News / Signals may be turning green for an east-west US railroad merger

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US railroads could see a significant shake-up, as there are moves to test the regulator’s appetite for further M&A in the sector. 

There is talk of an east-west merger, which previously had been thought would not receive approval. 

But according to Semafor, Union Pacific – whose CEO Jim Vena has often touted the benefits of such a plan – has appointed Morgan Stanley to advise on the possibilities. 

The two operators under consideration would be CSX and Norfolk Southern (NS). 

Plans for further M&A in the sector have been much mooted recently, following the appointment of Patrick Fuchs as Surface Transportation Board chief in January. He has reportedly said that restrictive 2001 STB rules on mergers should be interpreted “pragmatically”, and with the new focus on rebuilding US infrastructure, it could be the first hint of possibility. 

However, it has also been acknowledged that, even with a fair regulatory wind, a transcontinental merger would be challenging.

“I see a lot of benefit,” said NS CFO Jason Zampi, at the Wolfe transportation conference in May. But he added: “I also view the regulatory framework as pretty challenging.” 

Representatives from Canadian National, CPKC, CSX and NS all expressed doubts at the conference over whether regulatory hurdles could be overcome. 

Kenneth Creel, CEO of the most recently merged entity, CPKC, said: “There’s always been an argument why it could make sense. But the arguments would have to be able to ignore the regulatory risk that is undeniably there.  

“I’m the only CEO in the industry that’s navigated that regulatory risk. And the standards we had to meet to get our deal approved pale in comparison to the standards that are untested in the new merger rules.

“To create a network that not only protects competition but enhances competition, that protects service and enhances service; there is not a hill of regulatory risk to climb, there are mountains of regulatory risk.” 

Executives at UP’s likely targets for acquisition also expressed some doubts. And CSX CCO Kevin Boone said there were other ways to bring benefits to shareholders, and the company was not looking at mergers. 

However, UP CEO Jim Vena told Trains it would be a “win for our customers and a win for competition, and it’s a win for how the country should move ahead”. 

He argued that cutting out inefficient and time-consuming interchanges at hubs such as Chicago would improve services, and allow rail to compete better with road. 

“You change the whole paradigm discussion with trucks on the highway versus what comes to the railroad,” he explained. He acknowledged the regulatory problems, but added: “I’ve always thought that it was possible. Now whether we’re in the right situation with everything – who knows, and we’ll see what happens.” 

If UP was allowed to buy an east coast railroad, it could force rival BNSF to make a similar move – but BNSF doesn’t believe such a move would be welcomed by customers. Spokesman Zak Andersen told Trains: “For a merger to happen in today’s environment, our customers, policymakers, and the communities we serve would need to indicate that they want to see additional mergers.  

“We view it as unlikely as we aren’t hearing from our customers or the other constituencies that they want to see further consolidation in the industry at this point in time.” 

The Canadian Pacific and Kansas City merger into CPKC was allowed because as a north-south merger, it did not reduce competition. Mr Creel explained: “Our merger was end to end. There was no overlap. 100% of the customers got more opportunities.  

“And I think those facts simply don’t exist with any other proposed merger that might be out there.” 

The two-year long integration of CP and KC went relatively smoothly, until recently when management systems were merged.