Few are the marriages made in heaven. But the Norfolk and Western and Southern Railways, perhaps the two strongest in the nation, are primping for what many believe will be a divinely inspired union. The two have posted their banns with the Interstate Commerce Commission and nearly all opposition to their proposed merger has melted away.
But for the unlikely event that the ICC disapproves the combination, it appears that the two roads will join track by early summer, operating under a new umbrella company, the Norfolk Southern Corp.
The Norfolk Southern will link in one giant rail system the industrial Midwest and the South. With 16,151 miles of track, according to statistics supplied by the Association of American Railroads, Norfolk Southern will be the fourth-biggest railroad in the country (although it would fall back to fifth if the combination of the Union Pacific and the Missouri Pacific and Western Pacific is approved).
The N&W already is at work improving the tracks between Fort Wayne and Muncie, Ind., to give shippers direct service from Chicago and Detroit via Cincinnati to Southern's markets such as Atlanta and New Orleans.
But the merger cannot come too soon to suit the two top executives, Robert Claytor at N&W and Harold Hall at Southern. Like all railroads, the Southern and the N&W have been hit hard by the recession. Carloadings of merchandise from auto parts to chemicals are falling.
But more than the business cycle concerns Hall and Claytor. It is an earlier rail merger. Southern's long-time competitor, the Family Lines, and N&W's major foe, the Chessie System, merged as the CSX Corp. in November 1980. CSX, with its 26,600 miles of track, already links the Midwest with the South. CSX's ability to provide direct service between the two areas, coupled with some competitive steps it has taken, has cut into the business of both the N&W and Southern.
Hall and Claytor say they can't quantify the lost business, but analysts say it runs into the tens of millions of dollars. Southern is a bigger victim than N&W because more N&W business is concentrated in coal, where most mines are captives of the trains that serve them. But Claytor said that N&W has lost virtually all its automobile business from Detroit to Jacksonville, Fla., a route CSX can serve directly but N&W and Southern cannot until the merger is approved.
"There will be further deterioration until we get the two roads together," says Southern's Hall. ot only can the CSX provide direct service to many points that N&W and Southern cannot yet reach, but by keeping rail cars on its own system, CSX more easily can cut rates than can two railroads that must "share" the fare for a shipment that originates with one line but is delivered by another.
Shippers like to keep their freight on the same railroad from pickup to delivery, if they can.
Each time a rail car changes railroads (and, depending on routes, sometimes one or more times as it traverses the track of the same railroad), it must be switched from one train to another. Although in the last decade railroads have greatly improved switching facilities, each time a shipment changes trains time is lost and the possibility of a mistake occurs.
"It's also easier for a shipper to deal with one railroad rather than two," notes one industry analyst. "The N&W salesman can go to a shipper in Chicago and say, 'We'll carry it to Cincinnati, then hand it off to that fine Southern which will get your shipment to Atlanta in great shape.' That just doesn't sound as good as the CSX guy who can promise the shipment will be on the same road from start to finish."
The CSX says it is grabbing business from N&W and Southern, but won't say how much--if it knows. But the company has said that one of the benefits of the merger was a pickup in traffic of $30 million last year. Presumably much of that was traffic that otherwise would have gone via the Southern or the Norfolk and Western. The CSX continues to pick up new business and will until the Norfolk Southern becomes a reality.
"We're going to get that business back and some more," after the merger, Southern's Hall promised in an interview.
"The first way we'll get it back is service," vowed N&W's Claytor. "When the two of us come together we'll have more incentive to work together" on hauls where now one of the carriers has little interest because of the small amount of revenues it would receive for its portion of the run.
Claytor seemed to rule out a rate war with CSX, saying the Norfolk Southern would go after business only if it is profitable. But he acknowledged that a merged railroad would be able "to take rate action that probably neither of us could afford to take" individually.
Nonetheless, CSX will have at least a 19-month head start on the Norfolk Southern, a lead CSX is counting on being able to hold.
But analysts bet that Norfolk Southern will make good on its promise. "You're dealing at Norfolk Southern with superior railraod management," says Charlotte Walker, who follows railroads for the brokerage firm L. F. Rothschild, Unterberg Towbin. "CSX is very vulnerable to a Norfolk and Western-Southern merger."
She called CSX a well-run road with a reputation for good service that is beginning to show some improvements as a result of its merger.
"But Southern is considered high-quality too," she adds.
In addition, N&W and Southern are the two most profitable railroads in the country. A merger will produce a formidable opponent for CSX. In 1981 CSX earned $367.7 million on revenues of $5.4 billion. Taken together, Norfolk and Western and Southern earned $503 million on revenues of $3.7 billion.
Both systems are blessed with huge coal deposits (CSX is the biggest coal hauler in the country, Norfolk Southern would be second) that will provide a continuing cushion to earnings, especially with rising foreign demand for U.S. coal.
Even if the Norfolk Southern recoups lost traffic, the CSX will survive, although at perhaps a less profitable level than today, analysts say.
The decision to merge the Norfolk and Western and the Southern was at least in part inspired by the Chessie-Seaboard Coast (or Family Lines) consolidation, Claytor said. In 1979, talks between the Southern and N&W foundered after seven months, only to be revived in 1980 following the agreement to form the CSX Corp.
But Claytor said the merger makes sense in any event. The Southern and the N&W connect at many major points such as Cincinnati and St. Louis and at towns fewer folks have heard of, such as Norton and Altavista, Va.
Such "end-to-end" mergers are the current wave in the rail industry. Eventually, analysts foresee a few giant systems that link not only North and South, but East and West as well. Already, the rail industry has narrowed to about a half-dozen big systems, although there are smaller systems still. The rail industry, which appeared to be in financial danger a few years ago, now appears sounder than the airline industry.
