After back-to-back train disasters, regulators approve the largest rail merger in decades creating a line that would stretch from Canada to Mexico
- Regulators approved a railroad merger that would create a single route stretching from Canada to Mexico.
- The rail industry has seen train accidents and labor disputes in recent months.
Rail consolidation has a terrible track record, but regulators think this time it will be different.
Canadian Pacific and Kansas City Southern, the nation's sixth and seventh largest railroads, have been waiting two years to combine their rail networks into the first single-line railroad connecting Canada, the United States, and Mexico. On Wednesday, the Surface Transportation Board (STB), which has sole authority over rail mergers, approved the $31 billion transaction. The board argued the merger was best for the country even though the highly-consolidated rail industry has exhibited major accidents, a grueling fight between railroads and unions, and service meltdowns in recent memory.
In February, a 50-car Norfolk Southern train derailed in East Palestine, Ohio, spilling highly flammable hazardous materials, forcing residents to evacuate, and killing thousands of aquatic animals. To close out the month, another Norfolk Southern train crash caused more than 1,500 Ohio residents to lose power.
Just a few months earlier, the Biden administration imposed a labor agreement to avert a rail strike that could have cost the economy $2 trillion dollars a day. Congress refused workers the sick leave they say would prevent future train disasters like the one in East Palestine.
The rail industry's top regulator argued that the new merger wouldn't add to the industry's woes. "If there is a problem in this country about the safe transportation of hazardous materials on rail," said STB Chair Marty Oberman at a press conference Wednesday, "it is a problem nationwide. It is not a problem caused or the result of this merger." Canadian Pacific (CP) is the safest major railroad, with Kansas City Southern (KCS) short behind, according to the Federal Railroad Administration.
In fact, Oberman argued that this merger would make the country safer, estimating the transnational single-line route would take 64,000 truckloads off the nation's highways. Not only would this prevent 120,000 tons of CO2 emissions from entering the atmosphere, it would mean fewer hazardous spills, as trucks are responsible for 94% of them and trains only 1%, he said.
"To the extent hazardous materials can be moved on rail rather than highways, we are better off," he said.
The history of rail consolidation begs to differ. As the industry has shrunk from 70 major rail carriers in the 1970s to just seven monopolies, it's abandoned nearly 100,000 miles of track and turned away all but their highest volume, highest margin business, forcing farmers and manufacturers to increasingly rely on expensive trucking when they are too far from the tracks.
This loss of competition has also allowed railroads to charge shippers more for worse service. With two duopolies in the east and west, and soon only one carrier running both north and south through the center of the United States, rates have crept up on shippers who "feel that they have little bargaining power," according to the STB.
Meanwhile, railroads have sacked almost a third of their workforce in the last few years and spent $46 billion more on stock buybacks and dividends than on investments in maintenance and equipment since 2010. It's no surprise that shippers have long complained about fewer service calls, lengthy delays, and unreliable service, according to CNN.
"30-40% of the United States economy depends on a well-functioning railroad," Oberman said in the Wednesday press conference. That's why the STB has been "railing about some of the rail service problems and issues affecting the rail industry," he said.
To ensure affected communities remain safe, commuter rail moves on time, and shippers retain efficient interline options, "We have instituted an unprecedented seven-year oversight period" to the proposed merger, Oberman said, noting the STB never allotted more than five years in the past to collect post-merger data and address issues.
Despite the woes of past consolidation, with a 4-1 vote, the STB "found that putting these two railroads together at this point in the country's history will" create "a stronger competitive force" in the economy, Oberman said. A transnational single-line from Canada to Mexico through the United States "will enhance trade, enhance productivity, enhance shipper opportunities to expand their own businesses," he said. Oberman noted that 450 shippers have filed their support of the merger between CP and KCS for one simple reason: The single-line network will save shippers from having to pay to switch their cars from one line to another. The efficiencies gained will allow the combined railroad to better compete with its larger rivals, he added.
Oberman also argued shippers would not lose any existing rail competition from the merger. Not only will the merger of CP and KCS result in the smallest of the major railroads, "there will be no loss of a parallel competitive route" because their routes do not overlap, he said.
"If it all sounds too good to be true, we are in agreement," Robert Primus, the one STB board member who voted against the merger, wrote in his dissent from the board's decision. He argued that market concentration allows companies to extract rents, wield heightened political power, and exploit workers, finding Big Rail to be no exception.
Primus echoed the Department of Justice's Antitrust Division, which expressed concern in January about further consolidation in the rail industry "in light of the recent supply chain disruptions that have wreaked havoc on American consumers and businesses." According to Washington Monthly, the nation's largest railroad, Union Pacific, repeatedly backed up supply chains at the height of the pandemic because it had cut the slack it needed to keep up with a rebound in consumer demand. It announced record profits in 2022.
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