Canadian National Railway Co. is eyeing smaller takeover targets to improve its network, but does not believe U.S. regulators would be open to large mergers in the North American rail industry.
Major freight haulers in Canada and the United States are in the process of restoring service levels after a winter marked by rail congestion, shipper complaints and scoldings from governments.
Ghislain Houle, chief financial officer of CN, said it would be hard for railways to overcome shipper objections and make the case any merger meets the requirement of the U.S. Surface Transportation Board (STB) that a takeover must enhance competition among the railways.
“Imagine now you are enhancing competition by removing one railroad. I wouldn’t want to be the lawyer having to defend that case,” Mr. Houle said at an investors’ conference in Boston on Tuesday. “I know some of my colleagues at other railroads don’t agree with me, [but] I don’t think the environment is conducive for Class 1 mergers.”
Without elaborating, he said the smaller rail companies CN is interested in are not on the market. But if a rival touches off a wave of consolidation among big railways, Mr. Houle said CN is “well-positioned to play.”
The STB imposed the service enhancement rule – to date untested – after it blocked the merger of CN and Burlington Northern Santa Fe in 2000. That failed attempt followed several years of mergers that slashed the number of major North American rail carriers to seven from more than 30.
Calgary-based Canadian Pacific Railway Ltd., between 2014 and 2016, tried and failed to merge with either of the two big railways in the Eastern United States, CSX Corp. and Norfolk Southern Corp. CP’s then-chief executive officer Hunter Harrison said bigger railways would reduce rail congestion by removing choke points and be better able to handle a rising volume of freight, an argument echoed more recently by his successor, Keith Creel. Customer groups and some railways actively opposed the plans, saying mergers would further concentrate rail market control.
This past winter, rail customers in a range of industries complained that service from all carriers has been marked by late deliveries and a rail car shortage that has reduced sales and driven up their costs.
Rail companies blamed a harsh winter and an unexpected surge in freight. CN apologized to customers, announced the departure of its chief executive officer and said it would improve its Western Canadian network while adding hundreds of locomotives and a net 1,250 conductors.