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A bold play to shake up the North American railroad industry ran out of track on April 11, when Canadian Pacific Railway withdrew its unsolicited $28 billion bid for rival Norfolk Southern Corp. Spearheaded by CP chief executive E. Hunter Harrison and activist investor William Ackman, the planned deal would have been the first merger of two Class 1 North American freight railroads since 2001.

But the management and board of the Norfolk, Virginia–based target had refused to talk. After three rebuffs and a proxy filing aimed at forcing merger negotiations by a shareholder vote, Calgary-headquartered CP saw “no clear path to a friendly merger at this time,” Harrison said in a statement.

CP investors were happy with the outcome: The company’s stock closed at C$187.65 ($145) on April 15, up 6.2 percent for the year. Politicians, rail customers and trade unions opposed the deal, which would have reduced the number of Class 1 railroads from seven to six, fearing job losses and higher freight costs. For its part, CP has asked the U.S. Department of Justice to investigate what it calls anticompetitive efforts by some of its peers to block the Norfolk Southern merger.

Harrison and CP board member Ackman, founder and CEO of hedge fund firm Pershing Square Capital Management, had big dreams for the tie-up: the continent’s third-largest railroad, stretching from Vancouver to Miami. To fulfill its East Coast ambitions, CP could yet swallow bigger competitor CSX Corp., but the Jacksonville, Florida–based company reportedly spurned a $20 billion offer, making that prospect unlikely.

With mergers unpopular in many quarters, the North American railroad industry finds itself at a crossing, searching for new growth engines. The commodities rout, in particular the steep decline of coal, has cut deeply into traffic volume. But railroad bosses — and bullish investors, including billionaire Warren Buffett — see light at the end of the tunnel.

For shareholders, who had been accustomed to steady growth before it ground to a halt in the first quarter of last year, the ride may continue to be bumpy. “After 15 years of relative outperformance, what we see now is a return to cyclicality with volumes but not pricing or margin improvement,” says Ken Hoexter, a New York–based transportation analyst at Bank of America Merrill Lynch.

The glory days are over, Hoexter warns. The “new normal” for railroads means earnings-per-share growth “in low two digits to mid teens,” versus peak returns north of 25 percent between 2003 and 2014, he says.

Until last year railroad revenue kept climbing, propelled by strong global appetite for commodities, favorable pricing and leaps in efficiency. Then growth hit a major snag. Coal shipments, which accounted for 39 percent of all U.S. carloads and 18 percent of U.S. railroad profits in 2014, according to the Washington-based Association of American Railroads (AAR), went into sharp decline.

Factors ranging from tougher environmental rules for power plants to cheap shale gas and weak Chinese demand have hammered the coal business. U.S. production will shrink to 752.5 million metric tons this year, the U.S. Energy Information Administration forecasts, a 31 percent drop from 2011. On April 13, St. Louis–based Peabody Energy Corp., the top American coal miner, filed for Chapter 11, joining fellow publicly traded giants such as Alpha Natural Resources and Arch Coal in bankruptcy protection.

Railroads have felt the pinch. In the first quarter, total carloads for U.S. carriers fell 13.8 percent year-over-year, the AAR reports. Coal shipments led the way, with a 32.5 percent decline; petroleum products and ores and metals were down 20.9 percent and 9.8 percent, respectively.

“We think that fossil fuels are probably dead,” Harrison, a straight-talking Tennessean, said in March at a J.P. Morgan transportation conference in New York. “It’s going to take a long time to transition.”

Still, railroads are faring better than the commodities producers whose goods they haul. Last year CP’s adjusted diluted earnings per share climbed to a record C$10.10, a 19 percent increase over C$8.50 in 2014. Revenue also set a record, edging up to C$6.71 billion from C$6.62 billion in 2014. On April 15, CSX stock closed at $25.93, flat for the year and up 18 percent since May 2011. By contrast, the Market Vectors Coal ETF finished the day at $8.18, down some 80 percent during the same period.

As freight trains head into unfamiliar territory, will new sources of revenue spur growth and hike returns? Not without “a fundamental, quantum shift” in railway operations, CP president and COO Keith Creel tells Institutional Investor, citing precision scheduling and single tracking, whereby trains going both ways share the same track.

