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Analysis: We need transcontinental railroad mergers

By Bill Stephens | January 19, 2022

Uniting East and West would give rail traffic a boost and make railroads better competitors against trucks.

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Transcontinental mergers would ease congestion in Chicago, where six of the seven Class I railroads connect. Here, CREATE’s 75th Street Corridor Improvement Project will eliminate a bottleneck traversed by 98 CSX, Union Pacific, Norfolk Southern, Canadian Pacific, and Belt Railway of Chicago freight trains, and 32 Metra and Amtrak trains daily. (CSX)

Railroads fall short of trucks in so many ways. The inability to offer seamless service from Point A to Point B shouldn’t be among them. But the Surface Transportation Board has said, in so many words, that Canadian Pacific-Kansas City Southern will be the last merger of Class I railroads. That’s a colossal mistake.

Why? Well, interline service will only take you so far, as CP Chief Marketing Officer John Brooks points out in the railway’s merger application. In 2009, CP and KCS sought to improve joint service via the Kansas City gateway through a program code-named Ice Pick. “Our analysis showed there was a potential to attract many tens of thousands of carloads to CP-KCS joint-line routes if we could improve our joint line offerings and create appropriate incentives for each railroad to market those offerings aggressively,” Brooks wrote.

Ice Pick failed miserably. After three years CP and KCS landed well below 20% of the potential traffic they had sought. “Factors that hampered the success of Ice Pick had nothing to do with any limitations on the theoretical potential for CP-KCS transportation offerings, but everything to do with the impediments inherent in two railroads coming to market with their own separate networks, separate operating priorities, separate capital investment plans, and separate financial interests,” he wrote.

The lesson, Brooks says, is that the only way railroads can reach their full traffic potential is by combining. He’s right. Brooks aimed to show the benefits of CP-KCS, but the same logic applies to transcontinental mergers. The maps of the seven Class I systems create artificial barriers to growth – barriers that truckers don’t face because they can roam anywhere on taxpayer-supported highways that go everywhere.

Just think of what a pair of transcontinental railroads would do for the industry in the U.S. Interchanges cost time and money, make it harder for shippers to do business with railroads, and are among the factors that make service unreliable. The U.S. Class I railroads swap a sizable amount of traffic with each other and short lines, ranging from a quarter of traffic at BNSF Railway to 40% of volume at Norfolk Southern.

If you create a railroad that runs coast to coast, then you eliminate the lion’s share of current Class I interchanges. And Chicago – the rail capital of North America – becomes just another dot on the map. That’s a big deal for several reasons, not the least of which is that 25% of the continent’s rail traffic originates, terminates, or passes through the Windy City.

First, by virtually eliminating interchanges in Chicago, you’d shave 36 hours off transit times, based on the average time it takes cars to move through the city. Second, grade-crossing problems in the Chicago area would be significantly reduced as trains would be moving through the city instead of parked awaiting yard space. Third, you wouldn’t need as many big-ticket CREATE projects to untangle the city’s crazy quilt freight network. Do this at all the major gateways, including New Orleans, Memphis, and St. Louis, and you’d make service faster and more reliable, which would allow railroads to better compete with trucks.

A transcontinental railroad also would open up new markets up and down the Mississippi River, the de facto dividing line between the big Eastern and Western systems. Suddenly long-ignored short-haul moves on either side of the river – between, say, Omaha and Indianapolis, Nashville and Dallas, or Minneapolis and Columbus – would become attractive single-line hauls. This alone could usher in a new era of growth.

Man with shaved head wearing eyeglasses and blue open-collared shirt.
Trains Columnist Bill Stephens

Shippers tend to oppose big mergers and would undoubtedly cry foul. You can understand this based on the chaotic megamergers of the 1990s, particularly Union Pacific-Southern Pacific and the Conrail split, both of which contributed to the 2001 rules that put the brakes on mergers. Yet few rail-served facilities have direct access to more than one Class I railroad, and half of traffic is intermodal that is by definition competitive. So the claim that transcontinental mergers would reduce competition is nonsense, particularly when you consider that joining East and West would have to include some version of reciprocal switching.

