CN CEO Says Mergers No Longer Offer Efficiency Gains

A major reason often given for railroad mergers is that they result in efficiency gains.

Jean-Jacques Ruest

But that may no longer be the case Canadian National President and CEO Jean-Jacques Ruest said this week at the winter meeting of the Midwest Association of Rail Shippers in suburban Chicago.

Lower operating ratios and the widespread adoption by Class 1 railroads of the precision scheduled railroading operating model have negated gains that mergers once promised.

But Ruest didn’t rule out mergers because another benefit to them is a larger system.

“I think all of us like to have a bigger footprint, a bigger franchise,” he said.

One way to do that, Ruest said, is by buying or buying back routes that Class 1 railroads were once eager to sell to short line railroads.

He acknowledged that CN went through a phase of lopping off marginal route because the thinking at the time was that they required too much capital to maintain. But that thinking has changed.

If buying a route from a short line is not possible, Ruest said another option is to form a partnership with one as CN did with the Indiana Rail Road.

The INRD operates on a former branch line of the Illinois Central that connects to the former Chicago-New Orleans mainline of the ICRR now owned by CN.

He said a key to making those partnerships work is ensuring that Class I railroad standards will be in place throughout the short-line operations.

On another topic, Ruest expressed optimism that railroad freight volumes will begin rising again, saying they can by cyclical.

“Commodities goes up. Commodities goes down,” he said. “We’re probably in one of the tougher times right now.”

To get out of those tough times, Reust called for focusing on the consumer economy because it is growing.

He said that includes moving freight “door to door,” and getting closer to the “real freight buyer.”

Wabtec Acquires RELCO Locomotive

Pittsburgh-based Wabtec has acquired RELCO Locomotives for $29 million in cash.

In a news release Wabtec said all conditions for the acquisition are complete and the transaction will be accretive in year one.

In 2019 RELCO had projected sales of $50 million.

Wabtec said the acquisition will expand its freight services capabilities and capacity to support growth in the remanufacturing and repair business.

RELCO is a locomotive leasing, repair and rebuilding firm with a shop in Albia, Iowa.

CP CEO Sees Class 1 Mergers 10 Years Off

Mergers of North American Class 1 railroads are inevitable but unlikely to occur for another 10 years Canadian Pacific CEO Keith Creel predicted on Monday.

Speaking to the National Railroad Construction and Maintenance Association Conference, Creel said the adoption of the precision scheduled railroading operating model by most Class 1 railroads has delayed any movement toward consolidation.

Creel predicted mergers will come about as the industry responds to the need for more transportation.

“The need for transportation is going increase; it’s not going to decrease,” he said. “Eventually, to create more capacity — because nobody wants to build any more railroads; you can’t justify them and nobody wants you in their backyard — you’ve got to create capacity by eliminating handoffs and interchanges, and bigger, longer networks that are optimized.”

Had PSR not come along, Creel said, the move toward merger might happen five years from now.

But PSR created more capacity through scheduling and more efficient use of assets, he said.

Creel noted that regulatory hurdle to mergers are substantial and that any merger must be viewed as “pro-service and pro-competition” to win regulatory approval.

In defense of PSR, Creel described it as a long-term story.

“It’s about creating a well-run company that’s highly capital intensive that you can invest money back into, to sustain success long-term and to grow with,” Creel said.

GE Transportation, Wabtec to Merge

Wabtec has agreed to acquire GE Transportation in a transaction valued at $11.1 billion, which includes a $1.1 billion net tax benefit.

The merger will make GE Transportation a wholly-owned subsidiary of Wabtec, which is headquartered in Wilmerding, Pennsylvania.

Wabtec will become a Fortune 500 company with revenues of more than $8 billion. The combined company is expected to have 27,000 employees.

It is not clear what effect the merger will have on the Erie locomotive assembly plant where production of new locomotives is winding down as the facility transitions to an as-yet unspecified new role.

A spokesman for the union that represents workers at the facility in Lawrence Park expressed hope that Wabtec would reverse that decision.

GE Transportation also has engine plants in Grove City, Pennsylvania.

Wabtec, which got its start as Westinghouse Air Brake and is now formally known as Westinghouse Air Brake Technologies Corporation, will become a major player in the global railway equipment and services market with operations in more than 50 countries.

General Electric and Wabtec said in a statement on Monday that they expect synergies of around $250 million by 2022.

The merged company will operate as Wabtec and more than 23,000 locomotives in its global installed base and components on virtually all North American locomotives and freight cars.

GE is to receive at the closing of the deal $2.9 billion in cash for a 9.9 percent stake in the new company, while its shareholders will receive a 50.1 percent stake. Wabtec shareholders will hold the remaining 49.9 percent stake.

Wabtec Chairman Albert Neupaver will be the executive chairman of the merged company with Raymond Betler serving as president and CEO.

The company will have its headquarters in Wilmerding, which is a Pittsburgh suburb. GE Transportation is currently headquartered in Chicago.

GE Transportation President Rafael Santana will become president and CEO of Wabtec’s freight division, which will be based in Chicago.

Wabtec Chief Operating Officer Stephane Rambaud-Measson will become president and CEO of Wabtec’s transit segment, which is based in Paris.

GE will designate for nomination three independent board members.

The locomotive assembly business is prone to cyclical swings, but GE Transportation’s earnings before interest, taxes and depreciation is expected to grow from about $750 million this year to between $900 million and $1 billion in 2019.

The company has a backlog of about $18 billion including about 1,800 new locomotives and another 1,000 units to be rebuilt and upgraded.

In the past two quarters, GE Transportation has received orders worth $3.6 billion.

The merger is not expected to be completed until early 2019 and is subject to approval by the U.S. Securities and Exchange Commission.

GE Transportation spokeswoman Deia Campanelli said the GE Transportation name is expected to continue in some fashion, but those details have not been worked out.

Scott Slawson, president of Local 506 of the United Electrical, Radio and Machines Workers of America, which represents about 1,500 employees at the GE Transportation plant in Erie, told the Erie Times-News that there remain many matters for the union to work through between the time the deal closes and when the union’s contract expires in June 2019.

“If Wabtec is going to be a new employer to us, there are a lot of benefits to employees that we currently have with GE,” he said. “We have to bargain those things away from GE and make sure everyone gets what is in the contract. There is never anything easy. It means a lot of work. You have to be on your toes.”

However, Slawson said he is trying to see the merger as a positive. “At this point we have no reason to look at this any differently.”

GE Transportation said in summer 2017 that it planned to phase out production of new locomotives in Erie by the end of 2018.

The company has a newer and non-union assembly plant in Fort Worth, Texas, that is expected to continue building new locomotives.

“I think a fresh set of eyes might look at things differently,” Slawson said. “Mistakes are made. Hopefully our new employer is willing to listen.”

Slawson told Trains magazine that perhaps a Pennsylvania-based company might be willing to return some work to the Erie plant.

Raymond E. Grabowski, the president of the Lake Shore Historical Society in North East, Pennsylvania, said his group’s museum might be able to incorporate into its exhibits the technological advances made by Wabtec.

“One day, we hope we can look back and tell future generations that these too were proudly developed and made in Erie.,” he told Trains.