and brought in Frisco's management and THEY completely changed the direction of the railroad and slashed budgets and plans. So that makes it even harder to judge the choices of those at BN in 1970 and what BNSF is today.

 

It would appear though that optimal is not a word that describes the situation. 

[jrbernier]

    The Milw was in terrible shape by the 60's  The Pacific extension was down to 261/262(XL/Thunderhawk) road freights and 263/264 many time operated as a 'dead freight'.  When traffic did increase, a 261TC section ran west from the Twin Cities to move the extra traffic.  The Milw route had too many mountains to climb.  Two railfan trips in 1972 & 1974 revealed how bad things were on the Milw.  On one trip we watched as 261 arrived in Haugen, MT.  The crew wentto bed, and there was not a 'rested' crew to move the train over St Paul pass.  It sat there until a dead freight arrived from the west.   The train left with a crew with short hours and died on hours before arriving at the next terminal.  This was not a bad weather situation - it was summer!  The 1974 trip was to see the end of the electric operation.

The NP was in much better shape, but again had too many mountian grades/helper districts.  The GN 'highline' was devoid of population centers, but only had one real helper district(Marias).  The limiting factor of the GN line was the limit of trains that could be run through the Cascade Tunnel.  The NP had a lot more 'on-line' traffic, but the future was through traffic between the Pacific and Chicago.  GN 97/82(West Coaster) always ran much faster than the NP 600 series road freights.  The NP main(now MRL) is used for overflow traffic, or traffic originating from KC/Denver/PRB.  Even some of that traffic moved north to the High Line via Great Falls after the line rebuild there.

  JJ Hill controlled the GN .  And the NP when he saved it after the 1880's panic.  GN had the contracts with the ocean shipping, and his Glacier Park Company controlled vast areas of forests and mining.  He leased this out to his friends like Weyerhaeuser, and set up companies like Plum Creek Lumber.

  Remember, it's not how many trains you run or the tonnage - Did you make any money doing it?

Jim

 

[YoHo1975]

Murphy Siding

 

YoHo1975:

 

Chatting with a former PacNW Milw and I think BN guy, he mentioned that yes, NP was actually the better route at the time. Both in better shape, but it also hit more population centers than the High Line did. 

I wonder if that entered into anyone's thinking at the time?

 

     These folks were running railroads for a living.  The merger planning seemd to involve railroaders from both GN and NP.  Given their expertise, and the amount of time they had to plan the merger,  why wouldn't we expect that they looked at every aspect of the merger beforehand?  Are you sure that isn't just an urban legend?

 

 

I'm asserting that ICLand's Statement corroborated by others, that the NP line was more profitable and that thus consolidating 75% on the Highline was a mistake is true and speculating as to additional reasons why that might be.

Clearly, the assertion may not be true. I wasn't there, but if I assert nothing, then there is nothing to say on the topic. Humans are fallible, I would not assume anyone at any level is above reproach and we have the advantage of 20/20 hindsight.

 

Stampede pass has height restrictions on it now that limit it's viability in moving intermodal east/west. I don't know the answer to this, but I assume that at some point Steven's pass also had such restrictions and the tunnels were improved. This of course affects our perception of how good the route could have been then by actions that were or were not taken over the last 40 years.

 

Also, I've been told that Milw lines west was actually the profitable segment of that railroad in the early to mid 70s until it was finally overcome by the problems of the company. Milw didn't have a lot of connections east of the Pacific coast and west of th Mississippi, but they did have a lot of connections in the midwest. One wonders if we didn't lose a more viable route in the Pacific extension.

From what I understand, prior to it being pulled up, the Milw actually moved more freight east from the PacNW than BN did.  

[Paul_D_North_Jr]

CNSF

  [snip] . . . but the other part was actually using that knowledge to generate operating savings while at the same time doing a better job of meeting customer expectations than our competitors.  The fact that our operating department was able to do both of those things simultaneously led me to believe that they were one of, if not THE, best in the industry in the '90's.  

 

Good point - one that I did not remember, but it makes a lot of sense.  Why focus only on the 'Revenue' term and ignore the 'Costs' item in the "Profit = Revenue - Costs" equation ?

CNSF

  Furthermore, both the marketing and operating teams were enabled by a superb costing group which gave us the information to make intelligent decisions - and that's where Carl Ice came from. 

Was this based on - and/ or are you familiar with - the paperbound booklet Profit Management Systems; Key to Stronger Railroads by Edward C. Christ (of ConRail), published by Simmons-Boardman, New York, in 1977 (86 pp.)  ?  That described and advocated a similar cost-accounting system that would yield similar decision and results. 

See also "RAIL PROFIT RESPONSIBILITY AND PROFIT MEASUREMENT: REORIENTING DEPARTMENTAL STRUCTURES AND INFORMATION SYSTEMS TO THE COMTEMPORARY DEREGULATED RAILROAD ENVIRONMENT" by M. B. Lawrence and R. G. Sharp, Journal of the Transportation Research Forum, 1989, at -  http://tris.trb.org/view.aspx?id=302482 

- Paul North.   

[Murphy Siding]

YoHo1975

Chatting with a former PacNW Milw and I think BN guy, he mentioned that yes, NP was actually the better route at the time. Both in better shape, but it also hit more population centers than the High Line did. 

I wonder if that entered into anyone's thinking at the time?

     These folks were running railroads for a living.  The merger planning seemd to involve railroaders from both GN and NP.  Given their expertise, and the amount of time they had to plan the merger,  why wouldn't we expect that they looked at every aspect of the merger beforehand?  Are you sure that isn't just an urban legend?

[YoHo1975]

Chatting with a former PacNW Milw and I think BN guy, he mentioned that yes, NP was actually the better route at the time. Both in better shape, but it also hit more population centers than the High Line did. 

I wonder if that entered into anyone's thinking at the time?

[YoHo1975]

Just to clarify, I'm quite sure there were many intelligent if not brilliant railroad people at SP, I guess my bias is No money for new units, pulling up Track one at Donner, because they couldn't afford new rail on the Sunset, etc etc.

SP in the 70s and 80s feels like a railroad on the brink. 

I didn't know about Ticor, knew a bit about Sprint.

Would spinning off Sprint earlier even have worked? Given the way AT&T fell out? 

 

Still, if you look at a Fiberoptic Trunk Map of the Wester United States, where those route go, it looks eerily similar to a railroad route map and for that, you have to credit visionary. Just think, our posts about trains on the internet are probably being bounced around cables that were installed by those railroads.

 

So, I hate to ask people on the Day before Thanksgiving to devote time to educating little ole me on the internet, but I'm curious to see a bit more debate on the GN vs. NP routing. It seems that in fact the merger team spent the better part of a decade if not longer figuring out which route would result in better efficiencies, but that maybe all of that was based on a false assumption?

[Falcon48]

CNSF

What fun!  As an insider at the time, here's my take on it:

No, UP+CNW did not cause BN+ATSF.  BN first made overtures to Krebs some time back in '88-89, as ATSF was staggering out of the failed SP-SF attempt and being circled by takeover sharks (Sam Zell et al).  Krebs (and presumably the board) agreed BN was a good fit, but decided BN's offer was too low.  They found a white knight (Olympia & York) willing to finance an internal restructuring and Krebs split up the company (spun off land, mining, etc.) and went to work on the railroad.  The new 'pure rail play' ATSF stock debuted at around $6 a share, was up to $11 a year or so later, and eventually fetched an offer of somewhere in the $30's from BN.  UP deemed this still too low so drove up the price to $45 or so, as others have correctly noted here. 

Given this track record I find it interesting that some deem Krebs' tenure at ATSF a failure.  No, he did not have a warm personality nor did he get along with all his people.  And, true, ATSF alone could not get its OR below 80%.  But I believe that had more to do with the fact that ATSF had virtually no online coal or power plants, a weak chemicals portfolio, and was dependent on intermodal for 50% of its traffic and revenue, than with any significant management failings. 

Think about it, 50% intermodal!  For just about every other big class 1 at the time, intermodal was barely break-even traffic that was only taken on in order to sop up capacity they couldn't use for anything else, and never amounted to more than 10-20% of the business.   So the bit about BN wanting ATSF management is at least partly true, but it wasn't just Krebs they were looking at.  It was people like Carl Ice, who were figuring out how to make at least a little bit of money from intermodal.  Also don't forget that ATSF's new computer system (which a whole bunch of people within ATSF had built from scratch) was immediately adopted by BN, purchased outright by CN (and look at 'em now)  and pretty much set the new standard for the industry over the following decade.

But I digress.  The BN+ATSF merger was pretty much inevitable from the minute the SP+SF merger failed, and the reason SF had to merge with SOMEbody was...  wait for it...

UP+WP+MP

If you don't immediately see my logic:

1) refer to a map and think about it

2) refer to earlier posts about the positive effect of simply being the largest competitor

2) note one of the first things UP did after snagging WP and MP was to attack ATSF's automobile business, which in the early '80's was extremely lucrative for them.  UP lowered the rates by almost half and essentially bought the business, both because they could afford to and because they knew ATSF didn't have any high-margin online traffic, such as chemicals or PRB coal, to replace it with.  UP understood that the manufacturers (the domestic 3, anyways) would always choose price over service, that there were economies of scale in hauling autos, and that it was an advantage to be able to offer one-stop shopping for virtually every major market west of the Mississippi. 