Everyone in Washington – from regulators to Congress to the White House – says they want to see freight shift from highway to rail. But their lack of understanding of the rail industry produces policies that are counter to the goal of reducing truck traffic and the greenhouse gas emissions that contribute to climate change. Railroads are lumped into the Big Is Bad mood when, in fact, bigger is better – and essential for rail traffic to flourish.

You can reach Bill Stephens at bybillstephens@gmail.com and follow him on LinkedIn and Twitter @bybillstephens

29 thoughts on “Analysis: We need transcontinental railroad mergers

  1. That appears to be a staged photo. Whether or not the photo is staged, congestion at that interlocking has nothing to do with mergers or lack of mergers.

    1. Yes it is staged. Congestion is a problem and mergers would allow traffic to avoid Chicago entirely. A balkanized rail network can’t grow nor is it efficient. Alot of traffic that Bill pointed out travels in the Mississippi region. C1’s are not going to short haul themselves in this market that has the greatest potential. Not tomention looking at recent freight flow charts. Mid-America is growing the fastest compared to East-West. Detroit-Dallas, Idianapolis-Laredo, Louisville-Houston-Laredo, I can name many other lanes that can benefit from a duopoly eliminating the artificial barrier at the Mississippi.

  2. I understand Bill’s point, but I’m not sold. Why should railroad’s be “rewarded” by creating just two systems, when they’ve proven they are incompetent in simply handling interchanges with each other. I’m not sold that reducing the number of interchanges will make railroads better at what they do. Look at the big systems now and how they deal with their terminals. Here in the Twin Cities trains typically wait several hours or worse just to get through the terminal. Just because one railroad goes right through Chicago doesn’t mean they won’t still be slowed down, stopped, yarded and otherwise delayed whether it’s one railroad or seven.

    What I think we need in the immediate future is more competent railroad management that can think outside the box. So far the only railroads that have proven that they can do that are not bigger, but smaller. Regional lines like Wisconsin Central, Montana Rail Link and Indiana Rail Road were able to bring the focus to the customer and grow their business, and then handed over their gains to larger Class One’s. Once rail management has done all it can to attract business, grows their traffic and become more customer focused, and then can prove that they are being hindered by not being able to merge into two systems, then the argument can be made. But at this time, making two systems out of seven seems to me to be rewarding railroads for their own bad behavior.

    1. I agree with Steve, whose TRAINS byline gives his views legitimate heft. The railroads have had a hundred years to figure out how to interline. If they haven’t done that by now, another merger won’t help. People on this forum don’t always like my airline analogies, too bad here comes another. Why is it that Air France and KLM drive up to Delta gates at DTW Detroit Metro? Why do flights all over America and Canada have both Delta and WestJet flight numbers? Nothing new, in 1978 I flew on a KLM flight with a British Airways ticket. Done all the time.

      1. So, as you clearly point out, mergers are not the answer. Your airline example endorses the idea of interline operations rather than outright mergers. Clearly, there are impediments to interline operations, and it’s not a lack of mergers. Maybe it’s all the government red tape required for a railroad to do anything.

    2. Well, based on STB logic you could argue that FedEX and UPS should be split into four companies with two of the respective companies on the west side of Mississippi and two on the East side of the Mississippi so we have better competition. Or say we do that with trucking companies, double the number and put each on equal side of the river because everyone should be able to handle the interchange without any inherent problems or loss of time in handing over a box from one truck to another, or land a plane so the package can go onto someone else plane.

      Like the writer I agree their is a huge efficiency to be gained in forming a true transcontinental rail just has Canada has that with CP and CN. The STB I believe is mistaken in somehow you have competition by keeping railroads from offering coast to coast service yet every major logistic mode of transportation from ships to planes to trucks are not restricted as such. On top of that most modes of transportation in this country benefit immensely on government build and tax payer supported infrastructure. Time for STB to get over itself and let railroads have a shot a providing a coast to coast service.
      ..

  3. One detail comes to mind – How does a privately owned Class 1 (BNSF) potentially merge with a publicly owned Class 1 (CSX or NS)? Does BNSF use its deep pockets to take the other private? Does BNSF go public again? Can it be done without both being in the same category going forward?

