Atlanta is at the center of a railroad merger with big economic implications

For Atlanta, it also presents the potential loss of a Fortune 500 headquarters and local jobs.

Proponents, including Norfolk Southern CEO Mark George, argue an “artificial bifurcation” between eastern and western railroads in the U.S. has been holding back the industry’s growth for nearly two decades.

That’s how he put it before several hundred industry insiders at Railway Age’s annual conference in Chicago last week.

“We’re stuck, frozen in time since 2000 with these artificial barriers called the Mississippi River,” he said.

“And if you don’t have growth, you’re going to be in a cycle where all you’re doing is perpetually looking to cut costs.”

Opponents, which include all other North American Class 1 railroads, argue the merger consolidates a dangerous percentage of the nation’s freight into the hands of one “Goliath,” as Canadian Pacific Kansas City CEO Keith Creel told the same room a few hours later.

“What’s being proposed, I think, is a very, very risky way of (improving efficiency), and I don’t know if that destination is what ultimately is in the nation’s best interest. In fact, until I’m convinced differently, I feel strongly it’s not,” he said.

The proposed merger will be decided by the Surface Transportation Board, an obscure federal panel responsible for the economic regulation of freight rail.

While the board cannot comment directly on pending matters, Vice Chair Michelle Schultz said at the conference they take their regulatory role seriously.

“We are very much aware of what’s at stake and the impact that the actions of this board have on the rail network, which we all know is a backbone of the supply chain, which is the backbone of the economy,” she said.

“It affects basically every business in America and every consumer in America.”

After the two companies’ initial application was deemed incomplete, they have promised to refile by the end of next month with hopes to secure approval in 2027.

Credit: Jamie Kelter Davis

Credit: Jamie Kelter Davis

‘A system that’s fragmented’

George and his counterpart at Union Pacific, Jim Vena, who plans to stay on as CEO of the unified company, point out that the way railroads operate in the U.S. today, where eastern railroads hand off freight to western counterparts, doesn’t make much sense.

Vena compares it to asking everyone flying across the country to stop in Chicago to change planes.

On a given day in Chicago about 1,000 trucks will move intermodal freight from one railroad interchange to another, he added, “because there’s not a good enough (rail) connection to make that time work perfectly.”

He estimates a transcontinental network could cut 24-48 hours off the shipping time.

The country’s bifurcation, George said, “has basically put the brakes on our ability to grow anymore. We’ve been seeing truck freight growing. We’ve been seeing the economy grow. We haven’t been participating in that volume.”

A larger railroad “is going to force our competitors to be better. If they can’t meet our service … then they have to do it only one way and that is price,” Vena said.

And it will take more trucks — which he argues are the industry’s chief competitor — off America’s highways.

“One would assume” that this scenario would be “much more symbiotic and easier to pull off,” said Jason Seidl, a transportation industry analyst with TD Cowen.

And he noted a unified company might help out “watershed traffic,” or customers just over the railroads’ mid-way meeting point. In that region it’s sometimes not worth it for one railroad to bid on just 100 miles of a 600-mile journey that is split in two, so shippers get no service at all.

“The question is, can we get there? Can they meet their targets without any major disruptions?” Seidl asked.

Railroad history is littered with mergers that yielded varying degrees of service disruption and safety issues.

“History isn’t really kind to what’s happened post-merger, both in terms of service integration challenges, as well as the growth that accrued out of those mergers,” BNSF Railway’s Chief Marketing Officer Tom Williams said at the conference.

His company is another vocal opponent to the deal.

Credit: Jamie Kelter Davis

Credit: Jamie Kelter Davis

‘It’s not perfect’

The American Farm Bureau Federation, which represents many agriculture producers who ship via rail, voted to oppose the merger earlier this year.

A recent economic analysis by the bureau warns the deal could increase farmer costs and consumer food prices.

“While not all costs are passed through fully or immediately, the cumulative effect can contribute to higher consumer prices, particularly for staple foods,” the report read.

Another major rail shipper group, the American Chemistry Council, has also been opposed, warning it could leave the industry paying even higher rail shipping rates for worse service.