There may be more to the story; this is only what I saw from my perspective.  And now that I've mentioned UP+MP+WP, someone else will no doubt point a finger at whatever caused that.  Trying to figure out the root cause of rail mergers is a bit like trying to figure out who hit first in the Balkans.  But a lot more fun!

 

I agree that UP-CNW didn't cause BNSF.  I, too, was on the inside at the time, but at CNW, not on the BN or ATSF side of things. As I mentioned in an earlier post, the "cause and effect"  was the reverse.  It was the announcement of the BNSF merger, and UP's failed run at ATSF that led to UP's complete takeover of CNW, which had not previously been UP's intention.

One thing to keep in mind is that UP and CNW had a very close strategic relationship long before either the UP-CNW or BN-SF merger.  UP and CNW, of course, had closely cooperated in CNW's entry to the Powder River Basin in the 1980's, and the two railroads proved to be powerful competitors for BN's coal business. From a strategic perspective, the two roads were effectively a single competitor to BN for PRB business from 1984 on.  

Now, fast forward the the abortive attempt of Japonica to take over CNW in 1989-1990 (I may be off by a year).  UP was a "white knight" in this effort and provided much of the financial muscle that ultimately defeated Japonica.  In return, UP got two things - trackage rights over CNW's stategic east-west line and the right to appoint directors to the CNW Board.  The trackage rights became effective in January, 1991, and effectively gave UP the ability to unilaterally control the marketing of most UP-CNW service over this important corridor (CNW continued to physically operate the service under a "haulage" arrangement, but it was subject to strict service commitments).  And, the agreement giving UP the right to appoint directors to the CNW Board had been public knowledge since Japonica, although UP could not fully exercise these rights until the ICC granted UP "control" authority. In other words, from the perspective of BN and ATSF, UP and CNW were as closely tied together as they could be without an actual merger by 1991, and it was clear that the relationship was going to be even closer when the ICC control proceeding was concluded.  If the BNSF merger had been "caused" by UP-CNW, it would have been agreed to earlier than 1994.

Finally, those who remember the details of the UP-CNW control proceeding may recall that, while the "control" authority UP sought permitted a full merger, UP repeatedly stated throughout the proceeding that they had "no present intention" to do a full merger or take complete control of CNW.  That was also the position they expressed privately with CNW officials.  CNW officials, of course, didn't know what was going behind closed doors in Omaha.  But, from CNW's perspective, UP seemed to change its mind about a full merger after its failed run at ATSF, particularly from December, 1994 on.      

 

[CNSF]

I was a member of that ATSF Intermodal marketing team, though not the individual behind the article.  Segmenting the traffic based on service requirements and what it would pay was part of the trick, but the other part was actually using that knowledge to generate operating savings while at the same time doing a better job of meeting customer expectations than our competitors.  The fact that our operating department was able to do both of those things simultaneously led me to believe that they were one of, if not THE, best in the industry in the '90's.  Furthermore, both the marketing and operating teams were enabled by a superb costing group which gave us the information to make intelligent decisions - and that's where Carl Ice came from. 

On Krebs v. Haverty, they both have their loyalists and detractors, but personally I feel that the real problem was that they were both good, but had different styles, and in the end, Santa Fe wasn't big enough for the two of them.  Haverty's decision to bring back the red-and-silver paint scheme galvanized morale at a time when it was probably near an all-time low, and he provided the personal touch needed to seal the J.B. Hunt deal that revolutionized the industry.  But Krebs was the visionary who put us into "quality school" not because it was the latest fad, but because he really believed it would make us a better company (and it did), and who launched the "build it and they will come" capacity expansion that also proved to be correct. 

I never would have believed anyone could work in marketing/sales in the rail industry and turn away customers, but that's exactly how it was in the mid-90's.  We had a long line of unhappy SP, Pacer, and UP customers outside our door, and the M&S people's job was akin to that of a nightclub bouncer, deciding who would get in and who wouldn't.  Krebs, Haverty, and countless others all share in the credit for that.

As for SP, well, I always figured their middle management at least must have been wizards, to keep that thing going as long as they did in the shape it was in.  And look what happened when UP took over and fired them all!  I did get a chance to personally work with a few former SPers, and can attest that Rollin Bredenberg and Don Skelton were good. 

[Paul_D_North_Jr]

CNSF

  What fun!  [snip]  And, true, ATSF alone could not get its OR below 80%.  But I believe that had more to do with the fact that ATSF had virtually no online coal or power plants, a weak chemicals portfolio, and was dependent on intermodal for 50% of its traffic and revenue, than with any significant management failings. 

Think about it, 50% intermodal!  For just about every other big class 1 at the time, intermodal was barely break-even traffic that was only taken on in order to sop up capacity they couldn't use for anything else, and never amounted to more than 10-20% of the business.   So the bit about BN wanting ATSF management is at least partly true, but it wasn't just Krebs they were looking at.  It was people like Carl Ice, who were figuring out how to make at least a little bit of money from intermodal.  [snip; emphasis added - PDN]   

 

This is pretty much corroborated by the lengthy article that appeared in Trains in the mid-to-late-1990's or so by a former ATSF marketing guy (whose name I cannot remember).  He described how it 'sliced and diced' (my term) the InterModal traffic into something like 17 different market segments with regard to service needed in terms of schedule and transit time, priority, consistency/ reliability, rate/ price, etc., and then solicited and priced each so as to maximize the "revenue yield" - an early railroad version of what the airlines do with flight/ seat prices and some other businesses as well today.

- Paul North. 

[PNWRMNM]

YoHo

I was a low level staff guy with SP when Krebs was Vice President Operations.  He was obviously very smart and very dedicated to running the railroad right.  They one time I dealt with him on a stressful issue he treated me entirely correctly.  I continue to hold him in high regard

I can also recommend as men of exceptional quality John Ramsey, C. T. Babers and Rollin Bredenburg.  This list does not include all of them by any means.  SP had a long established management training program and had more than their share of good, smart operating people.

W.J. Lacy ruled by intimidation.  He spread the fear that you seem to be concerned with and frankly he accomplished far less good in my opinion than any of the others I have mentioned.

The worst problem at SP was at the very top, Ben Biagiani, and his hand picked Board of Directors.  In the late 1970's and early 1980's he tried to feed two capital intensive businesses, the railroad and what became Sprint communications, plus he bought Ticor title insurance just before the depression of 1980-82 destroyed Ticor's earnings. 

He would have been better to have passed Ticor and spun off Sprint to stockholders early to let it access the capital markets directly.  Oh to rewrite history with 20-20 hindsight and without the responsibility!

Mac

[Railway Man]

YoHo1975

2: On Krebs, some would tell you that Krebs had nothing to do with Santa Fe's success and it was all Haverty's doing. Haverty was already gone of course by the time the merger came around. His work at KCS should suggest that he knows what he's doing at least. Krebs was an SP guy and, again this is fan bias, but I have a hard time thinking that anyone that came up in the SP system really knows what they're doing, at least from a leadership perspective. It's a bias for sure, I have no idea if it's true. 

I have to be careful how I say this since I'm not retired yet ... but here goes.  I admire Rob Krebs enormously.  There are only a handful of CEOs that transformed railroading like he did:  Ralph Budd, Downing Jenks ... it's a small list.

RWM

[sandiego]

Back in action with a full tummy and a cold drink in hand (no Rule G here!):

First, a slight addition to my previous message:  The quote about the GN's finances was from page 138 of "Leaders Count." Quotations in this message are also from same book.

Until reading the book I don't think I had realized how far back planning for the present-day BN merger went; here's a brief timeline to illustrate:

1955:  Steering committee established to study potential for consolidation.

July 16, 1960:  GN, NP, and CB&Q announce that they would seek federal approval to merge.

1961:  Stockholders of all three railroads approve merger, merger application filed with ICC, hearings begin.

August 24, 1964:  ICC examiner Robert Murphy approves merger plan subject to certain conditions.

April 27, 1966:  Full ICC rejects proposed merger plan; GN & NP petition for reconsideration.

January 1967:  ICC grants re-hearing.

November 30, 1967:  ICC now approves merger; US Dept. of Justice successfully challenges merger in courts.

February 1970:  US Supreme Court rules that merger can proceed.

March 2, 1970:  Merger becomes effective; Burlington Northern begins operations.

From the book:

"The extended process wasn't helpful from a financial standpoint, but "as a matter of getting the thing to work, long planning certainly was helpful," said Downing. Officials of both railroads had more than enough opportunity to get to know each other, and Downing added:  "They also didn't know who was going to be boss, so they had to be nice to each other"" (page 150).

""There was a joint planning committee of the operating officers of both companies," Downing noted. "They planned how this thing would work, realizing that they might well be the ones who had to do it after merger"" (page 151).

"Operationally, the new BN was able to implement a pre-merger study that determined the most economic and efficient routes to be used once the railroads were combined. This plan affected primarily the former GN and NP which essentially were parallel railroads. "We set up preferred routings on which we would concentrate freight traffic, especially transcontinentally," Downing said. "The NP as a railroad was considerably less profitable than the GN. The reason for that was that their route structure was not as efficient. They crossed the Rocky Mountains twice. You cross the Continental Divide west of Helena, Mont., but before you get there, you've already gone out of Livingston and up over Bozeman Pass west of there. You come down the other side, and then you go back up again at Helena. It was longer. Their costs to get a train from St. Paul to Seattle were simply higher; the NP was longer and it had less favorable grades. So when the time came to merge the two companies, we used the NP from St. Paul or Minneapolis to Fargo, N. D., the GN from Fargo to Sandpoint, Ida.; and then the NP to Spokane, and the GN from Spokane to Seattle. in each case, those segments were the most efficient. So. we pieced the best parts of each company, and the GN was about 75 percent of the total"" (page 169).

