October 15, 2014 / 5:28 PM / 4 years ago

UPDATE 1-CSX CEO: Major U.S. rail mergers could disrupt service

(Adds CEO quotes from interview)

By Nick Carey

CHICAGO, Oct 15 (Reuters) - Further consolidation of major U.S. railroads could lead to service disruptions rather than improvements in U.S. rail freight congestion, the chief executive of CSX Corp said in a conference call with analysts on Wednesday.

“We might actually see a step back in service,” Michael Ward said when asked whether consolidation would improve rail capacity.

Ward’s comments came after the Wall Street Journal reported on Sunday that Canadian Pacific Railway, the No. 2 Canadian carrier, had made a bid for CSX, the No. 3 U.S. railroad, but had been rebuffed. Both companies declined to comment on the report.

In an interview with Reuters CSX’s CEO said he expected push back from some customers about freight price increases next year, and said new reporting requirements issued by the top U.S. rail regulator last week may take time to implement.

When asked by an analyst about whether consolidation would benefit the industry, Ward referred to the last major round of U.S. rail mergers in the 1990s, which were accompanied by system-wide service collapses.

“We saw service disruptions after those transactions,” Ward said.

One of those deals concerned Conrail, which CSX and Norfolk Southern Corp divided up between them in 1997. At the time, the integration of Conrail’s network by both railroads was widely regarded as a disaster for their service.

The major U.S. railroads have been struggling to keep up with demand, with a record harvest, growing oil-by-rail shipments and rising volumes of consumer goods moving by train.

Analysts have said railroad service problems could make the U.S. Surface Transportation Board (STB), which regulates the industry, skeptical of any deal.

CSX’s conference call came a day after the company announced a third-quarter profit that beat analyst expectations. The company predicted double-digit earnings growth in 2015 and said rising demand for freight should enable it to raise its prices.

During the boom prior to the Great Recession, some rail customers were very vocal in their opposition to increases in rail freight rates. The railroads argue higher prices during economic expansion help them pay for service improvements in what is a capital intensive business.

“There is a small group always complain about higher prices,” Ward told Reuters in an interview. “But most customers will be happy to see their products move in a more expeditious manner.”

Citing rail service problems, last week the STB ruled that starting Oct. 22 the major U.S. railroads must submit weekly reports on data including average train speeds, dwell times and other service metrics.

Ward said CSX will comply with the regulator’s ruling, but added that some railroads have different definitions for the metrics the STB wants them to report.

“Getting everyone to agree on one definition will take some time,” Ward said. (Reporting By Nick Carey; Editing by Chizu Nomiyama)

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