Largest Railroad Merger in 2 Decades Approved, Linking US, Canada, Mexico

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By NTD Newsroom
March 17, 2023Business News
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Largest Railroad Merger in 2 Decades Approved, Linking US, Canada, Mexico
Freight train cars and containers are pictured at a yard in Conway, Pennsylvania, on April 2, 2021. (Gene J. Puskar/AP Photo)

After two years of deliberations, the Surface Transportation Board (STB) this week approved the acquisition of Kansas City Southern Railway Company (KCS) by Canadian Pacific Railway Limited (CP)—subject to a number of conditions and an extended oversight period. 800 new jobs are set to be created in the Unites States as a result of the merger, according to the board.

The combination will be known as Canadian Pacific Kansas City—or CPKC, and will link the United States, Canada, and Mexico. In the first railroad merger of this magnitude in two decades, Canadian Pacific’s $30 billion acquisition of Kansas City Southern was approved on March 15, and involves the combination of the two smallest major railroads operating in the United States. CPKC will remain the smallest of all the major freight routes, with an estimated 20,000 miles of track.

“On balance, the merger of these two railroads will benefit the American economy, and will be an improvement for all citizens in terms of safety and the environment,” said STB Chairman Marty Oberman at a press conference announcing the decision.

Following the controversial merger of Union Pacific and Southern Pacific in 1996, which shippers said negatively affected rail traffic over a prolonged period, new regulations were imposed that effectively raised the bar significantly for railroad mergers.

An unprecedented seven-year oversight period will be implemented for the new combination, alongside multiple stipulations which include mitigating environmental impacts, preserving competition, protecting railroad workers, and promoting efficient passenger rail travel.

The STB forecast stated that it expected service, employment, and oversight to improve with the merger.

“CPKC will be the first railroad with single-line service through Canada, the United States, and Mexico,” according to the STB statement. “Shipping of grain, automotive parts and vehicles, and intermodal goods will improve with new single-line options, and shippers will have opportunities to expand their market reach.” The STB maintained that the conditions imposed will ensure competition, and that shippers’ options will not be not reduced.

The initial application by the companies was filed in October of 2021. This sparked a barrage of almost 2,000 comments and other filings, and the STB also held a seven-day public hearing. The Final Environmental Impact Statement (FEIS) drafted by the Board’s Office of Environmental Analysis ran to more than 5,000 pages.

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A freight train is pictured passing through Houston, Texas on Sept. 14, 2022. (Brandon Bell/Getty Images)

Overall, the Board says, it anticipates that the merger and conditions will benefit the public.

“The Board has carefully considered the full record, weighed the public benefits against potentially harmful impacts, and imposed appropriate conditions to mitigate those impacts in its approval of the merger,” the STB stated.

CPKC will continue to be the smallest Class I railroad, at around half the size of the Western railroads. With the two companies’ rail networks only connection being in Kansas City—a so-called end-to-end merger—there will be little to no track redundancies or overlapping routes between the two railroads.

The STB said that travel time over the single-line service will be greatly reduced, which in turn is expected to provide added incentives for investment and lead to greater internal efficiencies.

Dissenting voices, however, including other railroads, expressed concern that the merger will quash competition and lead to increased commuter traffic. Concerns had also been expressed regarding the capacities of rail hubs such as Houston, Texas and Chicago, Illinois to deal with potential increases in rail traffic.

“The other Class I railroads, in opposing the transaction, are simply seeking conditions and other remedies that appear aimed at protecting their own traffic from competition with CPKC and at limiting the ability of the combined CPKC to meet its potential,” the STB responded.

“Consistent with the Board’s policy to protect competition and not competitors, the Board is denying those requests while also ensuring that existing competitive gateway options are preserved,” the STB wrote.

RSI Logistics, Inc. a rail logistics solution provider, said in a previous statement that the new CPKC network should be welcomed by rail shippers, and that this was especially true in the agricultural and automotive business segments. RSI believes that the new merger can deliver reduced costs and faster delivery times.

“There will no doubt be resistance from other Class I railroads, but it appears that a CP-KCS merger should be successful. Shippers who are engaged in automotive, agriculture, energy, and lumber should be very excited about the possibilities,” the statement read.

Implementing Safeguards

The STB added that numerous conditions will be imposed to mitigate risks for competitors.

“The Board is imposing numerous conditions to preserve existing rail service options at affected ‘gateways’—interchange points between CPKC and other railroads—on commercially reasonable terms, which should ensure competitive options are not reduced for shippers served by CP or KCS,” according to the STB statement. “The decision also restricts CPKC from terminating reciprocal switching access for shipper facilities served by CP or KCS that have such access today.”

The STB claimed that the merger would be a safer and more efficient option environmentally, in that it will reduce the number of trucks on American roads, thus achieving significant reductions in congestion and emissions.

The Board also commented on safety concerns in the wake of the recent derailment in East Palestine, Ohio.

“As always, the Board has carefully analyzed the proposed merger from a safety perspective. It is important to underscore that rail is by far the safest means of transporting any freight, including hazardous materials,” it wrote in its statement.

Following community concerns about train lengths, the STB wrote that the projected average train length is expected to decrease on most CPKC line segments as a result of the merger. In addition, the General Code of Operating Rules state that trains must avoid blocking public crossings for longer than ten minutes.

The Board said that the expected increase in train traffic will not add a significant amount of delay.

One of the remaining concerns, however, is the increased level of noise, and particularly in areas where rail traffic is expected to increase significantly.

Increases in traffic are predicted to be highest between Chicago and Laredo, Texas. Across Iowa, some rail lines could see more than 14 additional trains per day. The route between Kansas City, Missouri and Beaumont, Texas is also likely to see an increase of around a dozen trains per day.

Shares of Canadian Pacific Railway Ltd. jumped 5 percent after the STB’s announcement of the merger.

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