MONTREAL — Canadian Pacific Railway Ltd. says industry consolidation in North America is inevitable, amid reports that it has approached a U.S. rival about a potential merger.
Chief operating officer Keith Creel declined to confirm it is eyeing Norfolk Southern, about a year after an overture to CSX Corp. ended without a deal.
But he told a Toronto conference that an industry pause on mergers will eventually end.
"When it comes to consolidation it's not if but when," he told a Scotiabank transportation conference.
Creel said change is needed to bypass the bottlenecks in Chicago that are the "Achilles heel" for the industry.
Canadian Pacific CEO Hunter Harrison has long advocated consolidation in the rail industry to ease congestion and transport goods more efficiently across the continent.
A larger CP (TSX:CP) network would allow the railway to avoid freight transfers to other carriers, Creel said. That would help Canada's second-largest carrier and free up space in Chicago that would help the entire industry improve service.
He acknowledged that CP's approach isn't popular with some competitors.
"But it's the inevitable thing and we're not going to stick our head in the sand."
Industry observers say a merger with Norfolk would be good for both companies, but it would face significant hurdles, including the U.S. regulator. The Surface Transportation Board placed a short-term moratorium on mergers in late 1999 following a proposed deal between CN Rail (TSX:CNR) and BNSF that was eventually called off.
Analyst Fadi Chamoun of BMO Capital Markets said regulators are probably loathe to ignite a flurry of mergers that could harm the competitiveness of other railways and hurt shippers.
"We believe the path towards regulatory approval requires shippers to be onboard and that could imply cost concessions from the railroads," he wrote in a report.
But Creel said it can be done if the merging railways and their customers speak with a "common voice" to demonstrate that the change will improve service. That requires a friendly transaction.
He wouldn't speculate on how soon consolidation will come.
"I've got a lot of years left to railroad, but it's going to happen within my time frame before I retire."
Earlier, CN Rail chief marketing officer Jean-Jacques Ruest told the Scotiabank conference that the current system works well for most railways in good economic times and bad.
Although the Montreal-based company is open to acquisitions of small, shortline operators, he said larger alternatives are constantly being considered and the railway will adjust to any changes.
"We like the environment that we have today. It doesn't mean that we can't deal with situations as they evolve," Ruest said. "None of us are static and especially coming from a marketing background, you always expect chaos and out of the chaos you do something out of it."
