We hosted a call with rail industry participants on an update on rail service, end markets, and thoughts on a transcon merger. Tariffs are having a meaningful effect on import/export demand, and customers are taking as long as possible to order goods. Class I service remains fairly healthy. A transcon merger came with mixed views, formal filing with the STB will be key for stakeholders to establish opinions.
A short line panelist sees a transcon network eliminating network frictions and emphasized the watershed opportunity. In addition to share gains from truck, some gains could also be made from short lines situated along watershed lanes. Recall that Union Pacific has disclosed $1.75 billion in revenue synergies in a single-line framework. As we have previously noted, prior mergers have seen incremental revenue estimates raised materially and believe upside is likely in this case.
Achieving beneficial transcon service is not impossible with an interline agreement such as proposed by CSX/BNSF, but our short line panelist noted this would be easier (and have cost advantages) in a fully integrated network. The STB’s revised 2002 merger rules acknowledge that interline agreements can deliver gains without requiring integration, but we note that the Board has also consistently established precedent, citing gains that only integration can achieve in prior merger decisions. We believe a lot will hinge on the final STB filing and course of proceedings/comments.
Two panelists (short line operator and rail logistics provider) were optimistic that a potential UP+Norfolk Southern integration would proceed smoothly, but the shipper was very cautious. This has been a key question, given the rail industry has a past of serious post-merger service snags usually arising out of problematic tech integration. Rail panelists acknowledged problems in the UP+Southern Pacific combination as well as the Conrail split between CSX and NS, but emphasized that technology has come a long way since those transactions in the 1990s. We concur with this view and believe that although service issues can creep up, disruptions will be contained relative to prior experience. This has been observed with the relatively quick recovery in the CPKC network following a snag in its tech integration. In contrast, both the historical deals mentioned had unique hurdles.
The chemical shipper on our panel took a less optimistic view of a rail merger. This shipper’s focus will be on the concessions that UP and NS will offer in their filing to the STB. Per this shipper, the details around switching and open access will be critical and assurance of concessions is far from enough—the devil will be in the details and reactions from the customer base are likely to be varied. In the previous edition of our proprietary rail shipper survey, we found that ~two-thirds of shippers supported a merger, provided remedies were offered.
Commodities have been a mixed bag this year, with the weakness coming from pulp/paper and chemicals/plastics. Our short line rail panelist cited three mill closures this year (one of them recently), all located on their railroad, driven by oversupply and global trade tensions. Our chemicals panelist stated YTD chemicals demand has been materially lower than its 2025 forecast (down double-digits, mostly international), with the hopes that 2026 will be flat at best. The weakness has been across resin types. Our panelist attributed the weakness to trade impacts and softer goods demand for items such as appliances (such as fridges, stoves). Another panelist stated he is seeing a big impact on his business from import/export declines (sand, chemicals), weaker cross-border traffic, and less leasing/buying of equipment. Shippers are taking as long as possible to order goods given uncertainty, resulting in a time crunch that is leading to trucks winning share from ports.
