We are on the cusp of what has the potential to be one of the most transformational times in the history of U.S. railroading. On July 24 of this year, Union Pacific and Norfolk Southern announced what had been rumored for a few weeks prior: The two would seek the first-ever transcontinental U.S. railroad merger, uniting lines connecting both coasts under a single banner.
While this has the potential to be groundbreaking in the railroads’ abilities to compete more directly with major nationwide trucking companies, it comes under the shadow of significant uncertainty, including integration challenges with combining two massive operations, the concerns of shippers and labor unions, and regulatory concerns—chiefly, the Surface Transportation Board’s significantly more complex and untested 2001 merger rules adopted after the denied merger of BNSF and CN from 1999-2000. While I intend to touch on all these issues, I’m primarily focused on what will likely be necessary to obtain approval under the new rules, focusing especially on the competition enhancement—an STB requirement.
Of foremost importance for railroad growth and relevance in the 21st century is the ability to compete with as well as compliment major U.S. trucking company networks. A significant drawback of the current eastern and western duopolies is lack of a transcontinental corridor under a single banner. This creates interchange issues that are often based on the railroads’ internal desire to not “short-haul” themselves—in other words, wanting to maximize the mileage (and thus revenue) for freight hauled. One result has been making Chicago, already a significant freight origin and destination point, into the main interchange point between the East and West (significant alternatives including St. Louis, Kansas City, New Orleans and Memphis). These routings are often more circuitous, with transit times bogged down by unavoidable interchanges between carriers (these handoffs necessary, even if using some of the less-busy interchanges).
The Midwest is particularly affected by this problem, due to the railroads’ natural competitive advantages with higher freight volumes over longer distances (500+ miles), essentially creating a freight rail “service desert” in the Midwest whose void is filled by trucks. As examples, many customers served solely by UP trying to move their freight east or by NS trying to move their freight west find they aren’t well-served (or served at all) by rail for those routings due to the shorter-haul distances the eastern carriers would need to haul their freight before handing it off to a western carrier, or vice-versa. This is uneconomical, resulting in trucks taking much of this traffic.
The STB must take a broader approach in how it views enhancing competition: Railroads currently suffer a competitive disadvantage due to geographical constraints not suffered by other modes of freight tfrom ransport such as trucking and air freight. To quote rail industry veteran Nate Clark, “Major railroads have a recurring problem with wearing blinders that trick them into forgetting that the real competition rides on rubber tires.” I encourage the STB to avoid wearing those same blinders as it considers the UP+BS merger.
Having a nationwide network with complimentary overlap to major trucking companies isn’t enough, though. One can look to Canada, where the two primary rail carriers, CN and CPKC, under similar regulatory, operational and market conditions as their U.S. Class I counterparts, operate transcontinental networks, and yet find themselves losing volume to trucks due to abandonments and service cuts. Canadian rail service has seen recently experienced some growth following rollbacks of certain negative PSR aspects.
In the U.S., under pressure from Wall Street and activist investors (hedge funds) and pressing on with extreme applications of Precision Scheduled Railroading, some railroads have pursued staff reductions and curtailed investment in capacity improvements and other capital projects—all in the name of driving down the operating ratio. Meanwhile, railroaders and customers have suffered, both consistently saying these cuts have been too large, making railroaders’ lives miserable and customers’ service levels unsustainable.
Among additional cautionary tales in the history of consolidation and resource reduction without sufficient planning, often accompanied by what’s best described as “us vs. them syndrome”:
- The ill-fated Pennsylvania Railroad-New York Central merger in 1968, resulting in the Penn Central bankruptcy, which led to the 1976 creation of government-owned Conrail, requiring decades to repair the damage to the eastern rail network.
- The two-year operational meltdown following the 1996 Union Pacific-Southern Pacific merger, whose effects were acutely felt in the Houston region.
- The operational meltdown of former Conrail territory after the 1999 Conrail split.
One of the best ways for the STB to manage and account for downstream merger effects will be to give shippers and rail labor a say in creating minimum staffing and capex spending requirements as a condition, based on mileage operated, anticipated freight traffic growth and worker needs.
The final and possibly most important focus of my observations is related to route optimization through competition-enhancing line transfers. With the duopolies in the eastern one-third (NS and CSX) and western two-thirds (UP and BNSF) of the U.S., there are significant regional service gaps where one of the two carriers has successfully blocked the other out of the market, creating Class I monopolies within those regions. Major metropolitan regions such as Salt Lake City, Seattle, Nashville, Tampa, Indianapolis, Boston and San Antonio, among others, are served by one Class I. A few technically have limited service from a competing carrier via trackage rights. These situations have often been created due to perceived intentional anti-competitive behavior, such as the CSX predecessor Chessie System abandoning parallel routes into Tampa to prevent NS predecessor Southern from accessing Tampa, today the highest-tonnage U.S. port served by a single Class I.
