We hosted a call with former Surface Transportation Board Chair Daniel R. Elliott III to discuss rail M&A. An East-West consolidation remains an uphill battle—he gave it a 20%-25% chance—and would likely be an early 2026 event. given confirmation timing of a fifth STB member. If a merger occurs, open access, reciprocal switching, large labor concessions and a blessing from the POTUS47 Administration are all important consideration factors.
Elliott sees a 20%-25% likelihood of a transcontinental merger—where there was negligible chance under the Biden Administration—in line with our view. Only a U.S. East-West/end-to-end combo is truly in play given 1) lack of overlap, and 2) geopolitical complications involved with a Canada-U.S. merger. In our recent rail growth deep dive, we estimated CSX’s CEO receives a 7x payout compared to Norfolk Southern’s CEO in a change-of-control event. Currently, a CSX-Union Pacific combination is the most discussed among the investor base. A transcontinental merger would likely facilitate a second between the remaining U.S. players, and this possibility would weigh on regulators’ evaluation.
Competition will be the STB’s main sticking point, but the railroads could accept open access to alleviate concerns. In our rail deep dive, we highlighted that prospective merging rails could offer to adopt full reciprocal switching as an olive branch to retain competition. Elliott noted that in some cases open access/reciprocal switching in a consolidated landscape could be more beneficial than fragmentation without frictionless access. We view this comment as incrementally positive for a merger case’s prospects. Service considerations will prove less of a concern for a merger case, as CPKC’s track record has alleviated this.
A fifth Republican STB Board seat will likely need to be filled before any railroads would make a move. Given the long Senate confirmation process, the STB will be lucky if it fills the seat before the end of the year, according to Elliott. The risk of moving forward with a merger in a current 2-2 split (Republicans Patrick Fuchs, Chair, and Michelle Schultz; Democrats Robert Primus and Karen Hedlund) is too high, given the likelihood that the two Democrat Board members would vote against any additional consolidation. Potential candidates remain unknown, but this is likely not a high priority for the Administration.
Getting the Administration on board will be key to any merger being successful. The FRA has already taken a stance on two-person crews, signaling the Administration’s alignment with the labor unions. An end-to-end merger likely shouldn’t eliminate any jobs (aside from corporate/executives), though negotiations with the labor unions would likely need significant new benefits to get them on board. Getting the unions on board will be crucial to getting “blessing” from the White House.
