Steep Grade For A Rail Deal

Taking over Conrail has snarled CSX and Norfolk Southern

Six months ago, a confident Norfolk Southern CEO David R. Goode outlined the extensive--and expensive--preparations that Norfolk Southern and its rival, CSX, had shouldered to make sure their 1997 takeover and division of Conrail stayed on track. Despite the complexity of absorbing the 10,700-mile Northeastern system, the two rail giants were determined that the trains would keep rolling. Still, Goode predicted, "no matter how well we plan the transaction, something is going to go wrong."

He was right. Three weeks after Conrail's network was finally divided on June 1, shippers--particularly in Pennsylvania and Ohio--are complaining about late trains and misrouted cars. Analysts are busy trimming second-quarter earnings estimates for Norfolk Southern Corp. and CSX Corp. in light of heavier-than-expected integration costs. And some rail watchers fear that any long-lasting problems could fuel a re-regulation effort. "We didn't expect anything like this," says Edward H. Rastatter, director of policy at the National Industrial Transportation League, a major shippers' group that has fielded "dozens" of complaints since June 1.

COSTLY SHIFTS. Certainly, the problems so far do not hold a candle to the rail gridlock that followed the 1996 Union Pacific Corp. takeover of Southern Pacific Rail Corp. "We're not at meltdown," says Norman Black, a spokesman for big rail customer United Parcel Service of America Inc. Nonetheless, UPS recently shifted half of its former Conrail traffic to the highways because of delays that were running from 3 to 12 hours on both CSX and Norfolk Southern. Millennium Inorganic Chemicals' plant in Ashtabula, Ohio, recently shipped four freight cars for the week instead of the usual 30 on CSX because it couldn't get enough empty cars, says distribution manager Jack Prugh. The move is costing an additional $70,000 a week.

Considering the two years of planning that went into these rail marriages, the breakup of Conrail was supposed to be the smoothest rail deal yet. Both CSX and Norfolk Southern have added hundreds of workers and locomotives and spent nearly $2 billion to move the added freight. Plus they signed new labor pacts before the merger. "People underestimate the problems that are associated with asking thousands of people to do things a new way," says James V. Dolan, vice-president for law at Union Pacific.

Frustrated investors, meanwhile, are still waiting for earlier rail mergers to deliver promised payoffs. Burlington Northern Santa Fe Corp. has worked out the kinks from its 1995 merger, but analyst Anthony P. Gallo of Deutsche Bank Alex. Brown notes that "earnings growth has been very lackluster."

Shippers think the next few weeks will prove critical, especially for Norfolk Southern, which appears to be suffering the worst problems from computer glitches. The railroads should get a bit of breathing room when carmakers take their regular two-week summer production shutdown in July. "I'm very confident you won't be calling me in August to talk about this," says Jon L. Manetta, senior vice-president for operations at Norfolk Southern. At CSX, Executive Vice-President Michael J. Ward believes his system will be in good shape by the start of the late-summer shipping season. But until the two are back on track, shippers will be watching and worrying.