Shipper groups express concerns over Union Pacific-Norfolk Southern deal

While leadership at Class I railroad carriers Union Pacific (UP) and Norfolk Southern (NS) touted the benefits of this week’s announcement, coming to terms on an $85 billion deal in which UP will acquire NS—to create the nation’s  first transcontinental railroad that will connect more than 50,000 route miles across 43 states from the East Coast to the West Coast and connect around 100 ports as well—feedback from various shipper groups has been less than receptive to the deal.

UP CEO Jim Vena said on a call earlier this week that combined single-line service will create new routes and increase access across the country, making freight rail transportation a cost-effective option for more American shippers, adding that by eliminating interchanges, customers’ products will reach their destination faster, and increased speed and reliability, combined with lower brake costs per mile, makes rail a more attractive option than truck. And with improved service reliability, he said the new railroad will lower its customers inventory and equipment costs with reduced cycle times.

But shippers don’t appear to be amicable to this vision.

NITL: The National Industrial Transportation League (NITL) told LM that it has been on record as saying it does not want any more rail mergers, explaining that shippers generally oppose continued consolidation in the rail industry based on past experiences, resulting in increased rates, higher fees, and unreliable service.

“The growth in market power is also resulting in railroads forcing shippers into contracts which is outside STB jurisdiction,” said NITL. “Under the new merger rules, a merger must demonstrate enhanced competition. For most shippers, this means enhanced railroad-to-railroad competition, not just enhanced competition to truck. Granted, some shippers might benefit from enhanced competition to trucking but not all [do], and it seems a bit odd when the railroads have lost market share to trucks over the past 20 or so years but their profits keep increasing. NITL shipper members will have to see if an application is filed and then what is offered and what the STB might prescribe and what enforcement mechanisms are put in place—all freight rail shippers need guaranteed competitive solutions.” 

ACC: The American Chemistry Council (ACC) issued a statement, expressing its concerns about the negative impacts of this merger on American manufacturing from further freight railroad consolidation. And it added that it is closely watching the proposed terms of the deal and will actively oppose any merger that fails to significantly enhance competition between railroads.

“Our industry is one of the largest users of the U.S. freight rail system, and we need efficient and reliable service to deliver products that make people's lives better, healthier, and safer,” said ACC. “The four largest freight railroads already control more than 90% of U.S. rail traffic, with two dominating in the eastern U.S. and two dominating in the west. The impact of a transcontinental merger between two of these railroads threatens to leave American manufacturers, farmers and energy producers with even fewer competitive options to ship by rail.” 

To that end, ACC explained that many rail customers are currently dealing with high rates and unreliable service, stating that further consolidation within the rail industry is likely to make these problems worse. 

“Producing and moving more chemistry here at home is key to growing the economy,” it said. “From microchips to cars to medicines, if we want to make more things in America and lead in global trade, we must do a better job transporting American made goods. We call on policymakers to help create more competitive and reliable transportation options, not less.”

IANA: The Intermodal Association of North America (IANA) held what could be considered a neutral view on the deal, saying that the intermodal industry thrives when it offers a competitive alternative to long-haul trucking.

“It succeeds where there are strong efficiencies, a focus on growth, and a commitment to customer service,” said IANA. “As this merger moves forward, we will be looking for these core values to be reinforced.”

ACD: Alliance for Chemical Distribution (ACD) President and CEO Eric R. Byer said in a statement that the chemical distribution industry relies on freight rail to deliver the products essential to Americans’ everyday lives.

“Following prior rail mergers, freight rail has not served the needs of its customers who inevitably pay increasingly high rates for unreliable and inadequate service,” said Byer. “Despite persistent deteriorating rail service, railroads are rarely held accountable for supply chain disruptions caused by extensive monopolies and an outdated regulatory system. Freight rail is already highly concentrated, and further consolidation will exacerbate existing challenges while expanding the rail industry’s market power and profit margins.

The STB must ensure that freight rail customers have access to competitive, efficient, and reliable rail service. Approving a transcontinental mega-merger will benefit the merging rail companies and Wall Street, at the expense of U.S. chemical distribution companies who are critical contributors to the American economy. It is hard to see how expanding railroad monopolies would meet the STB’s high burden to ‘enhance competition’ and serve the ‘public interest.’”

SMART-TD: From the perspective of labor, SMART-TD, the largest rail labor division in the U.S., said it views this deal “with measured skepticism rooted in the real-world impact such consolidations could have on rail workers, safety, service quality, and the long-term health of the freight rail industry.”

In terms of how this deal could impact railroad service quality, it said that Class I railroads continue to grapple with persistent service challenges as a result of Precision Scheduled Railroading (PSR). And it said that the STB’s recent decision on reciprocal switching could further strain operational fluidity and responsiveness.

“Merging two large carriers, particularly one with an entrenched PSR framework, risks exacerbating these issues, not improving them,” it said.

It is fair to say that once this deal was announced that it would receive some pushback from shipper groups and industry stakeholders—which appears to be the case based on commentary from these organizations. It is also fair to say that what happens from here is not likely to be a linear process. But it helps to remember that not all that long ago there was a major freight railroad merger between Canadian Pacific and Kansas City Southern that came to fruition and crossed the finish line, creating the CPKC. Will this process play out similarly and lead to the establishment of the Union Pacific Transcontinental Railroad? It is too soon to tell, but one thing for sure is that it is the biggest news in the sector at the moment and will likely be for some time.