Federal Regulators Put Brakes on Plans for Rail Consolidation

The $6-billion merger of Burlington Northern Santa Fe Corp. and Canadian National Railway Co., which would create North America’s largest railroad, was stopped in its tracks Friday when the U.S. regulators imposed a 15-month moratorium on new railroad consolidations.

Citing widespread service snags and customer complaints that followed other recent railroad mergers, the Surface Transportation Board postponed new combinations while it works out revised rules governing such merger activity.

Burlington Northern, a Fort Worth-based railroad that has a sizable presence in Southern California, promptly signaled it might file suit to overturn the decision. “BNSF will thoroughly review today’s decision to determine what appropriate legal action to take,” BNSF Chairman Robert Krebs said in a statement.

Mark Hallman, a Canadian National Railway spokesman, said the railroad believes the regulators’ decision is contrary to the public interest, adding: “We are launching a legal challenge to the decision.”

The federal board acted following hearings on the future of the rail industry, hearings that were called after Burlington Northern and Canadian National announced their deal in December.

The merger would create a network of 50,000 miles of track from Nova Scotia to Los Angeles and the Gulf of Mexico to Vancouver in British Columbia. The combined company also would have 67,000 employees and annual revenue of $12.5 billion, making it bigger than the current largest U.S. railroad, Union Pacific Corp.

But recent mergers--especially Union Pacific’s purchase of Southern Pacific Rail Corp., which caused enormous disruptions and delays in U.S. shipping in 1997-98--prompted the agency to temporarily block further deals.

“Given the financial and service instability that exists in the rail sector as a result of the most recent round of major railroad consolidations, I cannot in good conscience allow further actions to occur,” board Chairman Linda Morgan said in a statement.

“We recognize that our action is unprecedented,” said the board, which is part of the Transportation Department. “But these are not ordinary circumstances and we see no way of adequately protecting the public interest short of the steps we have outlined here.

The board said that neither the industry nor the public has yet “fully recovered from the service disruptions associated with the previous round of mergers.”

But Krebs said “we are extremely disappointed” with the move. “While Chairwoman Linda Morgan’s action may be well-intentioned, as it stands, it has the effect of denying our proposed combination . . . before receiving our application and giving it a proper review.”

Nevertheless, stocks of both companies rose in trading Friday on the New York Stock Exchange. Burlington Northern gained $1.25, to close at $22.25 a share, while Canadian National rose 94 cents, to $28 a share.

Although shippers have been among the most vocal critics of recent railroad mergers, the National Industrial Transportation League--which represents shippers that use all modes of transportation--expressed disappointment with the moratorium.

“It’s going to be another 15 months before we get anybody to look at problems in the industry,” said spokeswoman Kathy Luhn. “This keeps the status quo for another year and a half--poor service and at the same time rising rates.”

But rivals that already have completed their own mergers welcomed the decision.

John Snow, chairman of CSX Corp.--which along with Norfolk Southern Corp. took over and divided up Conrail--said the ruling recognizes that more mergers are not in the public interest right now.