    1. Yes, my bet if the next merger to happen it would be BNSF buying out NS or CSX shareholders w cash offer, keeping everything private. I read a report that Warren Buffet’s company Berkshire, BNSF owner, has a plus +$100 Billion in cash to go after new acquisitions. Otherwise, like CPKS merger it would be stock trade and remain publicaly traded.

      The other thought that I don’t think is out of the realm of possibility is a private equity buys out shareholders from two railroads and combines say UP and NS to form a single privately held company. Their is private equity firms with significant capital resources and they might see the gains Warren Buffet has gotten out of BNSF>

    2. The publicly traded or privately held status of the equity does not matter. Berkshire Hathaway can bid for CSX or NS and if it wins the market’s approval and the STB’s approval, either CSX or NS becomes a part of Warren Buffett’s empire. Those tracks become part of BRK. (BTW, Berkshire Hathaway is publicly traded–BNSF is not privately held; it is a holding of a publicly traded entity.) Conversely, NS or CSX can approach Buffett about selling his BNSF business, but good luck with that.

  4. Two obstacles:

    1] The 50% reduction in CEOs. This has doomed many a merger in the past.

    2] Reciprocal switching, which will be a requirement. C1s oppose it universally … well, ‘universally’ in America. In Canada it has worked for years. And there are two transcontinental roads there. A lesson for American roads?

    1. Completely agree with your point number 2!

      Given that any consolidation involving an eastern carrier with a western carrier will essentially set off the “final round”; the STB would have to insist on a Canadian style interswitching arrangement but, without the 30 kilometer limit.

      Any rail shipper located anywhere in the lower 48 would have to enjoy commercially reasonable access to another railroad. It’s the ONLY way it could work.

  5. “The inability to offer seamless service from Point A to Point B shouldn’t be among them.”

    That ability already exists, ever since railroad gauge was standardized. I seem to recall that back in the 1960s a series of smaller roads created what was nicknamed the alphabet route where something like four of them cooperated to provide a competitive route from the northeast to Chicago.

    Going to only two railroads transcontinental in scope does not solve the challenge of the shipper where either Point A or Point B are only on the other railroad. A real downside is that you also halve the possibility of a railroad coming up with innovative ways to provide service. The bigger a company gets, the resulting inertia generally makes it more resistant to change. If you think they are arrogant towards customers now, just wait until a duopoly reigns.

    Of course, one solution would be to separate the infrastructure from the operators, and allow freedom of access to the whole system. But that is unlikely.

  6. A Chicago bypass route like the TP&W might actually get used if it didn’t involve a road short hauling itself.

    Many trains would still have to switched somewhere to allow for multiple destinations even if not interchanged.

  7. “That’s a big deal for several reasons, not the least of which is that 25% of the continent’s rail traffic originates, terminates, or passes through the Windy City.”

    Doesn’t need to. Chicago is “cheap and easy” because everyone is there. As opposed to some other gateways where some are missing. If the USG offered to build a “super gateway” outside of Chicago where everyone could meet, would the C1’s allow it? Not likely.

    The other option they don’t mention is a carrier just having the balls to outright build their way to being a transcon.

    1. Unfortunately history is littered with failed Chicago bypasses — Kankakee Belt, Michigan Central to Joliet, Santa Fe buying (then dumping) TPW.

  8. As the author says truckers can travel on taxpayer funded hwys same with commerce using waterways & airports but RR’s are the only mode that has to maintain their own ROW putting them at a big disadvantage. Maybe the govt should manage/fund the RR infrastructure (tracks/disp) as they do other modes charging users fees. This would free them of this expense & allow more open access on the rails to finally start capturing all this business they have lost to truckers. A good experiment would be to take the NEC away from Amtrak put it under FRA mgmt charge the users Amtrak, commuter & freight fees to maintain & upgrade the corridor.

    1. Thank you! I wholeheartedly agree.

      Railroad infrastructure should be nationalised and private companies – freight and passenger – should have the ability to gain access to those lines by paying user fees.

      We’ve lost thousands of miles of extremely valuable infrastructure and right-of-way, all in the name of capitalism, whilst transport modes using publicly owned and maintained roadways, airways and waterways rarely have their profit motives questioned (only subsidised).

