Don’t make me take you to the watershed: During Union Pacific and Norfolk Southern’s July 29 presentation announcing the proposed combination, the piece we found most interesting (beyond the audacity of attempting a transcontinental merger in the face of STB rules specifically designed to prevent a transcontinental merger) was the market share opportunity from trucks around the Ohio Valley and Mississippi river, which they’re calling the “Watershed,” because there’s lots of water in the Mississippi and Ohio rivers, presumably.
Anyway, the basic idea seems to be this: The current industry structure discourages service offerings to customers on mid-haul East-West routes that cross interchange points. For example, Memphis is a UP-NS interchange point, and let’s say there’s a 1,000-mile length of haul opportunity with Memphis in the middle. For Union Pacific, it’s an unattractive 500-mile short haul with an interchange coordination headache with NS, and for Norfolk Southern it’s an unattractive 500-mile short haul with an interchange coordination headache with UP. Therefore, it remains an untapped opportunity able to be exploited by a unified system running single-line service with no interchange.
It’s a good idea that makes logical sense, and UP and NS are using it as a carrot to the STB as one of their strategies to satisfy the public interest test (trucks off the highway). Comments by Hub Group management on its earnings call also suggested this Watershed opportunity is real and material. What immediately struck us as we listened to the presentation was, why haven’t they done it already?
The merger rules only give weight to service benefits “that cannot otherwise be achieved,” as we underline below. § 1180.1(a): General: “Although mergers of Class I railroads may advance our nation’s economic growth and competitiveness through the provision of more efficient and responsive transportation, the Board does not favor consolidations that reduce the transportation alternatives available to shippers unless there are substantial and demonstrable public benefits to the transaction that cannot otherwise be achieved. Such public benefits include improved service, enhanced competition and greater economic efficiency.” So, the question becomes: Can truck conversions to rail in the Watershed “otherwise be achieved” without a merger?
UP and NS are waiting for a green light from the STB before they try, but what about BNSF and CSX? If UP and NS see opportunities here, those same or similar opportunities no doubt exist for BNSF and CSX. Have they also relegated them to the too-hard-basket given the challenges of coordinating resources and negotiating contentious revenue splits on mid-haul moves? That’s not unreasonable, but things have now changed.
Whether they like it or not, BN and CSX may soon be heading for an arranged marriage (unless Berkshire tries to outbid UP for NS, of course). On July 29, NS effectively transitioned from a BNSF service partner to a competitor, and UP transitioned from a CSX service partner to a competitor. If BNSF and CSX did attack the Watershed prior to any combination of their own by coordinating schedules, sharing power and only changing crews at interchange points, all of the potential outcomes would be interesting. For example, they might find that:
• UP and NS are correct. BNSF and CSX may discover there are indeed underserved lanes worth hundreds of millions in annual revenues, with single-line service the key to unlocking them. However, collaborating on them now is a good way to engage early with customers and nail down the key routes for when they’ll be able to offer single-line service of their own.
• There’s no “there” there. Alternatively, they might conclude these mid-haul Watershed markets are more fantasy than reality, which would be good ammunition in the event BNSF and CSX decide to try to spike the UP-NS merger in the 2026 STB hearings.
• Exists, but underwhelming. Another potential outcome is that, yes, there are some commercial opportunities here, but truck competition remains too fierce and customers too reluctant to switch to rail on these lanes to warrant more than a handful of additional train starts. We’re obviously just spit-balling here and the commercial teams at BNSF and CSX have no doubt thought long and hard about these things in the past. But, like we said earlier, the East-West competitive dynamics just changed, and it’s much easier for two railroads to collaborate on new service offerings if there’s an expectation they will later merge, so maybe it’s time for a fresh look.
