Dear devoted MODESians,
The first episode of MODES hits the airways Thursday. You can watch at 2 p.m. EDT on FreightWaves TV or simply listen wherever you get your podcasts. I don’t have the link right now because it’s recorded live, so you’re just going to have to look it up later!
Federal regulators approved Canadian Pacific’s $31 billion acquisition of Kansas City Southern on March 15. The decision is effective April 14 and will form a new rail carrier to be called Canadian Pacific Kansas City (CPKC).
That merger was approved despite the Biden administration’s initiatives around increasing competitiveness in the American marketplace.
In 1980, there were 33 “Class I,” or major, rail companies. Next month, just six Class I rail carriers — two based in Canada — will service the U.S. These companies employ 88% of all freight rail workers and command 94% of industry revenue, according to 2021 numbers.
Given the current administration’s anti-monopoly stance, it’s odd that the federal government would approve the merger between the sixth and seventh largest companies in a highly consolidated field. Rail experts, however, say this merger was all but inevitable.
What’s most interesting to me, a neophyte rail observer, is that it’s a sign that rail (or at least one major player) actually wants to grow volumes. Generally, one assumes that an industry wants increasing revenues. That has not been the case with rail, which has become more keen on shrinking costs in the past decade.
Let’s explore what this merger means and how it all happened.
Wait, a huge corporate merger? In this economy?
The Surface Transportation Board is charged with regulatory oversight of the rail industry and approved the merger. Sen. Elizabeth Warren, D-Mass., and the Department of Justice previously filed separate letters with the STB urging caution on increasing consolidation in the rail industry.
“On a fundamental level there hasn’t been a merger of Class I railroads in 20 years,” Matt Stoller, the director of research at the American Economic Liberties Project, told FreightWaves. “To have the Biden administration facilitate one really cuts against their main policy agenda.”
How the Class I rails have consolidated since 1980. (USDA report)
STB Chairman Martin Oberman isn’t exactly the kind of guy who’s buddy-buddy with the rail barons. Indeed, industry publication Railway Age described the 70-something as getting in “bare-knuckles fisticuffs” with four of the biggest rail CEOs last spring. The chairman directed these executives to participate in a two-day hearing concerning their remarkably bad service levels in early 2022.
Still, Oberman approved the historic merger — with some heavy stipulations, including a seven-year oversight period.
That’s partially because KCS, the smallest of the Class I carriers, fell under a special set of merger rules. A merger involving KCS is only required to not “adversely affect” current competition.
Class I railroads, ranked2022 revenueBNSF Railway$25.9 billionUnion Pacific Railroad$24.9 billionCSX Transportation$14.9 billionNorfolk Southern Railway$12.7 billionCN Railway$12.5 billionCanadian Pacific Railway$6.5 billionKansas City Southern Railway$3.4 billion
Even combined, KCS and CP remain the smallest of the Class I railroads. Mike Steenhoek, executive director of the Soy Transportation Coalition, wrote in an email to soy-affiliated folks on March 15 that this merger could improve service offerings, rather than slash them — a major concern for agricultural shippers.
“The question is what will exert more competitive pressure against the other Class I railroads: 1.) Two considerably smaller railroads with more limited and distinct networks or 2.) A single larger railroad with revenue and a network that is more comparable to the other railroads?” Steenhoek wrote.
Rail customers typically aren’t a fan of consolidation, because they say it means they have limited options for how they move their wares. In 1980, the four biggest railroads originated 53% of all grain and oilseed traffic. By 2011, they accounted for 86%, according to a 2014 federal report.
The merger could be good for the rail industry … and maybe the planet … but not trucking
While still the smallest Class I rail by mileage, soon-to-drop CPKC will be the only rail giant to connect Mexico, the United States and Canada in one company.
That allows CPKC to seamlessly move Mexican fruits and vegetables, meat from Middle America and Canadian grain. CP CEO Keith Creel said at a March 16 JPMorgan conference that the company is launching a premium service from Chicago to Mexico by the end of April to capture that market.
Beyond agricultural goods, FTR Transportation Intelligence’s Todd Tranausky, who leads rail and intermodal coverage, told FreightWaves that intermodal shipments typically stay within Mexico. This merger could stomp out some cross-border trucking and redirect that volume onto rail.
In total, CP estimated that increased rail volume as a result of the merger could divert up to 64,000 trucks per year onto rail.
No offense to the truckers, but that would probably be good for the planet. The Association of American Railroads (OK, I know, it obviously has a bias) says freight railroads are three to four times more fuel efficient than trucks. One train can carry the same amount of freight as hundreds of trucks, per the AAR.
In less cheery news for Mother Earth, CPKC can also use this newly synergized route to more easily and cheaply ship crude oil from tar sands in Alberta, Canada, down to refineries in Texas, the Huffington Post reported in October. We reported in 2021 that these shipments were already starting.
It’s worth noting that all of these tracks already existed before the merger. One could probably move all the avocados and tar sand extractions they want right now with the current tracks KCS and CP separately have. But it wouldn’t be as lucrative for these rail giants. “They’re not doing this merger for fun,” Stoller said. “It’s done to increase market power.”
If rail wants to expand volumes, it needs to win back trust
Rail is far cheaper than truck. But shipping by rail is a more complicated process. For one, you have to actually build a connection to the rail track.
“When you’re out to build a new facility, when you want to ship by truck, there’s next to no pre-coordination or preplanning that needs to be done,” longtime rail consultant Michael Sussman, founder of the rail advisory organization OnTrackNorthAmerica, told FreightWaves. “All you have to do is make sure you have a road outside your property and a curb cut, and you’re going to have a selection of trucking companies that you can call up.
“When it comes to rail, it requires coordination to have your rail connection and it requires education and understanding,” Sussman said.
Even if they do have that understanding, many farmers and industrial folks don’t want to work with rail. They’ve been burned too many times. Eric Voigt of the Washington Potato Commission told me late last year that the members of his commission stopped moving their fresh potatoes by rail about 15 to 20 years ago. About one in 10 carloads would end up, say, forgotten on the sides of the track to rot.
If rail were more dependable, more shippers would use it. It’s certainly cheaper than moving stuff via truck. Creel said at the JPMorgan event that CP has been “creating a very reliable service, trucklike reliable services” for the past 10 years.
That’s unusual among the rail giants. The ethos among most rail carriers in the past decade has been to slash costs and head counts in order to boost margins. It’s part of an operating playbook called precision scheduled railroading, or PSR.
This has made railroads incredibly profitable but also ticked off a lot of their customers. (These customers, by the way, aren’t exactly wee victims, they include the coal industry and agricultural giants.)
Email firstname.lastname@example.org with your thoughts. Don’t forget to subscribe to MODES for weekly transportation insights.
If you want more on this, colleague Joanna Marsh has been covering the CP-KCS merger since it all started back in 2021. Read some of her coverage on the topic:
Rail shippers watching to see whether any benefits come from CP-KCS merger
Feds say merger of 2 rail giants would cause ‘adverse’ noise pollution
7 takeaways from STB’s hearing on proposed CP-KCS merger
5 more takeaways from CP-KCS merger hearing
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