SHIPPERS FEAR DEAL-MAKING CLOUT TO SUFFER BUT MANY SEE EFFICIENCY GAINS

SHIPPERS FEAR DEAL-MAKING CLOUT TO SUFFER BUT MANY SEE EFFICIENCY GAINS

Having had time to fully digest the news of the proposed Union Pacific- Southern Pacific rail merger, securities analysts are finding the prospects much easier to swallow than the people who actually use the railroads.

While their levels of enthusiasm differ, shippers and analysts agree that the $5.4 billion deal announced last month raises competitive issues that will generate extensive negotiations with competitors, railroads and customers.Mike Lloyd, an analyst at Merrill Lynch, credited UP for seeing the benefit of trying to work out issues up front with interested parties.

"There is enormous benefit for getting this done quickly," he said. "If they have to move more aggressively, that's to their benefit. Imagine the loss of value of the merger if the negotiations went on for a year or two."

Based on comments from a sampling of shippers, UP's deal-making ability will be tested severely before a scheduled Dec. 1 merger application filing.

Concerned about the loss of competitive rates, Phillips 66 Co., the Bartlesville, Okla., oil and gas conglomerate, filed a verified statement at the ICC requesting that action be taken to preserve reasonable freight rates, said Bill Bayless, the company's regional transportation supervisor.

Other shippers rue the loss of competition, believing they benefit only when there are two or more carriers to play against each other.

Not everyone agrees that pitting one carrier against another in a rate- reduction attempt is a positive situation for shippers.

"We don't favor beating up on the carriers. That only gives you a short- term gain," said Robert B. Howle, director of distribution, supply and management services at Hercules Inc. in Wilmington, Del.

Instead, Mr. Howle preferred to look on the bright side, saying rail mergers deliver maximum benefits when they lead to improved efficiencies and lower costs, something he hopes will be realized from this marriage.

Other shippers, notably utilities, surprisingly seemed unworried. Neither the UP-SP merger nor the Burlingon Northern-Santa Fe marriage will greatly impact Oklahoma Gas & Electric Co. because the Oklahoma City utility has long- term contracts with both UP and Santa Fe, Andy T. Knapp, coordinator of traffic services.

Janie Mitcham, director of the coal and lignite fuel acquisition and administration department at Houston Lighting & Power Co. in Houston, whose coal originates in the Powder River Basin, also said neither merger will affact her company.

Scott Flower, an analyst at Paine Webber, said "SP has some wonderful, best-of-breed, routes. Shippers see the opportunity of money being spent and service being upgraded there. On the other hand, they want to make sure there is enough competitive access and capability to make sure they have options. There is that definite tension in the marketplace."

Service could be a bright spot.

More than one shipper expressed optimism that UP's better management and deep pockets will translate into improved service on the SP and eventually over the entire merged system.

Complaints about poor service, particularly from SP shippers, were echoed by traffic manager after traffic manager.

Charles Middleton, western transportation manager at Rhone-Poulenc Basic Chemicals Co. in San Francisco, told of difficulties routing railcars from a plant in Portland, Ore., on the SP.

"UP performs the switching for us into Peninsula Terminal, but we lose about 48 hours with the SP giving the cars to the UP which are taken to two yards."

After the merger, Mr. Middleton said he hopes SP will be able to take railcars directly in Portland's Peninsula Terminal, cutting transit time. He said he's also hopeful that rail service will improve at two SP-served plants in Dominguez and Martinez, Calif.

Analysts, such as Tony Hatch of NatWest Securities, believe intermodal will be a key area to watch because the UP-SP deal reduces the number of major intermodal players from three to two.

"You are eliminating the lower rate carrier (SP)," he said. "Shippers do not necessarily agree on that as a positive thing."