KAUFMAN 2

KAUFMAN 2

Lawrence H Kaufman - 1, 2 Proving the adage that there are no permanent friends, there are no permanent enemies, only permanent interests, the four-railroad coalition has shifted.

UP continues to oppose more rail mergers. Its position is consistent and makes good sense from its perspective. As the largest railroad in North America, it is unlikely that UP would be able to take the initiative and start the next merger round.For 20 years, UP has responded to other railroads' merger proposals and argued successfully before regulators that it only wants the right to compete against rivals that are using mergers to seize competitive advantage. The argument worked in the UP-Missouri Pacific- Western Pacific case; it worked in the Chicago & North Western acquisition, and it worked in the Southern Pacific case.

UP is in great shape. Its franchise is virtually impregnable, particularly the chemical traffic from the Texas Gulf Coast, and the status quo serves it just fine. If it were to seek a merger partner, it most likely would be with one of the two eastern systems, and it interchanges nearly equal amounts of traffic with each, making a strategic merger of little value to it.

For the other one-time allies, however, the situation is considerably different. Mergers may not look as dreadful to them today as the BNSF/CN proposal did a year ago.

Canadian Pacific is being spun off from its corporate parent Canadian Pacific Ltd. and may want to keep as many options open as possible.

Norfolk Southern and CSX continue to struggle financially with the aftermath of their joint $10 billion purchase of Conrail and the ensuing service problems resulting from the dismemberment and division of that railroad. A transcontinental merger with a financially stronger carrier might be the solution to otherwise intractable problems.

Railroads don't believe the STB should be forcing them to demonstrate that a merger proposal will enhance competition. They want the agency to retain its current merger standard that public benefits outweigh perceived costs, and that mergers continue to be judged on a case-by-case basis.

The STB hearing gave shippers an opportunity to reiterate their calls for rules that would force railroads to enhance, rather than merely preserve, existing competition. The draft rules say it will do that, so we had the unusual sight of shippers applauding the STB.

Shippers complain that past mergers were predicated only on making the companies stronger and more competitive with other modes and that perhaps that might provide some benefits to customers. They want merging railroads to demonstrate benefits to their customers, something not a single shipper must do when they engage in their own mergers and acquisitions.

Here, I am reminded once again of the aphorism: there are a lot of socialists out there wearing capitalist suits.