Get ready for SuperRail.
Over the next decade, a combination of mergers driven by intense competition between trucks and railroads will result in a few--probably three--super railroads. Dozens of small branch lines, operated by private owners or state governments, will provide feeder service.
Railroad experts in government, the industry and the financial world are in unusual agreement on that scenario, although most of them would discuss the matter only if they were not identified.
There is also substantial uneasiness--particularly among coal and grain shippers and their states as to whether deregulation of transportation will go too far and leave some sections of the country and those "captive" rail shippers at the mercy of a predatory monopoly.
Just who will own what after the great shuffle of the next few years is anybody's guess; there are a multitude of possibilities.
"What we don't know is who's going to move first," one railroad executive said. "But sometime in the next two or three years, one of the Big Seven is going to try and break out of its territory , and then it's going to get very interesting."
The Big Seven is a reference to the major railroads remaining. There are now three big eastern roads: the Norfolk Southern (a merger of the Norfolk & Western and the Southern); the CSX Corp. (a merger of the Chessie System and the Seaboard System), and Conrail, the federally owned remnants of the Penn Central and six other northeastern lines.
There are four big western roads: the Burlington Northern (which includes the old Frisco); the recently merged Union Pacific-Missouri Pacific, commonly called PacRail, the Southern Pacific, and the Atchison Topeka & Santa Fe.
In 1981, the last full year for which industrywide figures are available, the Big Seven carried 85 percent of the total revenue ton miles (a ton of freight carried one mile) carried by the 22 largest U.S. railroads.
There are also several lesser roads in the Midwest and parts of those could become important links if eastern and western roads merge and improve their connections at such junctions as Chicago, St. Louis and Kansas City.
If you want to play the merger game yourself, start by ruling out two combinations, because they would doubtless be found anticompetitive. PacRail and the Burlington Northern share much of the same territory in the Midwest and West; the Norfolk Southern and the CSX Corp. overlap throughout the Southeast and Midwest.
Anything else is possible. There is even a possibility the game could start right away because the federal government is trying to sell Conrail. The only known bid is from Conrail employes, and most observers think that will be the case for the next year or two because Conrail's one-year record of profitability is too short to be called a trend.
"As long as we remain independent, then the national status quo is preserved," L. Stanley Crane, Conrail's chairman and the former president of the Southern, said in a recent interview. "But if someone comes in and tries to buy the railroad, there's going to be one hell of a dog fight, I expect. And the reason I think that's going to occur is because of the fact that, whoever acquires Conrail is going to have a superior competitive position to the others."
Conrail still controls access to the old industrial Northeast, including New York and Philadelphia, and still has the best routes between New York and Chicago and St. Louis. Despite the nation's southern migration, a lot of freight has to move over Conrail's tracks.
Therefore, parts of Conrail would be highly attractive for both southern and western railroads. If it were possible to buy parts of Conrail, as some have advocated, the dog fight would already be under way. But right now, Conrail is meeting the financial goals Congress has said it must meet if it is to be held for sale in one piece.
The Norfolk Southern created a bit of a stir in February when it announced that it had acquired 5.01 percent of the stock in Santa Fe Industries Inc., which owns the Santa Fe. In a subsequent filing with the Securities and Exchange Commission, the Norfolk Southern said it has "no present intention to seek to acquire control" of Santa Fe Industries.
Nonetheless, it is widely assumed that Norfolk Southern did not make that western move just for fun, although "the map doesn't work worth a damn" on a merged Norfolk Southern-Santa Fe system, according to one railroad specialist.
The Santa Fe and the Southern Pacific are the smallest members of the Big Seven. They held extensive merger discussions themselves, but those talks have terminated.
Most industry analysts interviewed think one of those railroads is going to be the odd man out in the merger game, with the other road establishing an eastern link and forcing PacRail and the Burlington Northern to do the same.
Santa Fe is regarded as being in a slightly stronger position to survive, largely because it dominates the market between Chicago and both Los Angeles and San Francisco.
But the Southern Pacific is selling off its Sprint communications subsidiary and will have a lot of cash.
The reason for all this speculation is not just an uncontrollable urge on the part of railroads to merge; it is the way the business of ground freight transportation has changed in the era of deregulation.
Over the past four decades, truckers have taken advantage of the interstate highway network and the flexibility of being able to go anywhere without first laying track to gain substantially on the railroads. Trucks carried only 10 percent of the intercity freight in 1940, but 22.5 percent in 1980. Railroads dropped from 61 percent to 38 percent.
The railroads have started to fight back. They can now change freight rates almost at will without having to go through a laborious hearing at the Interstate Commerce Commission. They are matching or beating truck rates overnight and pouring millions of dollars into building updated "piggyback" facilities so they can load truck trailers on flatcars and take the long-haul business away from the trucker.
To be most effective, the railroads have to control a shipment from origin to destination. A single-line shipment does not have to pass through a series of switching yards, for example. A shipment moved over two or more lines usually goes through at least one extra switching yard for each railroad, and each trip through a yard costs time--usually several hours. Eliminate yards and you eliminate the trucker's time advantage.
"If I were a railroad executive," a government expert said, "I would call my marketing people together and ask them, "Where does our traffic go? Then I would look at the map and try to buy the track."
Joint-line shipments, which move over two or more railroads, have another problem in the deregulated era: at least two railroads have to talk to each other to establish the freight rate, because the old universal rate schedules on point-to-point shipments have been knocked in a cocked hat.
But if two railroads talk to each other in an unregulated atmosphere and without the protection of antitrust immunity, their attorneys get very nervous about possible Justice Department intervention. The easiest way to avoid antitrust problems is to own the track.
Ten years ago, 66 percent of the revenue tons had to travel on more than one railroad; now, with fewer railroads, only 37 percent of the tons travel on more than on railroad to get where they are going. Nonetheless, joint-line shipments still account for 60 percent of revenues.
A big problem for railroads is to persuade Congress that, as these mergers continue, competition will not suffer and essential service will remain available at reasonable cost.
They argue that their real competition comes from the truckers. History tends to support that view and the ICC has cited it in several recent decisions. Further, truckers recently have won major productivity improvements with federal law now requiring states to accept on their highways double trailers and wider loads.
Still at issue is the captive shipper question. There is great nervousness on Capitol Hill about two recent ICC rulings that would have been unheard of five years ago: total deregulation of rates for export coal and boxcar shipments.
If the railroads are able to retain those victories after administrative and court tests, it will be interesting to see if they can both merge and restrain themselves.
If they cannot, it would be the ultimate irony. It was the predatory monopoly railroad that brought governmental regulation of transportation to this nation with the creation of the Interstate Commerce Commission in 1887.