It is the end-to-end link-ups that enable the railroads to construct longer runs and eliminate many costly maneuvers to hold onto shipments as long as possible.
For example, much of Southern's coal business is concentrated in the southwest tip of Virginia near Norton. Rather than hand off the coal to N&W there, the Southern hauls it by a rather circuitous route through North Carolina to Altavista, where the N&W carries it to its export facilities in Hampton Roads. The Southern's motivation is clear: the longer a railroad can keep the shipment on its own tracks, the bigger the portion of the fare it can keep. After the merger, Southern can hand over its coal at Norton and cut about 200 miles off the journey to port. That not only saves fuel, but gets the coal cars back sooner for new business.
In testimony to the ICC, the two roads estimated they could have handled combined Norfolk Southern business in 1979 with 1,985 fewer cars that had a replacement value of $75.7 million.
The two railroads also will reap cost savings from the direct routes from the Midwest to the South. Shippers are happier, and switching costs railroads money. They will share maintenance facilities, too. N&W will build cars and repair locomotives that the Southern now handles through outside contractors, and Southern will provide welded rail and other products N&W now gets from others.
N&W chief Claytor, whose brother W. Graham Claytor Jr. headed the Southern until he joined the Carter administration, said both roads are aware of the potential difficulties of merging two strong operations and will move slowly to avoid logistical and morale problems.
The marketing teams of both railroads, the salesmen, immediately will be combined into one Norfolk Southern office under the direction of headquarters.
The two big rail systems will be run as separate entities, however. "We're trying to form a partnership rather than set up competitive managements," Claytor said. The immediate benefit of the merger will be the "coordination and consolidation of sales. But you don't have to do that by destroying the heritage both railroads have built."
Unless the sales forces are combined under the Norfolk Southern banner, Claytor said, a marketing officer would be likely to have a subtle bias toward the road he or she works for, even though the profits of each will be consolidated. A salesman who, through habit or unconcious predisposition, routes traffic to keep it longer on either the N&W or the Southern track when more efficient routes exist would thwart some of the cost-saving and service-enhancing aspects of the merger, he explained. That seems to be a subtle dig at CSX, which has maintained separate marketing staffs at the Chessie and Seaboard Coast Lines.
Slowly, however, the Norfolk Southern will increase the coordination of the two big rail systems by linking communications facilities (Southern has one of the largest private microwave communications systems in the country), sharing maintenance and repair yards, and merging terminal and classification operations (where boxcars are switched or unloaded). N&W maintenance locomotives often idled during the winter because of the severe weather on much of N&W's system can be moved south rather than go into hibernation.
Whenever the merger occurs, be it late spring or early summer, the Norfolk Southern will face not only the steady competition of the CSX and the recession (which administration economists hope will be nearly over by then), but a heady battle with Conrail, the government-owned freight railroad formed from the Penn Central and several other bankrupt Northeast railroads.
Conrail, which moved into the black in 1981, has been working hard to get and keep business that it can ship directly from point-to-point on its own lines. So has CSX.
Under the 1980 Staggers Act, railroads have increased ability to take steps to get business that before it had to share with other railroads. The CSX, for example, no longer hauls N&W piggyback traffic to Baltimore from its Connellsville, Pa., interchange. As a result, a piggyback shipper in Chicago doesn't send his trucks to Baltimore via the N&W and the CSX, but uses the CSX alone. (Piggyback traffic, an increasingly popular mode of shipping, puts loaded trucks on a train. The trucks are unloaded at the destination and driven to the delivery points.)
Similarly, Conrail virtually has closed the Chicago-New York City market to N&W. Claytor said N&W used to ship to Buffalo, then hand off the freight cars to Conrail. But Conrail, which serves Chicago directly from New York, no longer handles N&W traffic that originates at points Conrail serves.
Claytor, who has said railroads should be in the total transportation business, held open the possibility that N&W (or the combined Norfolk Southern)) might try to penetrate some Conrail areas by truck. The ICC, however, still has restrictions on how railroads can get into the trucking or barge business.
N&W already has taken one step toward becoming a "total" transportation company by purchasing a 20 percent stake in Piedmont Airlines. The company is holding the Piedmont stock as an investment, but Claytor said N&W is keeping its options open.
The government eventually wants to sell Conrail. Presumably both CSX and Norfolk Southern would be bidders for parts of Conrail when the system is put on the block, probably in 1984 or 1985.
Although Norfolk Southern faces increased competition, the outlook for the combined system is bright.
The two roads probably are the most efficient in the industry. They have the lowest costs in the business. Southern's Hall boasts that 60 percent of the line's maintenance expenditures are for materials and 40 percent for labor. At many other roads it is the reverse, he said.
Southern, and to a lesser extent N&W, have been innovators in an industry long characterized by stodginess. Southern virtually introduced computers to railroading and its communications system is unsurpassed. N&W, too, has relatively low costs.
Not all the advantages can be credited to management, as officials of both lines freely admit. Southern, put together by financier J.P. Morgan from a host of bankrupt Confederate railroads, has never had the excess trackage that many of its competitors had. N&W's coal operations are strategically located. The trains run downhill to the coast with their loads, then run empty back to the mines. The process helps N&W's fuel bills immensely.
The two companies are not only profitable, but comfortably flush with cash they can invest or use as a cushion in the unlikely event of a rate war.
Even in a severe recession year that was punctuated by a 72-day coal strike and severe inroads by CSX and others, both Southern and Norfolk and Western had record revenues and profits in 1981 and held on to their positions as the industry's most efficient operators.
"That should tell you something about their future," said Rothschild's Walker.