Unless you’re an industry analyst or work at the Surface Transportation Board (STB), you likely did not notice this week’s one-two punch which knocked the wind out of proposals for merging America’s few remaining major railroads.
After a long history of consolidation, just four big American and two Canadian-owned railroads serve the freight transportation needs of the entire United States. Two of them – Union Pacific and Norfolk Southern – sent shock waves through the transportation sphere when they announced their intention to merge, creating what would be a coast-to-coast rail giant.
Public discussion since the announcement focused primarily on how other rail companies will respond. Conventional wisdom said the proposed Union Pacific and Norfolk Southern merger would prompt the other west and east railroads, Burlington Northern Santa Fe Railway (BNSF) and CSX Transportation, to join the fray and accelerate the final round of industry consolidation. Indeed, CSX activist investors called for an immediate marriage of the two companies. But just this week, Warren Buffett, Chairman of Berkshire Hathaway and the owner of BNSF Railway, made it very clear that he would not be buying another railroad. Buffett went on to tout abundant opportunities for railroads to cooperate with each other to deliver shipper and public benefits without the well-known downsides of merging railroad companies.
Rail mergers are not inevitable because of complications and risk. The Canadian Pacific Kansas City (CPKC) put out a release that argued the proposed merger poses an “unique and unprecedented risks to customers, rail employees and the broader supply chain.” CPKC CEO and President Keith Creel argued that “a transcontinental merger would trigger permanent restructuring of the industry and result in a disproportionately large railway whose size and scope would require others to take action” and “has the potential to create more issues than it solves.” The company announced that it was not interested in joining in on the rail industry consolidation.
Fresh from its own merger in 2023, the company is still struggling to provide consistent service to its customers. For comparison, the CPKC merger is dramatically smaller than what Union Pacific and Norfolk Southern propose. CPKC now serves 5 percent of the nation’s freight rail market share. In comparison a new Union Pacific and Norfolk Southern railroad behemoth would dominate more than 40 percent of the market.
Entrusting almost half the nation’s rail freight to one company is unnecessary and extends extraordinary risk to the industries that rely on efficient transportation at a reasonable cost. Consolidation in the rail industry historically involves years of ironing out integration challenges and operational complexities, with many shippers still claiming ongoing problems years later. It feels like we just came out of the post-COVID supply chain crisis, caused in part by railroads not being nimble enough to shift quickly to the demands of their customers. With a mega merger, there would be fewer carriers to bear the load of America’s diverse economy. That seems risky, with many U.S. chemical, agricultural and manufacturing industries left to work with just one rail giant. It also sounds like the opposite of making things great for American companies and consumers.
Under the current railroad system, multiple shipping options exist in most of the country. This keeps rates competitive for shippers who can go to a competing railroad for a better offer. The result is a connected freight rail network which delivers for customers. Moving containers of consumer goods from the west coast to the east occurs relatively smoothly, but it can be improved through better railroad collaboration and cooperation. Grain from the middle of the country flows easily to southern and northwestern ports.
Other railroad companies are responding, not by announcing mega mergers with each other, but by entering into agreements to offer near seamless service across their interconnected networks. If competitors can improve service and expand service agreements without mergers, then the mega merger would not be necessary. These agreements would bring benefits to shippers and consumers without the significant risks one rail company could impose on America's economy.
The repercussions of the proposed Union Pacific and Norfolk Southern merger deserve significant public scrutiny. Even before a formal merger application is submitted to the little-known Surface Transportation Board regulatory agency for review, these parties have a significant burden to meet in explaining whether and how they have exhausted every other option to deliver competitive service and reliability benefits to customers and the public without the necessity of merger.
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