Dive Brief:

• Railroads are less likely to merge now that the majority of North American Class I's have adopted the principles of precision-scheduled railroading (PSR) said Jean-Jacques Ruest, CEO of the Canadian National Railway at the Midwest Association of Rail Shippers (MARS) winter meeting Thursday. 
• "The financial premise of doing a rail merger for a long time was based on the operating ratio," explained Ruest. Operational improvements have changed the motivations for mergers in the industry and diminished the immediate benefits, the CEO said. 
• Operating ratio (OR) represents the percentage of the railroad's revenue that goes into operations. In the past, said Ruest, railroads with higher operating ratios (less cost-efficient) would buy railroads with lower operating ratios (more cost-efficient) and receive instant benefits in the eyes of investors. With operating costs already maximized after adopting PSR, the increased efficiency from running a larger network with fewer resources is marginal, he said. 

Dive Insight:

The PSR playbook requires railroads to drastically lower OR in most cases and to do so, railroads tend to slash costs.

"As PSR progresses ... the payback [of M&A] has to come from something else. It has to come from either technology or commercial products," said Ruest. 

This line of thinking is a departure from some conventional wisdom relayed by Tony Hatch of ABH Consulting interviewing Ruest at the meeting, who said the ubiquity of the PSR philosophy has made operational integrations seem easier and therefore mergers more likely. Not so, said Ruest. 

Though consolidation among large players is unlikely, it's a "golden age for short lines," said Hatch. Many won't sell as these tend to be family businesses. But those that will sell offer Class I's even more predictability for their operations since the more of their customers' freight journey they can control, the better service they can deliver, in theory. 

CN has been expanding its reach and control through trucking acquisitions — it acquired TransX in March and H&R Transport's intermodal division in May. 

So M&A continues for railroads, just in new way — in yet another example of how PSR has shaken the eight ball stakeholders use to predict the future of rail. In May, Ruest said future acquisitions would focus on bringing in more volume, something many Class I's are hurting for right now.