Different cargo will travel by rail within five years, experts say. “The revenue portfolio is going to look dramatically different,” predicts Frank Lonegro, CFO of CSX. Railroads are pinning their hopes on the intermodal business, the integration of trucks and trains on routes that trucks alone now dominate. The plan is for faster trains that will replace coal and other slow-moving commodities with on-time delivery of consumer goods.

From Montreal to Fort Worth, Texas, railroad executives are keeping their eyes on head count. “Labor is our largest cost,” Lonegro says. “In five to ten years, we’ll move to less labor intensity, from two to one person in a cab, and maybe in my lifetime to zero.” In Australia some trains already run by remote control, he notes.

Before Harrison took charge in 2012, after heading Canadian National Railway Co. for seven years, CP paid too much for too little, according to Creel: “People would effectively come in six hours for 12 hours of pay.” After punching out they’d go to second jobs. The upshot? “We don’t need as many people,” Creel says. In 2015, en route to a Spartan operating ratio — the railway industry’s proxy for operating margin — CP trimmed its workforce by 12 percent, shedding 1,800 employees. Known as a ruthless cost cutter, Harrison expects to slash another 1,000 jobs this year.

In a world distracted by Facebook and iPhones, the sheer scale and power of freight trains still inspires awe. A single diesel locomotive can weigh up to 200 tons. In North Baltimore, Ohio, the CSX Northwest Ohio Intermodal Terminal spans 500 acres with some 35 miles of track. The terminal assembles 33 trains every day, using seven massive cranes that can lift 46 tons each. It’s just one node in a CSX network that serves nearly two thirds of the U.S. population and 60 percent of the nation’s manufacturing base.

“Railroads get into your blood,” says CSX’s Lonegro, whose company has its origins in the legendary Baltimore and Ohio Railroad, which began operating in 1830.

Almost 200 years of history, and an outsize role in the shaping of a continent, help to explain that attraction. “Without railroads, the United States today would, in all probability, not be radically different from the United States of a hundred years ago,” wrote Edward Hungerford in The Modern Railroad. That landmark history was published in 1911, five years before North American route mileage peaked at 254,000.

For most of the 20th century, dozens of railroads crisscrossed North America. Class 1 operations had colorful nicknames describing their local provenance: The Boston & Maine was known as the Route of the Minute Man, the Nashville, Chattanooga and St. Louis was dubbed the Dixie Line, and the Western Pacific was called the Feather River Route. Burlington Northern’s moniker — the West’s First Mega Railroad — foreshadowed changes ahead.

In 1960, North America was home to 106 Class 1 railroads and less than 160,000 route miles of track. The Staggers Rail Act of 1980 loosened regulation of the industry, triggering a wave of consolidation. There were just seven major North American railways by 2001, when the U.S. Surface Transportation Board began requiring companies that wished to merge to prove the deal was in the public interest. This rule remains untested by players such as CP, which didn’t make a formal merger application to the STB.

Three duopolies have ruled the rails in North America since 1999, when CSX and Norfolk Southern divided the assets of the Consolidated Rail Corp., better known as Conrail, a government-subsidized freight railroad formed in 1974.

East of the Mississippi River, CSX and Norfolk Southern compete. In the West the two rivals are Omaha, Nebraska–based Union Pacific Railroad and BNSF Railway Co., headquartered in Fort Worth and wholly owned by Berkshire Hathaway. CP and Montreal-based Canadian National span Canada and own some rail assets below the 49th parallel.

Kansas City Southern Railway Co. is the only railroad that abuts six others; its routes run down the center of the U.S. and into southern Mexico. All tracks lead to Chicago, the city of big shoulders and, when bad weather or energy snafus intervene, epic train tie-ups.

In a sign of the times, train operators lack space in their rail yards to store all of the assets that have fallen into disuse. Miles of mothballed rolling stock and idle locomotives reveal an industry under stress. Iowa Pacific Holdings has invited controversy by parking hundreds of empty crude oil tankers on its rail siding in Adirondack Park, a nature preserve in upstate New York. The Chicago-based company has several other such storage sites, in locations as far-flung as Walsenberg, Colorado; Elk Grove Village, Illinois; and Watsonville, California.

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