Rail Customers Express Concern Over CN-KCS Merger
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As leaders from Canadian National Railway and Kansas City Southern Railway promote their proposed multibillion-dollar merger, concerns are growing among some of their customers that the deal could limit competition in an industry that operates with only a handful of larger carriers.
The American Chemistry Council, a trade association, is expressing its concerns to the U.S. Surface Transportation Board, the federal government agency that ultimately will decide if the CN-KCS merger is approved. If not, KCS could be sold to CN’s rival, Canadian Pacific.
In March CP had an agreement to buy KCS for about $25 billion, only to find itself outbid a month later by CN for an estimated $33 billion. “The cost of shipping by rail continues to rise dramatically while our member companies have no effective remedies for rate or service issues,” American Chemistry Council President Chris Jahn said in a May 26 statement. “We are concerned that unless the STB takes the necessary steps to put appropriate safeguards in place and to shore up competition between railroads, any merger could have a negative impact on manufacturing in the U.S. — and the broader economy.”
Check out our latest blog regarding proposed #freightrail mergers - ACC calls on the Surface Transportation Board to address competitive & service related issues https://t.co/1TdQgSzZm5 pic.twitter.com/OjB1Wf0x65 — American Chemistry (@AmChemistry) May 28, 2021
The council points out that chemical companies are some of freight railroads’ largest and most important customers. In 2020, the freight railroads transported 2.3 million carloads of plastics, fertilizers, and other chemicals.
Almost 20 years ago to the day, June 11, 2001, STB tightened its merger rules for large railroads.
“The new rules substantially increase the burden on rail merger and consolidation applicants to demonstrate that a proposed transaction would be in the public interest,” an STB statement said at that time. “The new rules require applicants to demonstrate that, among other things, a proposed transaction would enhance competition where necessary to offset negative effects of the transaction, such as competitive harm, and to address fully the impact of the transaction on service, including plans for service reliability.”
RELATED: Rival Canadian railroads make pitch for Kansas City Southern
The board adopted strict rules for major railroad mergers after service problems developed following railroad mergers in the 1990s.
In the case of a proposed CN-KCS merger, STB recently declared those rules will be in place to determine if the $33 billion agreement goes forward. However, if the CN-KCS agreement cannot win regulatory approval and CP-KCS were to end up in merger talks again before STB, that agreement would be decided under the pre-2001 merger rules because the board earlier proposed a CP-KCS merger would “result in the fewest overlapping routes.”
CP’s leadership contends a CN-KCS agreement will face a long list of regulatory challenges that cannot be resolved, even as CN already has made changes to its proposal and said it would sell off a small amount of track to satisfy regulators about concerns over anti-trust issues.
“We think the STB needs to do more to ensure a competitive environment for rail service,” American Chemistry Council Senior Director Jeffrey Sloan told TT. “As a part of the review of any rail merger, there need to be provisions to prevent not only the loss of competition but enhance the competition.”
Industry analysts tell TT it likely will take at least a year before CN and KCS present their case for a merger before STB.
Bingham
IHS Markit Transportation Economist Paul Bingham said this allows CP to sit on the sidelines and watch what transpires. If the CN-KCS merger is rejected, CP could make another bid to acquire the smaller KCS, which is the only Class I railroad that operates deep into Mexico and is strategically valuable because of the new USMCA trade agreement.
“It is more complicated to make the case before the STB to make the CN deal than the CP deal, but that doesn’t mean it’s not going to happen,” Bingham said. “But maybe the STB will impose some conditions. Clearly, there have been conditions imposed in other agreements to satisfy the concerns of the STB.”
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Meanwhile, the leaders of CN and KCS continued their public relations push to win approval for the deal. CN officials say the two railroads have received 1,400 letters in support of the merger agreement, including one from Louisiana Gov. John Bel Edwards, who said the proposal would improve transportation in his state.
In addition, JJ Ruest and Patrick Ottensmeyer — the CEOs of CN and KCS, respectively — addressed the 37th annual Bernstein’s Annual Strategic Decisions Conference on June 3. This is at least their second joint public appearance in the past two weeks.
“We are even more confident today than when we started,” Ruest said. “It’s a bet the solid future of the U.S. economy, the economy of North America, on USMCA, which was renewed just last year, and it’s a bet on Mexico.”
Ottensmeyer said he sees a merged railroad competing with trucking on a much larger scale.
“There is a huge opportunity for growth in new rail service going after that I-35 freight corridor, to and from Mexico,” he said. “In addition to the market share opportunity, there will be growth as a result of USMCA and trends in the supply chain.”
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