Proposed Union Pacific-Norfolk Southern merger draws praise, skepticism ahead of STB Filing

With an expected December 1 date for the application regarding the historic $85 billion proposed merger between Class I railroad carriers Union Pacific and Norfolk Southern, there was no shortage of opinions regarding the deal at the RailTrends conference in New York last week. RailTrends was hosted by Progressive Railroading magazine and independent railroad analyst Tony Hatch.

Should this $85 billion merger be completed, the railroad carriers said it would create the nation’s first transcontinental railroad—which 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.

In comments made during an industry analyst session, Hatch explained that there are three clear reasons for this merger to occur: interline issues; reduced SG&A; and the watershed opportunity (in the Mississippi River basin region, where rail service has historically been less efficient due to the need for interchanges between Eastern and Western railroads), which he said is hard to quantify.

“All of these things are hard,” said Hatch. “If interline becomes just a pit stop, you offer a better, faster, and more reliable service and more capacity. All these good things can happen and you can translate that into market share and volume growth, but that is an ‘if.’ The other issue is, what is the merger going to be? I don’t know what the merger is. We will not know until the application [is filed] and the response from the STB, and then over time, the response from all of the stakeholder groups—shippers, suppliers, Amtrak, communities, and other railroads.”

As for how other railroads approach and view the merger, Hatch said that they are playing things smartly, in that they can watch the merger process, and get benefits without any risk, citing getting access, for example, without having to give anything up.

“If this merger is approved and creates a superpower that will hurt them [other Class I railroads], other railroads will merge and they will know how to do it, because right now UP is sailing in the dark on its own,” he said.  “I don’t think this is a slam dunk. The benefits are clear, even if undefined and unquantified. I have the highest faith in the Chairman of the STB and its other members that are going to be looking at this. This is the most important decision in the 200-year history of the industry because it will have follow-on effects.”

Kevin Boone, EVP and CFO, at CSX, told the RailTrends audience that, in looking at the potential impact of the merger, as it relates to established service partnerships CSX has, those relationships have worked because there has not been one party in control.

And he added that is because those have been equal-sharing partnerships in which one party has not been in control.

“Those things, I think, are going to have to have to be resolved as we work through the process,” said Boone. “And as we look at the filing, I'm sure a lot of these issues will be addressed in that filing, and if not, I think those are things that the industry is going to have to follow up with and come do a consensus as we work through this.”

Addressing the benefits the merger could bring to the watershed opportunity, Boone made it clear that single-line service does not mean volume just simply shows up for a railroad. Instead, he said it requires a willingness to make investments.

“I do think there's opportunity there, and there are friction points that have existed, and as we look at those and as if the industry coalesces around wanting to grow, I think those opportunities do exist,” he said.

Tom Williams, EVP and CMO, at BNSF, observed that the merger will undoubtedly change the industry landscape in some way, if it is approved, adding that the merger’s application will be the first one under the STB’s new merger rules, established in 2001, which state a Class I merger must be in the public interest and demonstrate enhanced competition to be approved, adding that the industry is about to go into what he called unchartered territory.

“This new standard of enhancing competition hasn’t been tested,” said Williams. “We will learn more about what this will mean, but it is a higher standard than had existed before. And if you were around in 2001 the one thing you put a commonsense test to this is that this clause wasn't put out there to protect the interest of non-rail customers. When we think about enhancing competition versus the highway [trucking], I think that does not pass the commonsense test. It is also kind of gaslighting the 10,800 closed stations between up and NS. I hear things no conditions, no concessions, and it's hard for me to get my head around how that even translates to maintaining competition, let alone enhancing competition.

For all practical purposes, there are four transcontinental railroads: UP-NS, UP-CSX, BNSF-NS, BNSF-CSX. And if this transaction is approved, two of those four transcontinental railroads are immediately eliminated. And when you eliminate those two railroads, you effectively eliminate all of the lanes that are associated with those two railroads.”

Representing CPKC, the byproduct of the March 2023 acquisition Kansas City Southern Railway Company by Canadian Pacific, Coby Bullard, CPKC Senior Vice President—Merchandise, Energy, Transload, observed that the primary differences between the CPKC and UP-NS deals are scale, scope, and complexity.

Bullard noted that CP and KCS were the two smallest Class I railroads when that deal was done, coming together to form the smallest Class I railroad, whereas a UP-NS pairing would represent the largest.

“When you think about complexity, I hear the applicants talking about end-to-end combination, and that they're using a lot of the same terminology that we did,” he said. “When CP and KCS came together, we had one point that the two railroads touched. We touched in one yard in Kansas City, and that was our single integration point for the railroad. So, from a complexity standpoint, compare that to the UP and NS in scale and scope. But then on complexity, you're talking about integrating all of the interchanges from Chicago, which is the heart of the U.S. rail network, all the way down to New Orleans and all of those interchanges in between.”