The merger studies indicated considerable savings:  "The gains to be obtained from the merger far outweighed costs of concessions to labor and competitors. All but 309 miles of the NP main line were to be reduced to secondary status, which would relive the new railroad of a huge amount of maintenance-of-way expense and future capital spending needs. The consolidation of nine separate yards in the Minneapolis and St. Paul area into one modern facility would enable the new company to handle freight in one-seventh the time previously required—and at a huge saving in operating expenses" (page 145).

Growing up in Minneapolis, and later working for the BN at Northtown, I saw the results firsthand. Counting smaller industry and support yards, the yard total was closer to double the nine mentioned above.

The GN had a particularly poor yard set-up; their main yard was Union Yard in Southeast Minneapolis, with the east end at the Minneapolis-St. Paul boundary. The yard was hemmed on the north by CNW's (ex-CMO) East Minneapolis Yard, and on the south by CGW's East Minneapolis Yard (later CNW's Southeast Minneapolis Yard) and a massive complex of grain elevators and other industries served by the CGW and NP. Motive power and cabooses were serviced at Minneapolis Junction roundhouse which was two miles west of Union Yard. So, all road power (and cabooses) had to be shuttled back and forth in caboose hops or light engine moves between the two points.

West of downtown Minneapolis on the GN line to Willmar were more yards strung along the main lines going as far west as St. Louis Park. The first major yard west of downtown was the big yard at Lyndale Junction, next was Cedar Lake Yard (actually two yards, one after the other).

With such scattered yards plenty of transfers were needed, and road trains would make pickups and setouts at outlying yards also.

The effect of the new BN Northtown Yard was dramatic, according to a BN switchman I worked with. He had been holding regular days-off as a switchman, but after Northtown opened he ended up about one hendred deep on the Switchman's Extra Board.

The Duluth-Superior (Head of the Lakes) area had plenty of potential for consolidation also (another first-hand observation). Both GN and NP had lines from the Twin Cities to the Twin Ports (even with traffic increases over the years the one surviving GN line still has plenty of capacity)

From Carlton (west of Duluth) the NP had a line via West Duluth to Duluth; and GN and NP each had a line going down the hill to Superior (the two lines even crossed each other at Sate Line Tower). The GN was double tracked to handle ore traffic from the Mesabi Range; by the 1960s natural ore shipments had declined enough that the GN line had an abundance of capacity. So, both the NP lines were redundant, especially the original NP via West Duluth with its steep grades.

In the terminal itself, the NP had one ore dock and associated ore yard, GN had four docks and the massive Allouez Yard for their ore business. As mentioned above, natural ore traffic was declining so Allouez had extra capacity; with that the NP dock certainly wasn't needed and could be closed.

Both GN and NP had side-by-side yards in Superior north of Belknap Street; here the NP yard was smaller and not as well situated so it was another retirement candidate.

GN had a roundhouse and car shop in Superior, NP had the same in Duluth at Rice's Point Yard; obvious duplication and the NP facilities were retired.

Rice's Point Yard itself was slimmed down, although this didn't occur until some years after the merger. The former GN Birch Street Yard on the other side of Rice's Point was mostly removed also.

Out west, Spokane had plenty of consolidation potential, but I'll leave the detailed descriptions of that to someone more familiar with the area.

To be continued again... (time for bed!)

Kurt Hayek

 

[sandiego]

A good resource for anyone interested in the history of both the BN and BNSF mergers is the book

"Leaders Count" by Lawrence H. Kaufman; copyright 2005 by BNSF Railway, published by Texas Custom Publishing and distributed by Texas A&M University Press. I don't know if it's still available from Texas A&M; in 2005 BNSF sent every employee a copy, I kept mine but it seemed that most of the employees threw their copies away (judging from comments I heard) so I'm not sure how many copies are still extant.

I found it to be worthwhile reading although somewhat biased (obviously) in favor of the carrier. I found a few factual errors also, with the biggest (to me) howler concerning the Minneapolis & St. Louis Railway. The book claimed that "In 1957, after 35 years in reorganization, the M&StL was merged into the CNW" (page 181). Actually, the M&StL completed reorganization in 1943 (20 years after entering receivership), and the railroad assets (only) were sold to the CNW on November 1, 1960.

The book's biggest strength is that the author was able to interview many former and current railroad officials, and received some solid, candid replies from them. Some of the best information came from the late Robert W. Downing, who started as an Assistant Trainmaster on the GN and retired as BN Vice Chairman.

Mr. Downing was extensively involved with the BN merger studies and is quoted directly many times, other passages suggest they were based on his information.

Regarding the GN, the book states (but doesn't quote him directly) that "Despite the best efforts of the GN managers and fairly stable volumes of freight as measured by tonnage, financial performance was lackluster at best. The operating ratio, which for a long time had been in the mid-70s, went above 80 in the late 1960s. During this period of declining railroad earnings, the GN was buoyed by non-operating income, mostly dividends and interest in other companies. The GN owned shares in pipeline companies, the WP RR, and Trailer Train. And, of course, the GN held its interest in the CB&Q, which continued to pay dividends."

To be continued... (I'm hungry and am going to make supper!)

Kurt Hayek

[YoHo1975]

A few comments

 

1: On ATSF being in bad shape. I'm no expert or insider, but as near as I can figure, this is railfan/railroad bias. ATSF was cash poor compared to BN, because a large part of their revenue source was Intermodal, but it was not in finacially tenuous condition. It was a good operation in the 1990s.

2: On Krebs, some would tell you that Krebs had nothing to do with Santa Fe's success and it was all Haverty's doing. Haverty was already gone of course by the time the merger came around. His work at KCS should suggest that he knows what he's doing at least. Krebs was an SP guy and, again this is fan bias, but I have a hard time thinking that anyone that came up in the SP system really knows what they're doing, at least from a leadership perspective. It's a bias for sure, I have no idea if it's true. 

3: As I recall, in 2007, the State of Washington started floating the notion of finding SOMEONE to reopen Snoqualmie. The line is as I understand it railbanked. It's a hiking trail, but banked. BNSF was at capacity on Stevens pass and through the gorge and apparently on stampede pass. So I find the notion that route consolidation was clearly the proper choice to get where we are today a little laughable. 

 

 

As pure speculation, and I'm not an expert of any type in these matters, so please correct my ignorance, but it seems like end to end mergers or mergers of vastly different regions make more sense to the layman.

For an example. The Western Pacific and C&NW mergers for UP make complete sense to me. Getting from the Bay area to Chicago all on one railroad seems like a good thing. Similarly I can understand why BNSF makes sense. They don't with the exception of somewhat in Texas and Illinois really provide competing routes.  

I don't however get the BN merger in the first place.

I mean I understand route consolidation and based on the information in this thread, it seems like the primary problem was that they consolidated on the wrong route, but the notion that traffic levels are fixed seems anathema to everything inherent in the market system. The merger seems to be about the divisions on a fixed size pie which is just not how this is supposed to work. 

One wonders, in the realm of purely speculative how things would have fallen out had CB&Q and NP been the merged lines. 

Or if SP had gobbled up MILW. 

[jeffhergert]

The Jan/Feb 1998 issue of the defunct magazine Vintage Rails has an interview with UP's past president, John Kenefick.  He talks about, among other things, the UP-MP-WP merger and the thinking that led to it.

Jeff

      

[Paul_D_North_Jr]

Thanks for those in-sights ! 

- Paul North. 

[CNSF]

What fun!  As an insider at the time, here's my take on it:

No, UP+CNW did not cause BN+ATSF.  BN first made overtures to Krebs some time back in '88-89, as ATSF was staggering out of the failed SP-SF attempt and being circled by takeover sharks (Sam Zell et al).  Krebs (and presumably the board) agreed BN was a good fit, but decided BN's offer was too low.  They found a white knight (Olympia & York) willing to finance an internal restructuring and Krebs split up the company (spun off land, mining, etc.) and went to work on the railroad.  The new 'pure rail play' ATSF stock debuted at around $6 a share, was up to $11 a year or so later, and eventually fetched an offer of somewhere in the $30's from BN.  UP deemed this still too low so drove up the price to $45 or so, as others have correctly noted here. 

Given this track record I find it interesting that some deem Krebs' tenure at ATSF a failure.  No, he did not have a warm personality nor did he get along with all his people.  And, true, ATSF alone could not get its OR below 80%.  But I believe that had more to do with the fact that ATSF had virtually no online coal or power plants, a weak chemicals portfolio, and was dependent on intermodal for 50% of its traffic and revenue, than with any significant management failings. 

Think about it, 50% intermodal!  For just about every other big class 1 at the time, intermodal was barely break-even traffic that was only taken on in order to sop up capacity they couldn't use for anything else, and never amounted to more than 10-20% of the business.   So the bit about BN wanting ATSF management is at least partly true, but it wasn't just Krebs they were looking at.  It was people like Carl Ice, who were figuring out how to make at least a little bit of money from intermodal.  Also don't forget that ATSF's new computer system (which a whole bunch of people within ATSF had built from scratch) was immediately adopted by BN, purchased outright by CN (and look at 'em now)  and pretty much set the new standard for the industry over the following decade.