Union Pacific and Norfolk Southern’s fellow railroads, for their part, argue that some of what the two are trying to accomplish can be done without a merger.

“At the end of the day, the system is working. It’s not perfect. We know it’s not perfect,” Creel said in a conference session titled “The Union Pacific-Norfolk Southern Merger: CPKC’s Alternative View.”

But some improvements the pro-merger camp seeks, he argued, can happen with marketing alliances and parties “willing to commit their networks to realize some of the synergies without the risk.”

The industry is already in a place, Creel warned, where “We’re so consolidated that shippers don’t have options.”

Credit: Jamie Kelter Davis

Credit: Jamie Kelter Davis

Indeed, CSX and BNSF — the other eastern and other western railroads in the U.S. — announced new joint intermodal service late last summer after the merger news. The companies say customers have responded favorably.

Further consolidation would arguably eliminate two existing transcontinental railroads, BNSF’s Williams said.

“From a customer perspective, there’s effectively four vibrant transcontinental railroads today,” he said: Union Pacific handing freight to CSX, Union Pacific handing to Norfolk Southern, BNSF to CSX and BNSF to Norfolk Southern.

“It’s really hard to see how you get to enhancing competition when you’re taking two of these four effective transcontinental railroads out of the mix.”

George and Vena have argued their combined railroad would carry about the same annual revenue per ton of freight per mile as BNSF.

Williams called this a “sleight of hand” because BNSF tends to ship heavier commodities. He has pointed out that a combined Union Pacific would control 40% of overall rail freight.

Credit: Jamie Kelter Davis

Credit: Jamie Kelter Davis

‘New rules’

Martin Oberman was chair of the Surface Transportation Board from 2021-2023, appointed by then-President Joe Biden. He told The Atlanta Journal-Constitution that to understand the merger question, it’s important to understand the history.

The Staggers Rail Act of 1980, which partially deregulated the industry, set off a major wave of consolidation, he said. The industry was “overbuilt …. And railroads were suffering financially.”

The country went from roughly 40 Class 1 railroads to seven. But that prompted the STB to enact a pause on further mergers in 2000, to decide whether enough was enough.

The “new rules” that the board ultimately drafted after that pause are what today’s proposal will be judged by.

And in Oberman’s telling, the “the tenor of those rules is: ‘The industry is greatly consolidated. We’re concerned about market power and consolidation going forward, so we are going to enact stringent new, I call them hurdles, that have to be overcome for us to ever approve another merger.’”

Those seeking a rail merger now have to prove their plan would enhance competition in the industry.

Many assumed these rules spelled the end of mergers, Oberman said.

But five years ago, Canadian Pacific and Kansas City Southern were allowed to merge into CPKC — in a far smaller deal than the Norfolk Southern-Union Pacific proposal.

CPKC’s network is one-seventh of the proposed unified Union Pacific network, its CEO Kreel pointed out, covering just 19 states to the proposed 43.

Oberman is clear he fears another major merger could be “problematic” given the way the industry already functions.

“If you already have monopolistic approaches to railroading with four railroads, it’s not going to get better with three. In fact, it’s likely to get much worse, if nothing else happens, because the new railroad will be bigger and more powerful,” he said.

The deal also raises the question of whether it could trigger further industry consolidation, even though BNSF’s owner has been clear that company is not interested in acquiring CSX.

“But those positions aren’t final and permanent. If this merger gets approved, something could change,” Oberman said.

In an interview with the AJC, Norfolk Southern’s George argued that some are biased against mergers because they are often a “cost play” that consolidate market share.

“This is an end-to-end linkage. It’s very, very different,” he said.

If rail competitors “choose not to get together to do a competing merger, then they’re going to have to compete with price,” he said.

“Golly, that sounds like enhanced competition to me.”

Current STB Chair Patrick Fuchs, appointed by President Donald Trump last January, told the conference that the “through line” of the board’s current priorities is, “we try to make markets work better.”

“And it depends on the nature of the market problem for what the solution is,” he said, adding that they’re looking to break down barriers and improve competition.

How they ultimately vote on this merger, said Seidl with TD Cowen, “is the, by far, hands down, most important decision in the railroad industry in the last 100 years.”