Union Pacific and Norfolk Southern shareholders overwhelmingly back proposed coast-to-coast rail merger

While it has not crossed the finish line yet, the proposed Class I railroad merger between Union Pacific and Norfolk Southern is ostensibly moving along, with shareholders for each company nearly unanimous in voting in favor of the deal, according to respective statements issued by each company today.

Union Pacific said that 99.5% of votes cast by its shareholders supported issuing new shares of company stock in connection with the merger with Norfolk Southern. And Norfolk Southern said that 99% of shareholder votes were in favor of the deal.

“We appreciate our shareholders’ support in reaching this important milestone on our path to building America’s first coast-to-coast railroad,” said Union Pacific CEO Jim Vena. “Our shareholders see the value and understand this merger will unlock new opportunities to enhance service, growth and innovation. We look forward to filing our application with the Surface Transportation Board (STB) and detailing how the transaction will provide seamless, single-line service across the country to improve transit times, safely increase reliability and strengthen the competitiveness of U.S rail.”

And Norfolk Southern President and CEO Mark George said that this shareholder approval marks a key milestone in the company’s journey to create America’s first coast-to-coast transcontinental railroad, combining complementary networks and capabilities to unlock a multiplier effect for benefits to all stakeholders.

“The merger will preserve union jobs and improve safety while delivering faster, more reliable transit times,” said George. “Together with UP, we will make rail more competitive with highways, offering customers new, more attractive shipping alternatives, unleashing the industrial strength of American manufacturing and creating new sources of economic growth across the country.”

Union Pacific said that this transaction is subject to Surface Transportation Board review and approval within is statutory confines as well as customary closing conditions.

As for next steps, unconfirmed reports indicated that the merger application could be filed with the STB on or around December 1.

Union Pacific’s Vena said when the deal was initially announced in late July that combined single-line service between UP and NS 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.

That view was not shared by Keith Creel, CEO of CPKC, the byproduct of a the most recent high-profile freight railroad merger between Canadian Pacific and Kansas City Southern, with the STB approving the deal in March 2023.

On the company’s third quarter earnings call, Creel said that CPKC strongly believes further consolidation is not necessary at this time and is not in best interest of the industry, the shippers, or the U.S. economy.

“As we said before, we remain and we'll be active participants throughout the regulatory process to ensure that the facts are not understood about what a merger of this size and scale means,” he said. The proposed merger would result in one single line of railroad handling about 40% of freight rail traffic in the United States. This proposed merger, in spite of what's been said, represents overlap in key markets such as Chicago, Memphis, St. Louis and New Orleans. This is not a simple end-to-end merger. The merger of this magnitude introduces unprecedented risk, by heavily concentrating much of decision-making for our national rail network with undeniable implications on the entire supply chain.”

Earlier this month, a bipartisan Senate duo—John Hoeven (R-N.D.) and Amy Klobuchar (D-Minn.)—penned a letter to leadership at the Surface Transportation Board (STB), including STB Chairman Patrick Fuchs, Vice Chair Michelle Schultz and Member Karen Hedlund, in which they stated they plan to “closely scrutinize” the proposed Class I railroad merger between Union Pacific and Norfolk Southern, with a focus on being able to demonstrate long-term competition in the freight rail sector, with clear and tangible improvements. 

“The STBs post-2001 ‘Major Rail Consolidation Procedures’ were adopted specifically to place heightened emphasis on whether Class I railroad mergers enhance, rather than merely preserve, competition… The proposed UP/NS merger will be the first to come before the Board under these rules, and it is essential that you establish a strong precedent and apply these heightened standards in the way they were intended,” wrote the senators. “If approved, a combined UP/NS would handle more than 40 percent of all U.S. freight rail traffic… a transcontinental system spanning 50,000 route miles across 43 states. Service interruptions of this magnitude could have severe consequences, especially for agricultural producers. Time-sensitive shipments during harvest could be delayed or spoiled, export windows could be missed, and access to global markets could be sharply reduced.”

And the senators added that, in conducting its review, it strongly encourages the STB to take into consideration the impact the proposed merger, if approved, might have on the nation’s agricultural producers, and on the STBs mandate to preserve long-term competition and ensure efficient, economically viable rail service, too.

Since the proposed UP-NS merger was initially announced over the summer, some industry groups have voiced their respective opposition to it.

In August, the Freight Rail Customer Alliance (FRCA), a group comprised of large trade associations representing more than 3,500 electric utility, agriculture, chemical, and alternative fuel companies, and their consumers, said it has long been opposed to continued consolidation in the rail industry based on past experiences resulting in increased rates, higher fees and unreliable service.

And it added that at the time of the Staggers Rail Act of 1980, there were 40 railroads, whereas now there are only six, four of which are responsible for moving 90% of the nation's rail freight.  

“This demonstrated market power is a continuing concern as the railroads have lost market share to trucks over the past 20-plus years due to their dismal service and high rates, but the railroads keep increasing their profits and reducing their operating ratios,” said FRCA’s spokesperson Ann Warner. “This growth in and exploitation of railroad market power has also included forcing shippers into contracts that not only fall outside the Surface Transportation Board’s (STB) regulatory jurisdiction but also lack protection from poor service and increased fees.  Any efficiencies achieved under so-called Precision Scheduled Railroading (PSR) have NOT been passed through to shippers—only retained by the railroads and their shareholders to Wall Street's applause.”

Under the new STB merger rules set in 2001, which have never been applied, a Class I merger must be in the public interest and demonstrate enhanced competition to be approved. For most shippers, this means enhanced railroad-to-railroad competition, not just enhanced competition to truck, particularly as trucking is not a viable option for most carload shippers, the organization said.  It stated that “particularly important to FRCA members is that a transcontinental merger provide enhanced competition for those who ship via unit train, typically point-to-point, and can utilize only a single rail carrier.”

Other groups that have voice opposition to the merger include: the National Industrial Transportation League, the American Chemistry Council, and the Alliance for Chemical Distribution.