But I digress.  The BN+ATSF merger was pretty much inevitable from the minute the SP+SF merger failed, and the reason SF had to merge with SOMEbody was...  wait for it...

UP+WP+MP

If you don't immediately see my logic:

1) refer to a map and think about it

2) refer to earlier posts about the positive effect of simply being the largest competitor

2) note one of the first things UP did after snagging WP and MP was to attack ATSF's automobile business, which in the early '80's was extremely lucrative for them.  UP lowered the rates by almost half and essentially bought the business, both because they could afford to and because they knew ATSF didn't have any high-margin online traffic, such as chemicals or PRB coal, to replace it with.  UP understood that the manufacturers (the domestic 3, anyways) would always choose price over service, that there were economies of scale in hauling autos, and that it was an advantage to be able to offer one-stop shopping for virtually every major market west of the Mississippi. 

There may be more to the story; this is only what I saw from my perspective.  And now that I've mentioned UP+MP+WP, someone else will no doubt point a finger at whatever caused that.  Trying to figure out the root cause of rail mergers is a bit like trying to figure out who hit first in the Balkans.  But a lot more fun!

 

[RKS]

Years ago, when the Main Office of BN was still in St. Paul, I heard this interesting tale regarding the BN-ATSF merger.  A BN Computer Operations person was going to a computer systems conference and was asked, to his surprise, by someone from the Legal Dept to find out what computer systems were used by UP, ATSF, and SP.  He was asked to do this "quietly" and to report back only to that person.  What he found was the BN and ATSF used the same system.  UP used a different system and SP used another different system.

Now, remember what happened soon after the merger when UP had all kinds of problems with many unhappy customers that had been served by SP?

RKS

[Paul_D_North_Jr]

fecsd40-2

  ATSF+Conrail+KCS is one that should have happened. It would have been an end to end merger with a long haul. 

 

Interesting - would have been kind of a rough 'mirror-image' of CN+IC, or maybe a southern version of that [EDIT] upside -down 'T' shape. 

But it would not have included the Powder River Basin, Pacific Northwest, or the Southeast US, all of which are significant traffic sources and destinations. 

- Paul North. 

[fecsd40-2]

ATSF+Conrail+KCS is one that should have happened. It would have been an end to end merger with a long haul.

[Murphy Siding]

      A reminder- this is from the  forum policies section:

No personal attacks or name-calling. Please keep conversations cordial. We understand that there will be differences of opinion. Please don’t let those differences turn ugly. Accept that others might not have your same point of view, don’t sink to personal attacks. Nothing is gained by doing so.

     I have edited out some things from a few posts.  Let's try to keep this civil and on track.  If you disagree with someone, explain what you disagree about, and why.  Childish name-calling, whether blatant or wrapped in snide remarks does nothing to promote discussion.  I'm not going to take the time to read each post on this thread and wash out the name calling.  From here on,  on this thread, if your post violates the wording and/or the spirit of the forum policy reference above,  I think I'll just delete it, and send the author a PM.

-Norris  user/moderator

[ICLand]

dakotafred

You describe a merger that was poorly implemented -- if he has the right of it -- in the northwest. ...

The point is that, for one reason or another, there wasn't enough traffic anymore to justify three lines between the Twin Cities and Portland/Seattle.

I misunderstood. I thought the discussion was about mergers. You appear to want to discuss Milwaukee Road for some reason or the effect of a given merger on somebody else.

Well, I thought the thread related to mergers, not to levels of traffic necessary to sustain profitable operations. "The point is ..." wasn't the point that I could see anywhere on this thread until you made the declaration.

How much "traffic" do you think would justify three lines? What levels make the difference? Why? How would that justify or excuse the intrinsic success or failure of a given merger?

There is an extensive, developed record from that era on the proposed merger. Approximately 500,000 pages of testimony and exhibits, and about 3,000 pages of findings and conclusions. At the time, I read through every single page. There is not a single mention of the assertion you now make.

Considering that the record is composed of studies, argument, and observations from over 15 railroads, and myriad other entities, and nobody saw your contention with the clarity you do, I suppose humility compels me to admit I didn't see it either. Admittedly, they were encumbered by facts, but sometimes it takes a fresh look to see the truth.

My point, however, was the original BN merger more or less compelled subsequent mergers by that company, and that any given future merger, such as BN/ATSF, was always to some extent captive to decisions made earlier, or as in the case of UP/SP, for reasons internal to the corporate and financial dynamics of the companies involved rather than external or competitive considerations. And that remains my view for the original BN merger. My additional point was that failure of the BN merger to create the synergy of size gave the Union Pacific Railroad -- a much smaller company at that point -- a great deal of breathing room in the "merger race."

[ICLand]

dakotafred

Wow, what billowing clouds of electronic black ink. As usual with ICLand, though, you wonder if the purpose is enlightenment or distraction and obfuscation.

Well, you've been following me across a couple or more threads now apparently for the specific purpose of personally insulting me, trolling for responses, and then obfuscating about whatever the topic is at hand.

You have an opinion that attempts to justify events and conditions at a given point in time in history by a pre-arranged imposition on those events, of your opinion regarding outcomes and conditions 40 years later by a company that is not even remotely close in size and scope to the original BN, under economic conditions which are radically different, under a completely different regulatory scheme.

One of the useful aspects of merger proceedings was the requirement that merging companies specifically identify the proposed benefits and detriments if a proposed merger were approved. The ICC required these, under the watchful eye of the Justice Department which was tasked with supervising and analyzing the effect of mergers under anti-trust law, and the SEC required these for the purposes of full disclosure to shareholders since the "New Company," invariably referred to as Newco in the merger hearings, was in effect issuing a new prospectus for a new company -- which it would be if approved. These proposals would then undergo examination by SEC specialists who would examine the underlying assumptions to determine whether or not the promises to shareholders were realistic or, at the extreme, fraudulent.

So, by the time the record got through all the hearings and presentations and examinations and cross examinations, there was a thorough and detailed record of exactly what a merger was designed to achieve. Because, isn't that the point, to achieve something?

Merger specialists are in virtually unanimous agreement that, if a merger has benefits, those benefits must show up within the first three years. After five years, no study that I have ever reviewed was able to find specific merger benefits "showing up" for the first time, unless something really botched up at the outset. And so, detailed pro forma Balance Sheets, Income Statements, Cash Flow Statements as well as Operating Plans for the Newco are drafted that show specifically the purposes of a given merger, and these are generally projected out to five years, seven if someone is ambitious.

In turn, these pro forma projections are based upon probability analyses attempting to take into account "unknowns" in terms of forecasting, and so based upon (typically) Federal Reserve econometric forecasting, sometimes private forecasting, a range of probabilities will be projected which estimate risk for the purposes of assessing worst case scenarios, likely scenarios, and best case scenarios, and the probability of each. Because probability analysis at that level was not the everyday function of a railroad planning department, that task would often be farmed out to one of several investment banking firms that had specialized departments that did nothing but that kind of evaluation and risk analysis; partly because they were better at it, and partly to get their "name" as a reputable company, on the pro forma projections, as added credibility.

Opponents of a merger, the ICC's Bureau of Economic Research (later the Office of Rail Public Counsel), and the Department of Justice will often have similar, independent studies done.

So, the record is a clearly developed record, obtained by a clearly defined process, subject to extreme scrutiny as to what a merger is designed to achieve. That is to say, ultimately, the "opinion" about what a merger is supposed to achieve comes from the merging companies themselves and, if the merger is approved, accompanied by the approval stamps of the ICC, DOJ and SEC.

It is not a matter of opinion, then, as to whether a merger succeeded or failed. It is a matter of objective reference to what the companies themselves defined as success or failure.

There is not a single reference in the Northern Lines Merger proceedings to what anybody thought would be a nice outcome 40 years later. And this goes, again, to the previous comments about IRR, and, in this case, the fact that you can't predict out that far, and it would be a waste of time to try and do so. It would be beyond idiotic to attempt to premise a current proposal upon an outcome 40 years in the future in a business context. And it simply never happened.

The Burlington Northern Merger did not obtain any of its stated objectives. Its subsequent performance fell below the worst case probability analysis. Had it not been for an 1862 Land Grant, it is likely that the history of Western railroading would have changed considerably by 1977 when BN may very well otherwise have been compelled to enter bankruptcy.

Rather than trying to justify a railfan religion, the better and more useful question about the BN merger is to ask why the pro forma projections were so wrong.

As I attempted to point out, using some actual facts, I believe there were some serious misunderstandings regarding capacity models used at the time. I also think there was a considerable amount of horseplay afoot to maintain the stock valuations of the respective companies. As I pointed out on another thread, the joint engineering team that performed the system review in the Spring of 1970 came away somewhat shocked at conditions. Everybody thought the other guy was doing better than their own company and it was only when the curtain was fully opened to that comprehensive review was their a realization that "uh-oh, we've got a problem."

In hindsight, it is fairly clear in the published statistical record that tie replacements on the three major participants had been severely curtailed for a number of years. NP was the only transcon of the bunch doing heavy rail replacement. These can be looked up.

