FRA to Scrutinize “Significant Safety Hurdles” from Major Railroad Mergers

Move could place another obstacle in way of Canadian Pacific’s uphill effort to combine with Norfolk Southern

Updated Jan. 15, 2016 1:33 p.m. ET

Canadian Pacific Railway Ltd. faces an additional obstacle in its uphill effort to combine with Norfolk Southern Corp., as federal regulators are concerned that mergers of major freight railroads can undermine safety.

The Federal Railroad Administration, which regulates safety for the U.S. industry, expects to scrutinize the “significant safety hurdles” that would result from merging any of the nation’s major railroads, the head of the agency told The Wall Street Journal.

“Combining large rail systems, rule books, workforces, and safety cultures can lead to safety vulnerabilities and deficiencies,” Federal Railroad Administrator Sarah Feinberg
said. “It’s our job to insure that safety is not only not compromised in any potential merger, but prioritized.”

Challenges include combining safety cultures of two different organizations, including determining which company’s safety rules and protocols will take precedence and how to
restructure a combined workforce to maintain the same level of communication and protection each had individually.

The FRA isn’t empowered to block railroad mergers, which require approval by another federal body, the Surface Transportation Board. It is, however, granted power by that
body to work with railroads on a “safety integration plan” to ensure safe operations in the case of a merger under largely untested rules put in place in 2001.

It’s the latest wrinkle in CP’s roughly $30 billion merger proposal, made public in November, which has been rebuffed by Norfolk Southern as “grossly inadequate.” CP has said its next steps may include launching a proxy fight to take the offer directly to shareholders.

“Operating safely is the foundation of our operating model here at CP. It’s a multipronged approach that shapes all our decisions at every level and has driven improvements at CP and will drive significant and lasting safety improvements at NS,” Canadian Pacific’s Chief Operating Officer Keith Creel said in an emailed statement.

The way in which the railroads would combine would result in more end-to-end service for customers without handoffs and interchanges, which would further improve safety, he added.

Norfolk Southern declined to comment.

Shippers already have been weighing in on the proceedings, filing letters with the Surface Transportation Board to oppose a combination of CP and Norfolk Southern. Manufacturers’ associations in Indiana, Kentucky, West Virginia and Pennsylvania, as well as those in the agricultural and automotive industries, have written to express concern about potential price increases and service problems if a merger occurs.

‘Combining large rail systems, rule books, workforces, and safety cultures can lead to safety vulnerabilities and deficiencies. ’
—Federal Railroad Administrator Sarah Feinberg

Other railroads also oppose the merger, including CSX Corp., Union Pacific Corp. and BNSF Railway Co. BNSF has said that if the CP-NS combination were to go forward, it would likely lead to further consolidation and big rail mergers as other railroads try to stay competitive, something in which BNSF would participate.

CP has argued that the combination of the two railroads would result in better service, more competition and congestion relief in the Chicago area. In addition, its executives believe they can run Norfolk Southern more efficiently, cutting costs and improving profitability.

The potential input from the FRA in a merger proceeding is another facet of regulatory scrutiny that weighs against efforts to combine any of North America’s seven major freight railroads. Safety concerns have grown at a time of busy traffic on the rails, especially after a series of fiery derailments of trains carrying crude oil.

Nonetheless, the past several years have shown improvements in rail safety, including at CP. The company’s train accidents per million train miles traveled fell from roughly 3 per million miles traveled to 1.3 per million miles traveled from 2013 to 2015, according to FRA data.

Meanwhile, a member of the Surface Transportation Board, Deb Miller, said in an interview that the agency’s mandate includes ensuring any merger is in the public interest and that it promotes competition. “Without question, safety is very likely to come up, but it’s going to come up under that broader question of public interest,” Ms. Miller

Federal safety officials have zeroed in on mergers before when searching for the cause of safety lapses at major freights. The National Transportation Safety Board held a special hearing in 1998 into Union Pacific, after a series of accidents that killed workers and some members of the public following its merger with Southern Pacific the year before. The agency criticized Union Pacific management at the time for insufficient procedures governing employee workload and train dispatching.

The FRA blamed the incidents in part on a “corporate culture in the merged Union Pacific and Southern Pacific railroad companies [that] had varying attitudes toward safety and a primary focus on improving operational efficiency instead of safety.”

But the issue has had little cause for study in the years since. There hasn’t been a merger of Class 1 freight railroads, the classification of the largest freights, since the current merger rules took effect in 2001.

“Certainly mergers of this size are hard to accomplish, and so they can lead to lost shipments, congested yards, all kinds of occurrences that create stress in the system,” said Grady Cothen, a former FRA safety official who is now an industry consultant. “And so that can over a short term I think create some enhanced risk.”