Rail merger approved, wheat shippers object

In a decision that has been pending for two years, the Surface Transportation Board approved the acquisition of Kansas City Southern Railway Company by Canadian Pacific Railway Limited, with oversight and conditions, on March 15.

The deal is worth about $31 billion; the approval takes effect April 14 and opens a north-south corridor from Canada to Mexico.

Besides releasing its decision, STB chairman Martin Oberman announced it in a press conference—the first-ever by the normally little-noticed STB—that has sole authority from Congress to approve, disapprove and regulate rail mergers.

The decision follows a two-year period of fact gathering, public hearings and information sessions. Oberman said board members had received 2,000 comments, engaged in seven community hearings and heard from “hundreds of concerned citizens.” 

One member of the board, Robert Primus, dissented, saying the merger increased consolidation and could harm communities along its routes. Sen. Richard Blumenthal, D-CT, who sits on the Senate committee that oversees railroads, said the approval decision "needs to be scrutinized."

The approval process began March 21, 2021, when Canadian Pacific announced the agreement between the two railroads. A rival bid by Canadian National worth $33 billion was withdrawn after the STB rejected parts of the proposal. The CP proposal was then considered by the STB. The STB is administratively affiliated with the U.S. Department of Transportation. The STB announced it will oversee the merger for seven years–the first three years of implementation and an additional four years.

It’s the first railroad merger in more than 20 years. The new entity will be known as Canadian Pacific Kansas City and will be the first railroad providing single-line service spanning Canada, the United States and Mexico. Yet CPKC will continue to be the smallest Class I railroad, with a network a few thousand route miles shorter than the next smallest Class I and half the size of the western railroads. KCS has about 7,000 route miles and CP has 13,000 miles. Their two competitors, Burlington Northern and Union Pacific, have about 32,000 route miles between them. 

The largest railroad, BNSF, has annual revenues of about $25.6 billion; the new railroad will have revenues of about $10 billion.

End-to-end was central 

The fact that the merger was “end-to-end”—that is, the two railroads had no overlapping routes—was a “central fact” of the merger approval, said Oberman. “This was different from all past rail mergers,” he said, and added that the board was convinced that the merger would actually increase competition among the rail majors. In particular, he said, the board required that no gateways—connection points between the new railroad and others—be closed. They connect only in Kansas City.

Oberman said he understood skepticism about railroad consolidation, and that he himself had often voiced it. But the STB had to work with the landscape it was given, he said, and the board concluded the merger would increase competition rather than reduce it.

Data submitted by the railroads led the board to conclude that the average length of trains would decrease except in some Chicago suburbs, where residents have been vocal about their concerns regarding train lengths and rail crossings.

Rate appeal procedure 

One of the conditions of the merger is a never-before-established procedure that will allow shippers to require written justification from the railroad for any gateway rate increases greater than inflation. If the shippers are dissatisfied by the response, they can appeal directly to the board for action. “This is a fast, economical way for shippers to challenge” rate increases that is an improvement over past procedures for appealing rate increases, Oberman said. He cited a letter from more than 450 shippers supporting the merger, although he noted that shipper support was not unanimous.

Wheat growers object 

Wheat growers challenged the board’s assessment of the merger’s competitive benefits. The National Association of Wheat Growers and U.S. Wheat Associates said they were “disappointed” with the approval.

In public comments submitted to the STB on the proposed merger in February 2022, USW said the market power held by the Class I railroads “has serious implications for U.S. wheat’s competitiveness compared to other major exporters.” NAWG shared similar public comments with the STB in February 2022, which outlined how reliant wheat is on rail and how decreased rail-to-rail competition hurts shippers and growers alike.

“U.S. rail industry consolidation has led to poorer, not improved, service for agricultural shippers,” said USW President Vince Peterson. “In addition, we see extreme disparity in rates for wheat shippers. Rail rates over the last decade have increased exponentially and rates for wheat are higher than rates for other commodities even with similar handling characteristics. Those higher rates make U.S. wheat less competitive in the global market at a time when higher prices already hurt our competitiveness.”

“NAWG is disappointed by today’s STB announcement and maintains our concerns that the merger of CP and KCS will impede competition in the rail market and increase rail rates,” said NAWG CEO Chandler Goule. “With 50% of wheat being exported, wheat is heavily reliant on rail transportation to move across the United States. Since the merger was announced in 2021, NAWG has filed four public comments with the STB opposing the merger, citing a myriad of concerns on the impact to competition, unfair access to competing wheat producing countries, and changes to tariff provisions that could impact wheat farmers.”

Safety concerns 

Addressing safety concerns in the wake of recent train derailments, including one in which hazardous chemicals were spilled, Oberman said 94% of all reported hazardous material problems occur on trucks, and only 1% on railroads. During a 5-year period, Canadian Pacific moved hazardous materials 60 million car-miles through Chicago without a reportable incident, he said.

The STB has increased its supervision of all railroads in recent years, as their workforces have been allowed to shrink due to attrition and they have turned to automation in an attempt to cut costs.

Oberman’s press conference is available on the board’s YouTube page. The board’s decision in Canadian Pacific Railway Limited; Canadian Pacific Railway Company; Soo Line Railroad Company; Central Maine & Quebec Railway US Inc.; Dakota, Minnesota & Eastern Railroad Corporation; and Delaware & Hudson Railway Company, Inc.—Control—Kansas City Southern; The Kansas City Southern Railway Company; Gateway Eastern Railway Company; and The Texas Mexican Railway Company, Docket No. FD 36500, may be viewed and downloaded here.

David Murray can be reached at [email protected].