Similarly, so can the statistics regarding the costs of transportation (an ICC accounting category) of the various Western roads, and you see some odd anomalies that just don't fit the "narrative" and one of those compelling anomalies was the very high cost of transportation, per unit volume, of the Great Northern Railway, compared to the other Western roads. Somebody apparently recently did a study on that; and I got an email about it sometime ago. It was an eye-opener, a real "wow" moment.

It caused me to rethink the BN merger from a different perspective, not changing my opinion about the statistical outcome, but rather going to the reasons why the outcome may have been so much less than predicted, even negative. And I don't recall reading anything about during the Northern Lines merger proceeding..

It would make a terrific doctoral thesis for somebody to go back and re-evaluate the BN merger from the standpoint of what modern econometric models would show, based on the data, compared to the ones used then. But also, to explain why the GN was so atrociously costly to operate and why, then, was traffic consolidated to that line. And i know the answer that was given then, and it made sense to me and likely everybody else then, but it looks to me -- and I have not done the thesis and don't intend  at my age to do so -- that there was a premise problem to the whole enterprise. It didn't matter what they projected, a misunderstanding of a key premise dooms all projections based on it to failure.

Of course, this extended comment, offered as a courtesy to you as to my thinking on the topic, and which invariably for some reason always elicits a derogatory personal insult or two from you, I am sure will have the same result this time. However, this underscores an earlier observation that working with engineers always has been more productive for me because 1) they rely on facts not opinions, and 2) they separate religion from business.

 

[dakotafred]

You  describe a merger that was poorly implemented -- if he has the right of it -- in the northwest. Some bad choices made. Gee, we haven't seen that before or since. You still show no lasting damage except (in an earlier post) loss of jobs and capital investment that were going to go away anyway (see the Milwaukee Road).

The difference 40 years later is that BN salvaged the most useful of the GN and NP instead of a bankruptcy court simply pulling up the GN. (Again, if he has given us an accurate picture of GN's pre-merger condition.)

The assertion that parallel lines did not compete in the days of the I.C.C. is sheer bunkum. While they might have been constrained from competing on price of identical services, they can and did compete with new services and new products. That's why there was such excitement surrounding such as the Southern's Big John jumbo grain hopper.

The point is that, for one reason or another, there wasn't enough traffic anymore to justify three lines between the Twin Cities and Portland/Seattle.

The Milwaukee went away. The GN and NP were combined. Worked out fine. Not what a railfan would have ordered, perhaps, but at least useful railroading has persisted into the 21st century, which was in doubt for a while.

[ICLand]

dakotafred

The railroads had plenty of competition -- from trucks, barges, planes and cars as well as each other -- much of it underwritten or otherwise propped up by government. (There's some Marxism in action for you.) Given the circumstances and outlook of the day, would you seriously argue that the rails were not overbuilt for the traffic they could still command in the 1960s and '70s? Elimination of fighting among themselves for the scraps, thru merger of parallel lines, was one of the few options.

Fighting among themselves for what? Revenue? It was a regulated system.

Freight rates rose between 1970 and 1980 to the highest rates ever charged for railroad freight. Overall Railroad revenues in the 1970s reached all-time highs. Total industry revenues (adjusted) are still lower today than they were at the time of the passage of the Staggers Act.  How were they "fighting for scraps"? The problem was they couldn't fight for scraps or anything else for that matter. IT WAS REGULATED. So were trucks. And railroads and trucks were regulated in such fashion as to conform to the government's perception of the proper economic niche and maximum efficiency within certain weight, distance, and service categories. And it wasn't always wrong in that regard.

Now, since you've got this entire picture just about backwards, the effect of Staggers was to restore competition to the system. And THAT'S when you really saw railroads start to scramble over what had been their weakness all along: costs.

And that underscores the danger and damage of a regulated system or a monopoly: if the revenue is guaranteed, and the government is constantly intervening to "protect" collective bargaining contracts no matter how irrational or unproductive, there is little fundamental pressure to lower costs. It was easier to just either b**** and moan -- or apply for a rate increase.  And it was during that period of unprecedented rate hikes that railroads lost business and began to really lose money. They weren't fighting for scraps, they were pricing themselves out of market after market.

And that's a whole different game, and exactly the opposite of the circumstance you believe existed.

With a rate increase, you almost never had the threat of nationwide strikes, sticking rusty Management into engineer's seats, last minute Federal Court injunctions, or anonymous employees rolling expensive locomotive sets downhill unmanned. So, when in doubt: attack costs and suffer two or three years of union strife, or demand a rate increase? What do you think railroads usually did?

After Staggers, employees were reduced by 60%. That didn't have anything to do with Staggers, per se, but Staggers had a lot to do with the competitive pressure put on railroads to streamline costs. You just couldn't go to the ICC any more. Fuel efficiency has improved nearly 100%. For the first time, railroads really did have to fight "for scraps" ... and any other business that they cared to solicit. Indeed, compared to your view of railroading then, railroading really became competitive after 1980, and by the means that genuine competition compels: continuous efforts to cut costs at every margin.

But, deregulation had a similar effect on trucking. Costs were cut, fuel efficiency has increased substantially. 

Railroads had a 40% share of intercity ton-miles in 1970 and it kept declining. Railroads were losing market share because of one reason: price. See above: costs increasing to their highest levels historically during the 1970s. From 1860 to approximately 1930, railroad rates had virtually always declined. When that reversed, railroads began losing market share. Well, duh. When that reversed again after 1980 -- because of increased ability to actually fight over scraps -- railroad share began to increase again and is now approximately 43%.

"Merging of parallel lines," you say was one of the few options.  No, it was in an entirely different category: operating costs. That has very little to do with the theory of merger, or of merging parallel lines. Indeed, in the areas where railroads have gained their efficiencies almost entirely is in those areas were they benefit the most -- operating costs -- and where they needed to push those productivity increases hardest because of the need to offer lower rates than competing railroads.

Indeed, none other than the STB disagrees with your premise. Union Pacific can't be said to have historically had significant long haul competition along its central corridor: it did, in broadly competitive terms, but not directly. Now it does as a result of one of the largest grants of trackage rights, to BNSF, in the nation's history: for the explicit purpose to increase competition by creating competition in parallel corridors.

Finally, your concept doesn't withstand historic or economic scrutiny. The most heavily competitive corridors in 1970 were generally in the Midwest. Generally, they all made money even during times when their corporate owners, as a whole, were losing money hand-over-fist. Admittedly, cost accounting on these things is more art than science, but I would give the gentlemen making the respective studies on these matters within the companies more credibility on the topic than, say, you.

And the second part of that defense goes to the cost of running trains. It costs substantially more, per ton-mile of freight, to operate a railroad over a line running 30 trains per day than it does to operate a railroad over a line running 15 trains per day. That is due entirely to the cost of friction -- the costs imposed by speed, timing, crew and equipment cost, transit time, and facility wear due to system operation -- in a railroad system, which is high.

Unlike manufacturing models -- which unfortunately academics and government officials attempted to utilize as "how railroads should operate" -- railroads do not maximize efficiencies at 80% or 90% of capacity. Railroads optimize at a surprisingly low utilization -- around 20-25%.

And that's what happened at BN. Everyone thought that all the GN/NP traffic could consolidate on the old GN line and achieve high efficiencies. The problem was, NP had been increasing its market share of transcon traffic during the 1960s and had been investing heavily in new ties and heavy rail. GN, with lighter traffic, and which had been declining, had invested little in heavier rail.

With its then-level of traffic, about 10-14 trains a day, GN had a pretty good operation, but even then because of its grade and route characteristics, had the highest operating costs, per ton-mile, of any of the Western railroads, with one exception. And while this isn't in accord with the conventional wisdom, it is firmly established in the statistical record.

However, the thinking on that was that GN simply needed more traffic to bring its per-ton-mile costs down, and that consolidation of the heavier NP traffic would kill two birds with one stone: lower unit costs on the GN line, and eliminate the onerous costs of curvature and multiple 2.2% grades on the NP line. Of course, "the thinking," or what passed for it in those days, didn't grapple directly with the fact of the NP's operating costs, on a ton-mile basis, being significantly lower than GN's. The NP was the line with all of the operating handicaps, right? Why would the NP have lower per-mile operating costs? Nobody asked the question. Everyone believed a public relations alternative, put forth by experienced operating people.

A lot of conventional wisdoms fell apart during that merger implementation.

Well, to make a long story short, consolidation of parallel lines in that case caused the unit costs of transportation to increase, not decrease. MOW costs shot through the roof after more than doubling the traffic on a line which had almost no heavy rail in place, which had seen its tie renewal program cut in half during the thirteen years prior to the merger; and just as 100 ton cars were becoming more common in the US rail system.

Now, can you tell me a story about one that "worked"?

[ICLand]

dakotafred

No, the 1970 BN merger wasn't a magic bullet, and recovery didn't happen overnight. (The industry itself was another 20 years pulling out of the ditch.) But 40 years later, BNSF's rationalized northern transcon still has sufficient capacity for the traffic, with Stampede Pass, Montana Rail Link and some other options waiting in the wings if they're needed.

Somebody knew what they were doing in 1970.

This illuminates nicely the earlier comment about people, even in the rail industry, having no concept of IRR -- Internal rate of return. It is also an example of post hoc ergo propter hoc.

The BN merger of 1970 was not designed to paint a pretty picture 40 years later. It was designed to solve the problems of 1970.

