Merger talk raises fears of service issues.
Washington, 15 April (Argus) — North American railroad customers remain concerned about a merger between carriers, even after Canadian Pacific (CP) called off its efforts to acquire eastern railroad Norfolk Southern (NS) on 11 April.
Customers fear a return to the lengthy delivery delays, car shortages and regional congestion spurred by past consolidations in the rail industry.
“With history as our guide, further industry consolidation more than likely would lead to even less competition resulting in increased costs and service glitches, which can reverberate throughout the entire system/country,” Freight Rail Customer Alliance executive director Ann Warner said.
CP’s proposal met significant opposition from shippers and their trade groups, including the freight alliance, the National Industrial Transportation League, and the Alliance of Automobile Manufacturers. Utility FirstEnergy, which ships several million tons of coal by rail each year, told the Surface Transportation Board (STB) it regards NS as “an efficient and reasonably well-run railroad.” It said it was “skeptical” that a merger with CP “can achieve additional substantial, near-term operational efficiencies.”
The merger also drew a negative reaction from Congress, including from US House Transportation and Infrastructure Committee chairman Bill Shuster (R-Pennsylvania), and lawmakers from Illinois who worried it would worsen Chicago congestion.
And there was also opposition from other carriers, including Union Pacific (UP), which also raised the specter of worsening conditions at the midcontinent rail hub. UP subtly pointed to its own past merger troubles, saying CP’s proposal “wholly ignores the potential harms — for example, exacerbating operating challenges in Chicago and impairing customer service.” UP’s September 1996 merger with Southern Pacific led to massive service failures nationwide that took more than a year to resolve.
The STB took those service failures into account when it revised merger rules in 2001. The changes could be a stumbling block for any future union. The agency will not approve a merger between Class I railroads unless they demonstrate the deal would be in the public interest. As part of a merger application, the carriers must submit a service assurance plan. And the board may also impose other conditions.
“There is a much higher public interest standard than was applied to prior mergers because of the severe service problems that had happened after the Union Pacific-Southern Pacific merger, and to a lesser extent in the Conrail transaction,” GKG Law partner Thomas Wilcox said on 12 April at the National Coal Transportation Association conference in New Orleans. “The board was very clear, saying even though these final rules say, ‘we are not going to mandate it,’ if you do not deliberately enhance competitive provisions, your changes of approval are very low.”
“It is quite likely, if CP and NS had submitted a merger application, it would have triggered consolidation of the industry into two or three major railroads,” he said.
The 2001 changes occurred in part because the STB concluded that the next merger would trigger consolidation that could leave only two transcontinental railroads in the end. The agency was expecting this to occur after 1999 BNSF-Canadian National merger proposal. That deal was cancelled after the new rules were issued.
A new merger will likely result in changes to pending rule proceedings and existing law, including rules on competitive switching, paper barriers, service commitments, rate reasonableness and bottleneck rates. The board is already in the process of updating some of these rules, meaning a merger could stall or even change what has already been decided.
But for now there appear to be no additional merger proposals waiting in the wings. Some Class I officials have indicated they are against any further consolidation at this time.
“With no clear path to a friendly merger at this time,” CP said it would focus on serving its own customers and driving value for its shareholders. NS said it was committed to increasing value for their investors by implementing a strategic plan to streamline operations, reduce expenses and maintain superior customer service levels.
The trigger to CP pulling back after multiple attempts to purchase NS appears to be comments by the US Justice Department on 8 April. The agency said CP’s use of a voting trust “risks altering the competitive landscape between the two railroads and, indeed, the entire rail system in a way that could not be reversed” if the STB rejected the merger deal. The STB had not yet weighed in on the voting trust structure.
Shippers are wary of anything that might cause service to worsen or, potentially even worse, block them from other carriers. The STB has always sought to ensure in past mergers that facilities served by more than one railroad did not lose competitive access. But many lost options at distant locations nevertheless.
CP’s failed acquisition of NS has reopened a nationwide discussion on service and competition. Those issues will not go away, particularly if any more Class I railroads decide to merge.