CPKC’s Creel warns of issues from UP-NS ‘endgame’ merger (updated)

CALGARY, Alberta — Canadian Pacific Kansas City CEO Keith Creel today teed off on the proposed merger of Union Pacific and Norfolk Southern, raising a host of questions and concerns about the $85 billion deal that would reshape the railroad industry.

Creel, speaking on CPKC’s earnings call, issued a series of warnings about the transcontinental deal, including the potential for a nationwide rail service meltdown if UP and NS were to bungle the integration.

Creel knows the complexities firsthand: CPKC’s problematic May 3 computer cutover in former Kansas City Southern territory in the U.S. caused nearly three months of congestion, missed switches, and delays for customers in Louisiana, east Texas, and Mississippi. The impact of similar issues on a combined UP-NS system that stretches from coast to coast would be enormous.

“
A network that big, if it gets sick, it’s not isolated to a particular geographic region of the nation,” Creel says. “The entire nation’s going to get sick. 
That’s the magnitude of this.”

UP CEO Jim Vena said yesterday that the railroad understands the challenges of meshing operations, noting that UP had a flawless cutover to its new cloud-based operating system last year. But Creel says it’s one thing to replace your own computer system and quite another to extend it to another railroad.

The specter of service problems — which have accompanied every megamerger in the modern era — already has concerned rail customers, some of whom have contacted CPKC about potential options.

“I guarantee there’s some customers out there … sitting on the edge of their seats, looking at their existing supply chains, trying to hedge their bets, thinking, ‘What’s at risk?’ ” he says.

Shippers have not forgotten the widespread service failures in 2021 and 2022 that were caused by crew shortages on the big four U.S. railroads. “Those customers experienced a lot of pain and suffering … 
They’d be irresponsible not to start looking at alternatives,” Creel says.

Creel successfully navigated the regulatory review process during the CP-KCS merger that won Surface Transportation Board approval in 2023 and says a transcontinental combination faces significantly higher hurdles.

The CP-KCS merger was judged under the board’s older, merger-friendly rules. The UP-NS deal faces the more stringent rules released in 2001 after the megamergers of the 1990s, which included Burlington Northern and Santa Fe, Union Pacific and Southern Pacific, and the CSX-NS split of Conrail.

The 2001 rules — which require railroads to show their merger would enhance competition, be in the public interest, and address downstream impacts such as additional mergers — ensure the STB’s review won’t just be about the UP acquisition of NS.

It will, Creel says, be about the future of the North American rail network.

“This does not just affect UP and NS. UP and NS both know this, the regulator knows this, we all know this,” Creel says. “
This … could well and might likely trigger additional industry consolidation — an endgame scenario.”

Considering the likelihood that a UP-NS combination would provoke a second transcon merger involving BNSF and CSX, Creel says the UP-NS deal cannot be judged in isolation. The UP-NS merger application, he says, must address a fundamental redrawing of the railroad map.

“They’re speaking to the entire industry. 
They’re speaking to every customer that ships on any rail network in North America, and it is a North American rail network,” Creel says. “So the gravity of this is not to be taken lightly.”

The key question, Creel says, is whether having a transcontinental duopoly, with two go-everywhere systems in the U.S., is in the public interest.

Creel says the STB will give the merger a diligent, fact-based review under the untested 2001 rules. “Rest assured, the STB will want to get this one right,” he says.

To enhance competition, UP and NS will have to agree to concessions that would open up sole-served customer locations to a second railroad, Creel says. And that means CPKC would seek unfettered access to UP’s crown jewel: Its lock on petrochemical traffic on the Gulf Coast as well as locations in Kansas City and St. Louis.

The access would enhance competition and allow CPKC to take traffic to Canada or Mexico, other points on its system in the U.S., or to interchange partners. “The strength of this network we put together allows us to compete and win in any of these scenarios,” Creel says.

Creel questioned the need for a transcontinental merger, arguing that railroads have not done enough to develop interline commercial partnerships or better coordinate interchange operations by building more run-through trains. “Have they exhausted all those opportunities? I know we haven’t,” Creel says.

CPKC will actively participate in the review process to protect its own interests, the interests of its customers, and to ensure that the facts are known, Creel says. “Rest assured, we will be a loud voice in the room,” he says.

But he would not rule out the possibility that CPKC would consider a merger. It’s among the options the railway would have to review as part of its obligation to maximize shareholder value, Creel says.

“We won’t be confined by the traditional, so maybe expect the unexpected — who knows?” he says.

Union Pacific, in a statement on Thursday morning, defended its record and the proposed merger.

“Union Pacific stands on its record, and it is clear. The Union Pacific–Norfolk Southern merger, when approved, will benefit America, supporting reindustrialization and moving products more efficiently across the U.S. It’s a win for customers who will benefit from end-to-end service and employees as we grow with customers and expand the workforce. We have a history of implementing technology changes, such as NetControl across our 32,000-mile network, without issue. Union Pacific looks forward to the transaction being approved once everything has been reviewed,” spokeswoman Kristen South said in an email.

CPKC rival CN, meanwhile, remains focused on interline partnerships while keeping a close eye on merger developments.

“CN is closely monitoring the ongoing discussions about possible transcontinental rail mergers. Our focus remains on delivering consistent performance for our customers, pursuing strategic growth opportunities, and creating long-term value for our shareholders,” spokeswoman Ashley Michnowski says. “CN believes this can be achieved through greater collaboration between railways, connecting key markets with critical resources.”

BNSF and CSX representatives declined to comment on the UP-NS merger.

CSX CEO Joe Hinrichs, speaking on the railroad’s earnings call last week, prior to the UP and NS announcement, said CSX would have to consider all of its options.

Note: Updated at 10:45 a.m. Central on July 31 with comment from Union Pacific.