The resulting record shows that did not happen.

[ICLand]

dakotafred

Somebody knew what they were doing in 1970.

Well, I guess you had to be there.

[dakotafred]

ICLand

dakotafred:

 

 

But wasn't either GN or NP going to go away in any case -- as the Milw did? In those days, elimination of "redundant" trackage was one of the things driving mergers: Get rid of that nuisance competitor that was responsible for both of you making a poor living.

 

Well, competition does that. That's why it promotes continuing efforts at efficiency.

Right?

Marxism offers you an alternative vision, I suppose, for those that have all this "competition is bad" ideology.

Mergers and Marxism, right.

The railroads had plenty of competition -- from trucks, barges, planes and cars as well as each other -- much of it underwritten or otherwise propped up by government. (There's some Marxism in action for you.) Given the circumstances and outlook of the day, would you seriously argue that the rails were not overbuilt for the traffic they could still command in the 1960s and '70s? Elimination of fighting among themselves for the scraps, thru merger of parallel lines, was one of the few options.

No, the 1970 BN merger wasn't a magic bullet, and recovery didn't happen overnight. (The industry itself was another 20 years pulling out of the ditch.) But 40 years later, BNSF's rationalized northern transcon still has sufficient capacity for the traffic, with Stampede Pass, Montana Rail Link and some other options waiting in the wings if they're needed.

Somebody knew what they were doing in 1970.

[carnej1]

schlimm

If you look over the timeline of when mergers were proposed, it looks like the UP purchased the SP after they failed to acquire the ATSF in a bidding war with BN. 

The Union Pacific (UP) started a bidding war with BN for control of the SF on October 5. 1994.
UP purchase and control of C&NW became effective May 1, 1995, formal merger occurred September 30, 1995. The UP gave up on the ATSF January 31, 1995, paving the way for the BN-ATSF merger September 22, 1995 .  Subsequently, the UP acquired the Southern Pacific (SP) in 1996.

Keep in mind that SP and ATSF did have a merger agreement back in the 80's and would have merged were it not for Federal regulators blocking the deal:

http://en.wikipedia.org/wiki/Santa_Fe-Southern_Pacific_merger

 

[Paul_D_North_Jr]

ICLand

  [snip; emphasis added - PDN]  Fred Frailey, in the February 1998 issue of Kiplinger describes "buying new locomotives by the hundreds," opening "big new truck-train terminals in Chicago, Los Angeles and Dallas-Fort Worth," and "adding track capacity across Oklahoma, Texas and New Mexico," as well as a new computer system.  

 

The underlined portion refers to the double-tracking of that segment of the Southern TransCon Route, which I should have remembered because that is the 'popular' understanding of the reason Krebs was removed as CEO of BNSF by the Wall Street types who wanted more of that Internal Rate of Return faster on those incremental investments (you know - like their selling sub-prime mortgage bond pools and default 'swaps' on the same, I suppose).

The rest seems like 'business as usual' for a modern Class I railroad. 

- Paul North. 

[bobwilcox]

At the time, this was the rumor floating between Rob's old friends at the Espee.

[bobwilcox]

At the time, this was the rumor floating between Rob's old friends at the Espee.

 

[Paul_D_North_Jr]

As the context above should have made clear, those were mentioned as mere examples to elucidate what might be the "costly projects" that you mentioned - nothing was said about them having anything to do with competence. 

But I misunderstood the scope of your reference to your former colleagues - which you've now clarified or restated - so your not identifying such projects is understandable. 

- Paul North.

[ICLand]

Paul_D_North_Jr

.... right now I can't think of or remember anything major that either railroad did in that time frame - no new classification yards or line relocations, purchases of fleets of cars or locos, other acquisitions, etc. -

Well, that's an interesting description of competence.

As I mentioned, my opinion is second hand from former colleagues that worked for him.

Fred Frailey, in the February 1998 issue of Kiplinger describes "buying new locomotives by the hundreds," opening "big new truck-train terminals in Chicago, Los Angeles and Dallas-Fort Worth," and "adding track capacity across Oklahoma, Texas and New Mexico," as well as a new computer system.

 

[nordique72]

ICLand

nordique72:

. Another caveat of the CNW was the "Fremont Connection"- which allowed UP-CNW runthroughs to bypass Omaha/Council Bluffs by running over the CNW's line via Blair, something the MILW and RI routes couldn't offer.

 

It was "there" but I don't recall that much traffic going that way. 

In the late 1960s the line was underutilized with only a couple trains a day out to Fremont- of course by comparison in the late 60s the CNW was running about 10-12 trains a day total on it's main line across Iowa.

When the CNW and UP realized the value of the connection- by the mid 1970s the traffic going via the Fremont Connection was quite a bit more-

WESTBOUND-

237 Wood Street (Chicago) to Fremont (UP)
Advance 239 Wood Street (Chicago) to Fremont (UP) "Falcon"

239 Wood Street (Chicago) to Fremont (UP)  "Falcon"
Advance 243 Wood Street (Chicago)  to Fremont (UP) "Falcon"

243 Wood Street (Chicago)  to Fremont (UP)  "Falcon"
245 Wood Street (Chicago)  to Fremont (UP) "Falcon"

247 Proviso to Fremont (UP) - "Pak Rak" Autos/TOFC
249 Proviso to Fremont (UP) - manifest/perishables
251 Proviso to Fremont (UP) - manifest

253 Proviso to Fremont (UP) - manifest

Eastbound

236 Fremont (UP) to Chicago - TOFC 
238 Fremont (UP) to Chicago - TOFC
242 Fremont (UP) to Wood Street (Chicago) - TOFC "Falcon"

244 Fremont (UP) to Wood Street (Chicago) - TOFC "Falcon"
248 Fremont (UP) to Wood Street (Chicago)
250 Fremont (UP) to Proviso - manifest & TOFC
252 Fremont (UP) to Proviso - manifest
256 Fremont (UP) to Beverly, IA - manifest

[Paul_D_North_Jr]

ICLand

  [snip; emphasis added - PDN]  I would have to go back and look, but my failing memory seems to offer that after Krebs came on board, BN's financial performance began to falter for exactly the same reasons that ATSF's had faltered under Krebs: costly projects, no sense of IRR. 

Wait a minute here - Krebs famously graduated from the Harvard School of Business, after Stanford.  How could he have done that if he had no sense of Internal Rate of Return ?  I couldn't have passed even my senior year Engineering Economics course without that and knowing how to apply it . . .  

And IRR wasn't new or rocket science even in the 1960's - my textbooks on it  had been written some years by the Bell Labs guys.  .  So Krebs must have known what it was - but perhaps he couldn't or wouldn't apply it, or was forced by circumstances to take acts that did not have a decent IRR. 

Can you provide some examples of those costly projects ?  The Powder River Basin line was largely built by then, and right now I can't think of or remember anything major that either railroad did in that time frame - no new classification yards or line relocations, purchases of fleets of cars or locos, other acquisitions, etc. - but maybe my memory is failing, too.

- Paul North.

[ICLand]

dakotafred

 

 

But wasn't either GN or NP going to go away in any case -- as the Milw did? In those days, elimination of "redundant" trackage was one of the things driving mergers: Get rid of that nuisance competitor that was responsible for both of you making a poor living.

Well, competition does that. That's why it promotes continuing efforts at efficiency.

Right?

Marxism offers you an alternative vision, I suppose, for those that have all this "competition is bad" ideology.

[diningcar]

ICLand:

Your mention of IRR (internal rate of return) was an elusive concept that few still understand.

However, today's BNSF, UP and I presume other Class 1's appear to have it. Since you appear to have it I would reqest that you offer a condenced explanation.

I have mentioned this concept twice before on other threads and RWM commented about it and a lack of understanding from those he presented it to..

 

 

 

[dakotafred]

ICLand

The BN merger illuminated the problematic nature of merging redundant lines: with two major transcontinental routes that more or less started at the same places and ended at the same places, one had to go, at a high sacrifice of investment, employment, and service, and of course that was the historic and venerable Northern Pacific Railway.

            UP/MILW would have presented much the same dilemma. Milwaukee and UP were big competitors for transcontinental traffic to and from the PNW, more so than the MILW and BN. UP was, in fact, the biggest beneficiary of the MILW withdrawal because of that.

            Now, Southern Pacific coveted that MILW mainline, but without a way of extracting it from the Granger burden, it passed. 

But wasn't either GN or NP going to go away in any case -- as the Milw did? In those days, elimination of "redundant" trackage was one of the things driving mergers: Get rid of that nuisance competitor that was responsible for both of you making a poor living.

S.P. going for Milw's PCE would have been different, representing a territorial expansion.

[ICLand]

Semper Vaporo

My remembrance is that ATSF was going under and Burlington Northern was stepping in to acquire it at a real bargain price... but Union Pacific started a bidding war and BN paid dearly to for it... much more than it initially was going to.  'Twernt no bargain by then.

Yes, ATSF had performed poorly under Kreb's management and fiery temper. Several of my friends worked for the man, and had little good to say about either his management skill or his personality. I would have to go back and look, but my failing memory seems to offer that after Krebs came on board, BN's financial performance began to falter for exactly the same reasons that ATSF's had faltered under Krebs: costly projects, no sense of IRR.