As part of the approval process of a UP+NS merger, potentially followed by BNSF+CSX, the STB must mandate sale of certain routes to enhance competition where regional monopolies currently exist. I propose the full sale of certain routes and partial sale of others (such as in cases where there is only a singular route), where partial sales would result in each railroad owning an equal share, similar to the creation of Conrail Shared Assets in the North Jersey, South Jersey/Philadelphia and Detroit regions.
Such key transfers would give the other carrier access to regions currently served by only one Class I. In the case of routes being sold outright, the selling railroad would retain full trackage rights at predetermined access rates. In the case of partial ownership transfers, the lines involved would be jointly owned by each railroad and operated similar to Conrail Shared Assets. These proposed changes (as seen on the maps) would enhance competition by providing unhindered (i.e. not requiring trackage rights) dual-railroad access to the Seattle region, Salt Lake City, Boston, Tampa, San Antonio, the Mexican border, and other places. BNSF owns its own route to the Mexican border at El Paso, but it connects only with Ferromex on the Mexican side, of which UP owns 26%. CPKC has its own route to the Mexican border, crossing at Laredo, Tex., but requires significant stretches of trackage rights over UP—which has full or partial control of all routes between the U.S. and Mexico.
Mandating trackage rights access for captive Class II and Class III railroads to interchange with other Class I’s as a merger condition could also provide competitive enhancements. Additionally, the STB could require fast-track rebuilding of key abandoned routes, such as:
- The ex-PRR Pittsburgh-Dayton-Indianapolis line.
- Lines down the west side of Florida to Tampa.
- The ex-Milwaukee Road across Washington State.
- The ex-CRI&P (Chicago, Rock Island and Pacific) Memphis-Amarillo line.
- The ex-Illinois Central Meridian-Mobile line.
The STB could also require freight railroads improve passenger train priority or give passenger rail agencies an option to purchase partial widths of rights-of-way to enable the construction of passenger-only lines parallel to existing freight lines as a more sustainable long-term solution. In all cases of lines designated for full sale, partial sale, parallel right-of-way access or trackage rights access, the selling and purchasing railroads would be able to negotiate prices, with mandatory arbitration for unresolvable disputes. The purchasers would maintain the right to opt out of purchasing designated routes. To enhance competition, the selling railroads would maintain full trackage rights on routes sold. Railroads would be encouraged to keep directional operation arrangements (such as on routes across Arkansas and Nevada), even with line transfers, to help maintain network fluidity.
In summary, freight railroads have a significant opportunity to expand their footprint and competitive edge if they play their cards right. This will require:
- Significant STB oversight.
- Concessions from all parties, including transfers of key routes.
- Input from employees and customers.
- Commitments to merger integration plans that minimize or prevent service meltdowns.
- Willingness to better accommodate passenger trains on shared or parallel routes with freights, or to sell redundant routes outright as passenger-only lines.
- Rollback on the harmful impacts of PSR on safety, service quality and competition.
Transcontinental mergers may be necessary for U.S. Class I’s to compete in the 21st century, provided they’re done properly. Like UP and NS, Berkshire Hathaway/BNSF and CSX should pursue a merger, not because they believe there’s no other alternative, but because they believe it’s the right thing to do.
Map Key
- White: Lines currently owned by the railroad in the “Current” map designated for either full or partial ownership transfer; or trackage rights access when competitor does not desire ownership.
- Pink: Lines to be jointly own between the combined UP+NS and BNSF+CSX systems. The receiving railroad can obtain trackage rights and retain the option to purchase partial ownership.
- Dark Green: Sold by UP, to be jointly owned by BNSF and CPKC as route to the Mexican border.
- Light Green: Partial ownership sold by NS, to be jointly owned by NS and CPKC.
- Light Blue: To be jointly owned by UP+NS, BNSF+CSX and CPKC. In Texas, this is the HB&T (Houston Belt & Terminal Railway Company, jointly owned by BNSF and UP), whose service limits would be extended from Beaumont to Rosenberg. In Indiana, Genesee & Wyoming’s CF&E (Chicago, Fort Wayne & Eastern) short line operates on CSX-owned tracks, which would be owned by all three.
- Orange: Current or proposed future BNSF-owned lines.
- Yellow: Current or proposed future UP-owned lines.
- Black: Current or proposed future NS-owned lines.
- Blue: Current or proposed future CSX-owned lines.
- Red: Current or proposed future CN-owned lines.
- Brown: Current or proposed future CPKC-owned lines.
- Purple: Current short lines or passenger rail routes on which Class I’s have trackage rights.
Jim Dodds is an industry observer who likes to think outside the box and approach ideas from a different angle than other observers, offering a fresh perspective. A 2018 graduate of Southeast Missouri State University with double majors in International Business and Spanish, he is currently a Talent Acquisition Coordinator at investment firm Edward Jones. While Jim’s primary focus is North American freight and passenger rail, he is also knowledgeable about the airline industry, having developed network strategy ideas. He additionally has significant knowledge along with first-hand observation of transportation systems around the world, giving him an international perspective on changes and enhancements that could be made to U.S. transportation. Jim’s longer-term professional goal is a career in freight rail, public transportation or airlines. The opinions expressed here are his alone, not those of Railway Age.