  9. I point everyone to a past service that offered seamless service coast to coast: to whit, American President Lines stack trans/Pacer Stacktrain(before sale to UP) offered just such a through service from coast to coast…and where is it today? Gone CSX had it’s own coast to coast service, CSX Intermodal, same with BNSF marketed as BNSF America…so I call BS on the whole inability of the railroads to operate seamless service coast to coast.

  10. The big problem in CHI is a lack of co-ordination between the east and west RRs. Example, the NS using auto router causes up, CN, CP, UP, and BNSF reluctant to call crew before the equipment is actually at the crew change point. The long crew districts in and out of CHI means a crew cannot be called until the train is at the crew change point. PSR strikes back.
    But this not to single out just NS. Except for a few hot shots, the connecting RR will have no idea when their train is coming. With the C-19 lack of crew presents more problems. What may be needed wis for all of CHI becoming one RR with qualified crews for all routes? Will that happen NO WAY!

  11. If you can’t compete when interchanging traffic halfway across the country, changing that isn’t going to make a lick of difference. Your problems rest elsewhere and aren’t because you’re not spanning coast to coast as one corporate entity.

  12. Stephens is absolutely right. The railroads need to exploit any efficiencies they can get to counter the more flexible truck competition. The Canadians have proven that transcontinental railroads are both practical and efficient.

    The anti-trust sentiments of the STB are misplaced. There is plenty of competition for even the largest railroads in the guise of rubber tired vehicles. With the probability of widespread driverless trucks on the near horizon, the railroads need to get their act together. Creating two national transcontinental railroads are a good start.

  13. I don’t disagree that a transcontinental merger would offer benefits. However, like many mergers the benefits are often overly optimistic and the downsides are underestimated. On the intermodal side a merger could mitigate some Chicago interchange and convert long-haul drays from Chicago into Indiana and Ohio. On the other, how does adding a bunch of new O-D pairs square with large train operation?

    I would also push back against the idea that this is all of sudden a problem starting with the Biden Administration. Railroads could have done a transcon merger in 8 years of Bush, 8 years of Obama (maybe), 4 years of Trump and didn’t. The only reason the new rules were tested was when CN swooped into the CP-KCS party. I might have missed it, but I didn’t see any dissents in the Board’s opinion on CN-KCS, which was mostly Trump appointees. Finally I didn’t interpret that opinion as shutting doors on mergers, but you need to come with an argument that is stronger than “It is great for competition because we said it is.”

  14. By extension, the government should own and manage railroad rights-of-way as they do highways, and as most countries do with railroads. That way, competing train operating companies could route traffic from anywhere to anywhere over the consolidated rail network. Just like truckers do over highways!

  15. So please help me understand how the Class I’s can routinely swap locomotives (I see every road name all across the country) and now work out arrangements with customers in a similar fashion? I assume they charge each other for the locomotive usage, so can they not work out arrangements for specific moves? Are they not interested or is it not possible?

    1. I meant “not” instead of now. How can they not work out similar arrangements for product moves similar to locomotives?

  16. Since when does market concentration ever lead to better service? I cannot think of an industry that has become a non-competitive oligopoly where consumers have benefited.

    As mentioned above, the Alphabet route provided premium service even though it involved multiple railroads handing off cars at crowded terminals, swapping out foreign power and delivering cars to hundreds of industrial sidings.

    The Class 1s can’t even hand-off entire container trains to one another without choking delays. Hundreds of service lanes have intentionally been abandoned; mergers would likely decrease service offerings And delivery of boxes occurs sometimes a hundred miles or more from a desired destination.

    The reason this worked was because of regulation — rates were transparent public information, so competition centered on service. That way the Alphabet Route, sandwiched by behemoths PRR and NYC could compete with them.

    While regulation had its problems, the industry suffered most from public subsidies to other modes, de-industrialization/relocation and sclerotic management.

  17. Bigger is not automatically better.`And what would happen if social woke-ism imposes constraint on operations and fees, ignorant of costs and profit? Would the ghost of the ICC resurrect to impose will without accountability? The solution lies in better operations of present network, and let the market determine life or death. Businesses that do not make profits go out of business.

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