[ICLand]

Paul_D_North_Jr

But in my view, the next significant merger - BN +ATSF - did force and compel the UP + SP merger, as a matter of competitiveness and survival. 

The financial condition of the SP, as the paramount source of traffic for UP, was of great concern. And SP had become a somewhat less friendly connection for that traffic in recent times, for a variety of reasons relating to UP's position on rate divisions. But, it was deteriorating and entry in bankruptcy could have led to various alternatives. My view is that, without the BN/ATSF merger, UP would still have been inclined to move on the SP simply because circumstances internal to SP compelled it. UP equipment was suffering lengthening cycle times because of SP's condition, for instance, and this was having a direct financial impact on UP's financial performance and ability to deliver equipment.

UP's fate had always been tied historically to CP/SP and there was nothing to be gained by letting that relationship be left in the hands of a bankruptcy trustee.

 

[ICLand]

nordique72

. Another caveat of the CNW was the "Fremont Connection"- which allowed UP-CNW runthroughs to bypass Omaha/Council Bluffs by running over the CNW's line via Blair, something the MILW and RI routes couldn't offer.

It was "there" but I don't recall that much traffic going that way.

Later mergers of Western railroads occurred in the context of the ICC's mishandling of the 1960's merger plans. Everyone -- and I mean everyone -- had the idea that there needed to be a series of mergers particularly among certain Western railroads. This had begun in the 1950s when the CNW and MILW first talked merger. And that was a big one. As it fell through, it got everyone thinking because it would have changed traffic dynamics of the Midwest and West considerably. By 1964, negotiations had brought out the following plans: 1) MILW/CNW (again), 2) UP/RI, and 3) CBQ/NP/GN.  There were numerous others, involving some of these roads simultaneously, but these were the biggies. And each was, in some respect, a direct reaction to the others, in an effort to protect traffic origination, and to maintain the leverage of size. CNW stuck its fingers into the pie by also applying to get the Rock or parts of it, and opposed the Northern Lines merger as well.

UP was in the toughest position, strategically, because any merger would dilute its traditional strong earnings source: the long haul with low collection and distribution costs -- other railroads did 80% of that work for UP. It was the perfect "bridge" railroad. Merger with ANYONE would dilute that strength, and history has shown that that is exactly what happened. It was a little hard to explain to shareholders: "never again will your dividends be as strong and never again will we achieve 65% operating ratios, but this is for the good of the company."

MILW and CNW was an ideal partnership, and that had been recognized since the 1860s. It would have greatly strengthened the long haul of both roads by higher utilization of Milwaukee's excellent mainline out West, and permitted substantial consolidation of expensive and redundant facilities in the Midwest.

GN/NP/CBQ was, after MILW/CNW, perhaps the second longest railroad courtship, dating back to 1901 when JJ Hill lost his bid for control of the Milwaukee and had to take the Q instead. It was also perhaps the "most necessary" of proposed mergers. Corporate projections of future performance showed all three companies beginning to generate losses -- structural losses -- by 1972. MOW budgets had been slashed during the 60s to maintain the illusion of health, but tie replacements had dropped in half and rail replacements -- railroads had generally begun programs of upgrading of mainline rail to 132 lb in 1956 -- had practically ceased. The GN, for instance, had only 77 miles of 132 lb rail by 1970, whereas most Midwest roads, MILW, CNW and CBQ, had well over 1,000 miles installed on each of them, and NP had nearly 800 miles.

However, thanks to ICC dallying, the Rock Island fell apart, and CNW stock price took a tumble upsetting the carefully contrived valuation that underpinned the share trade enabling CNW's participation in the CNW/MILW merger.

Yet, everyone had agreed that a condition of any of the mergers was the successful achievement of all of the mergers on the table. Fortuitously, for UP and MILW, the only "successful" merger -- NP/GN/CBQ -- was very nearly a complete dud from their perspectives. UP lost very little traffic as a result of that merger, MILW gained considerable traffic on its Western line as a result of the merger, CNW increased its traffic share as the result of conditions imposed, and the leverage of size -- the BN was considerably larger than the UP, MILW, and CNW -- was mitigated entirely by the poor financial performance of the merged company for the next 15 years.

Indeed, the structural losses anticipated by corporate planners in the mid-1960s showed up nearly on schedule and the reason was clear: the structural reasons remained intact, the BN had 15% of US railway mileage, but only 8% of US railway revenues. It looked almost exactly like its Midwestern counterparts MILW, CNW, RI in that regard. UP had something like only 8% of US railway mileage, but cornered something like 10% of US railway revenues.

So, that whole era gave UP considerable breathing room at the same time that it spelled the doom of the Rock Island in a bungled bankruptcy. MILW entered into a similarly bungled bankruptcy, and CNW managed -- in the words of one colleague "the worst managed railroad with the best public relations department" -- to eek out its existence until a later consolidation. ICG should have been in bankruptcy, but had a rich father. The Q would have been bankrupt but for the BN merger, and had the BN not also acquired the Northern Pacific land grants in the merger, it too would have likely entered bankruptcy by 1977 or 1978. That left the Santa Fe and the Southern Pacific to ponder their fates and perhaps, in both cases, they moved too slowly.

The shakeout, in any case, was dramatic and forced the survivors in certain directions; choices were fewer, and led perhaps more or less inevitably to UP/CNW and perhaps less inevitably to BN/ATSF.

 

[Paul_D_North_Jr]

That connection was featured in a Trains article at the time, titled "Flight of the Falcon" if I recall correctly.  However, since we no longer have the on-line "Index to Magazines" available to us here, I can't readily provide a citation to the issue date and page, author, etc. 

- Paul North. 

[nordique72]

Dakguy201

 Upon the final bankruptcy of the Rock Island -- 1980 -- did the UP make an attempt to obtain the east/west portion of the Rock that became the Iowa Interstate?  For that matter, was any attempt made to acquire the Chicago/Savanna/Council Bluffs portion of the Milwaukee?

 

By the time the Rock went belly up, the Union Pacific was already heavily invested in the CNW as their primary Chicago routing partner (which came about just as the UP lost interest in the Rock merger in the early 70s). By the late 70s the CNW's route across Iowa was selected as the "preferred" 4R rehabilitation route as well, so by 1980 the CNW main line was in pretty good shape, whereas the Rock and especially the Milwaukee (whose Iowa Division main had been severed since 1978 between Tama and Atkins) were in very poor shape. Another caveat of the CNW was the "Fremont Connection"- which allowed UP-CNW runthroughs to bypass Omaha/Council Bluffs by running over the CNW's line via Blair, something the MILW and RI routes couldn't offer.

[ICLand]

PNWRMNM

  MILW served no important markets except Tacoma, Seattle and Spokane, all of which were already served by the NP, GN, and UP.

Interesting opinion. The UP "already" served Seattle ahead of the Milwaukee by what, seconds, minutes? The "Joint Line" into Seattle was shared. Milwaukee actually built it and maintained it. UP piggybacked on Milwaukee Road into Seattle. That means ... what?

Add Butte, historically, and Portland after 1971.SP was intrigued by that Portland connection, and was using the MILW transcon fairly heavily considering that it was shorthauling itself to do so.

The "other" major markets were  ... what? Ephrata? Davenport? Havre?

[PNWRMNM]

Murray

They should have allowed UP to acquire the entire Milwaukee Road system to the Pacific Northwest, thereby equalling the playing field with BN.

Murray,

The UP did far better than that, they got the few bits and pieces of the MILW in Washington State that had value, most importantly the MILW's half of the UP/MILW main between Tacoma and Seattle and the MILW's then new Fife Yard and terminal trackage in Tacoma.

The MILW in MT, ID, and WA was not an asset.  It had the most mountains, thus the highest operating cost.  The celebrated electrics were an indication of weakness, not strength.  MILW served no important markets except Tacoma, Seattle and Spokane, all of which were already served by the NP, GN, and UP.

The Pacific Extension was perhaps the greatest error in railroad investment in the history of the business.  It was the cause of three subsequent bankruptcies and the chronic weakness of the MILW in the 20th century.

Mac

[Los Angeles Rams Guy]

Was working for IAIS back in '89 when UP acquired an option to purchase IAIS.  An interesting situation although everybody knew it was in response to the Japonica Partners pursual of CNW at the time and UP was simply protecting all their options.  Actually, given that UP and CNW had been partners for DECADES in moving traffic from Chicago to the West Coast (and this would include the period when the "Cities" Streamliners ran on the MILW from 1955 to 1971) I'm surprised the merger between the two didn't take place in the late 70's or early 80's. 

[Dakguy201]

The UP spent the 1960's attempting the Rock Island merger, which they ultimately walked away from (1974?) due to the deteriorated condition of the Rock.  Upon the final bankruptcy of the Rock Island -- 1980 -- did the UP make an attempt to obtain the east/west portion of the Rock that became the Iowa Interstate?  For that matter, was any attempt made to acquire the Chicago/Savanna/Council Bluffs portion of the Milwaukee?

[Falcon48]

 

In response to the various notes speculating on the relationship between the BNSF and UP-CNW mergers, I was on the inside of CNW at the time of these transactions.  UP's run at ATSF was, of course, a response to the proposed BNSF merger.  The UP-CNW control transaction predated the BNSF merger proposal, and actually goes back to the attempted takeover of CNW by Japonica (Blackstone and UP were the "white knights" that defeated Japonica).  However, until the BNSF merger was announced, UP did not intend to absorb CNW.  The announcement of the BNSF merger, and UP's failed run at ATSF, were what changed UP's mind

[CShaveRR]

Back to the original question:  yes and no.

The fact that C&NW had come partially under UP control (when C&NW was fighting to stay out of the hands of Japonica Partners...I well remember getting phone calls at home from them asking for my proxy!) may have led to BN and ATSF merger plans.  When those were announced, UP made the bid to control ATSF, probably primarily to drive up the price.  However, UP did not acquire full ownership of C&NW until later.  And when UP management addressed C&NW stockholders, they said that the big reason they were merging the company was in response to the soon-to-be-consummated BNSF merger.

[ICLand]

Murray

They should have allowed UP to acquire the entire Milwaukee Road system to the Pacific Northwest, thereby equalling the playing field with BN.

The BN merger illuminated the problematic nature of merging redundant lines: with two major transcontinental routes that more or less started at the same places and ended at the same places, one had to go, at a high sacrifice of investment, employment, and service, and of course that was the historic and venerable Northern Pacific Railway.

UP/MILW would have presented much the same dilemma. Milwaukee and UP were big competitors for transcontinental traffic to and from the PNW, more so than the MILW and BN. UP was, in fact, the biggest beneficiary of the MILW withdrawal because of that.

Now, Southern Pacific coveted that MILW mainline, but without a way of extracting it from the Granger burden, it passed. 

[ICLand]

CNW 6000

 

Maybe this is an over-simplification of your statement...but "the only thing that can deal with an 800 lb gorilla is another 800 lb gorilla!" kind of makes sense to me.

Could you give an example (with numbers) of your first paragraph?  I think I get what you're saying but want to be sure.

Say, for instance, your railroad company has revenues of $1 Billion, and is well-managed. It earns 10% NROI, or $100 million. Physical plant depreciation represents $30 million annually. Simplifying for the sake of brevity that $100 million with depreciation added back in represents a positive cash flow to the company of $130 million.

Your competitor is a railroad company, twice as large in the key respects, and earns $2 Billion in revenues annually. It is managed by neanderthals, and they can only extract 7% per year, but also have depreciation of $60 million annually.  The NROI is $140 million, and when depreciation is added back in, they have a net positive cash flow of $200 million.

You are the better manager, but $200 million to spend beats $130 million every time.

So, in competitive situations, the poorly managed company, by sheer virtue of size, will have 50% greater ability to throw money to obtain markets and competitive advantages. And they will still only likely earn 7% compared to your 10%, and they will always outspend you, and eventually at each turn of the competitive screw, they will be chewing at your 10%, eroding it and corroding it over time, and over the broad perspective there's isn't a thing you can do about it no matter how brilliant your team is: they will outspend you; buying your high end markets out from under you simply because it helps them, hurts you, and they have more cash to do it with.

And over the long run, there is an ultimate resolution in favor of the larger competitor over the smaller competitor that has nothing to do with the strength of the market system but which rather represents its Achilles heel because there is nothing "market" about it: it is the inevitable result of size leverage of cash flow and can, as the example is designed to illuminate, reward the less efficient at the sacrifice of the better manager.

This was one of the outcomes which the Sherman Anti-trust Act was originally designed to allay. 

"The only thing that can deal with an 800 lb gorilla is another 800 lb gorilla!" sums it up nicely.

[Anonymous]

They should have allowed UP to acquire the entire Milwaukee Road system to the Pacific Northwest, thereby equalling the playing field with BN.

[CNW 6000]

ICLand

One financial aspect of merger "theory" and what drives successive mergers is purchasing power. And purchasing power in a competitive industry gets completely short-circuited by disparity in size between competitors.  As an example, a company that has a 10% rate of return can be doing pretty well, but if it has to compete with a company twice its size that is managed less efficiently at a 7% rate of return, the 7% company will ALWAYS have more cash available to meet competitive challenges than the better-managed, but smaller, 10% company.

Where the ability to make capital investment is a key to competitive advantage, company size is crucial relative to the competitors within the industry.

This is why railroad mergers, in general, have occurred in a very lock-step pattern over the past thirty years. Size is everything, and management skill secondary to the ultimate power of cash flow. Railroad managers have long understood that attempting to compete with significantly larger competitors is a fool's errand; and that the only way to "compete" is to achieve similar sizes. This is not an economy of scale argument, but a leverage of size argument that, in fact, is independent of economies of scale and often works against economies of scale in actual practice.

Maybe this is an over-simplification of your statement...but "the only thing that can deal with an 800 lb gorilla is another 800 lb gorilla!" kind of makes sense to me.

Could you give an example (with numbers) of your first paragraph?  I think I get what you're saying but want to be sure.

[ICLand]

One financial aspect of merger "theory" and what drives successive mergers is purchasing power. And purchasing power in a competitive industry gets completely short-circuited by disparity in size between competitors.  As an example, a company that has a 10% rate of return can be doing pretty well, but if it has to compete with a company twice its size that is managed less efficiently at a 7% rate of return, the 7% company will ALWAYS have more cash available to meet competitive challenges than the better-managed, but smaller, 10% company.

Where the ability to make capital investment is a key to competitive advantage, company size is crucial relative to the competitors within the industry.

This is why railroad mergers, in general, have occurred in a very lock-step pattern over the past thirty years. Size is everything, and management skill secondary to the ultimate power of cash flow. Railroad managers have long understood that attempting to compete with significantly larger competitors is a fool's errand; and that the only way to "compete" is to achieve similar sizes. This is not an economy of scale argument, but a leverage of size argument that, in fact, is independent of economies of scale and often works against economies of scale in actual practice.

[Semper Vaporo]

My rememberance is that ATSF was going under and Burlington Northern was stepping in to acqure it at a real bargain price... but Union Pacific started a bidding war and BN paid dearly to for it... much more than it initially was going to.  'Twernt no bargain by then.

People that owned ATSF stock were quite pleased.

U.P, then just seemed to be primed to buy something and Chicago and NorthWestern was there for the taking.  I remember some folk talking about it in kind of a "shocked" tone... "What?  Wait... How'd that happen?"

 

[ICLand]

PNWRMNM

I would note that BN did not have any railroad management depth.  My personal opinion is that the BN board bought the ATSF to get Rob Krebs first and foremost.  Again in my opinion, they got a good buy.

Mac

Don't you think they could have just hired Krebs for something less than $4.2 Billion?

It's not like he was an old-time Santa Fe loyalist. Given the results at ATSF, it was likely he was on his way out.

[The Butler]

schlimm

If you look over the timeline of when mergers were proposed, it looks like the UP purchased the SP after they failed to acquire the ATSF in a bidding war with BN. 

...snip

As a young C&NW fan, I felt UP swallowed C&NW because of the loss of the bidding war.  Sort of a, "See we can take over a railroad!" kind of action.

[billio]

I think UP entered into a bidding war for ATSF knowing that it had a snowball's chance in a live volcano of actually acheiving anything close to control of the Santa Fe, but knowing that BNSF faced a terrible problem with its shareholders and regulators if it did not at least match UP's offer -- fiduciary responsibilities and all that, you see -- so BNSF ended up paying more than it otherwise would for ATSF.  Smart business strategy by UP, making BN incur greater expense to obtain control of Santa Fe.

My two bits.

[Mr. Railman]

I do not believe that your statement is true but both mergers were most likely cause by one thing: the Powder River Basin. The PRB is the sole reason as to why the CP bought out the DM&E/IC&E

[henry6]

If you're not the first, all others that follow are reactionary.  Of course BN-ATSF had to marry once UP had its family totally populating the neighborhood.  Yeah, we sort of knew it was gonna come to that, but still didn't really matter that great until then.  You will find that most mergers are the result of others either in progression or response.

[PNWRMNM]

I would note that BN did not have any railroad management depth.  My personal opinion is that the BN board bought the ATSF to get Rob Krebs first and foremost.  Again in my opinion, they got a good buy.

Mac

[schlimm]

If you look over the timeline of when mergers were proposed, it looks like the UP purchased the SP after they failed to acquire the ATSF in a bidding war with BN. 

The Union Pacific (UP) started a bidding war with BN for control of the SF on October 5. 1994.
UP purchase and control of C&NW became effective May 1, 1995, formal merger occurred September 30, 1995. The UP gave up on the ATSF January 31, 1995, paving the way for the BN-ATSF merger September 22, 1995 .  Subsequently, the UP acquired the Southern Pacific (SP) in 1996.

[Paul_D_North_Jr]

That's the chronological sequence, but I too doubt that it was causative, any more than a rooster's crowing before dawn causes the sun to rise.  What C&NW provided new to the UP was mainly direct access to Chicago, and to the Powder River Basin coal fields.  Since both BN and ATSF each already had good routes into Chicago for many years, and BN had the PRB for almost 20 years - and adding ATSF didn't do much for that, either - I don't believe that "response" characterization or conclusion is correct.  UP +C&NW was a preparatory step, but not enough to immediately force or compel the BN +ATSF merger as a matter of competitiveness or survival.

But in my view, the next significant merger - BN +ATSF - did force and compel the UP + SP merger, as a matter of competitiveness and survival.  Keep in mind, too, at that time - 1996 - was also the NS vs. CSX battle for ConRail, so it's likely that the western roads wanted to secure their home territories so as to be prepared for however that was going to turn out.

- Paul North.