What Does the CP-KCS Merger Mean For Our Region?

Railroads, like any network, feel a disturbance in the force at every corner.  Even though the action is largely taking place across the Misissippi, the transaction (and the preceding dance battle) has lessons and consequences for New England, Atlantic Canada and the northeast.

The synergies between CP and KCS have long been visible to observers.  The two railroads connect only at Kansas City so they don’t prompt competitive worries in a merger.  CP gets a gulf coast outlet for grain; KCS gets access to Chicago and beyond.  KCS makes CP more stronger and more attractive for future mergers.

Will Anything Change?

There may be a bit of gulf coast petro-chemical traffic or Mexican imports that CP can bring “across the top” and down to Albany or over the former CMQ, but it is hard to imagine this amounting to much or causing traffic diversions.  CP already brings a fair amount of propane to Albany, Vermont, Quebec, Maine and New Brunswick from Alberta and North Dakota.  A link to the gulf coast adds another source and another option if prices vary by source.  Adding KCS destinations in Texas, Mexico and elsewhere could bring new markets for CP shippers.

If CN prevails, KCS would add Kansas City, Dallas, Houston and Mexico to their map, adding destinations from Halifax and Montreal as well as points on NECR/P&W  and StL&A which interchange with CN.  A CN transaction has a higher risk of service disruption as CN’s plan is to divert traffic now moving up the KCS from Shreveport to Kansas City to instead run on it’s former IC line north from Jackson, Mississippi up through Memphis to Chicago, a route that Hunter Harrison single-tracked a few years back.

The more significant changes to our region could come from other mergers this could provoke and changes in how the Surface Transportation Board handles mergers.

The Chess Game of Merger

If CP is shut out from KCS it would create an imbalance, leaving CP the much smaller carrier relative to other class 1’s and especially it’s Canadian competitor CN.  No railroad wants to be the weaker partner in the merger dance.  For CP, this is an existential necessity.

CP may have tipped it’s hand about what what it would do without KCS when it warned that CN’s bid would destabilize the industry because it would be forced to seek another merger partner.  Indeed rumors have suggested discussions have already occurred between CP and UP and NS.  Of course it wouldn’t be a railroad without rumors, but both carriers mesh rather well with CP, having existing interchanges, partnerships and addressing CP network weaknesses, like connections in the Midwest.  How this would shake out is anybody’s guess.  UP has said they are not pursuing M&A at this time and UP seems more naturally aligned with CSX (which has been cooperating with CN) than NS.

What would the STB do when faced with a domino of mergers?  There is an established process, but the STB has shown lately that it is considering shippers interests.  Would we face an outcome where two railroads remain, serving the entire North American continent but with limited interchange between them?  In effect two separate economies with cost and service barriers for shippers who wanted to move goods from an origin on one to a destination on another?  Would this create some kind of “open-access” where one railroad had rights to serve shippers on the other?  Railroads hate that idea because it erodes their monopoly pricing power (shippers with multiple options typically get lower rates from the railroads).

Merger Problems

CP has laid out a business case for traffic growth and cost savings as well as advantages to shippers.  We can expect the same from CN.  Yet despite rosy predictions for growth in profits and shareholder value, Harvard Business Review reports that 75-90% of mergers fail, especially the larger mergers.  Think of how many companies google has bought only to subsequently shutter.  In the railroad industry, it isn’t just Penn Central, even the “Friendly” mergers have resulted in lost innovations and less traffic.  C&O/B&O, sometimes held up as the “Right way” to merge in contrast with Penn Central, still ran off B&O’s transformative president Jervis Langdon and squelched many of his improvements, replacing that (like UP with SP) with plenty of capital and confidence. B&O needed capital, but it still caused a mediocrity to take hold where Landgon’s innovations had been.  BNSF is another example of a “good” merger, but not to aggregated BN people calling it “Big New Santa Fe”. Th Conrail split-up, which seems to have resulted in a 20% traffic loss, at least on the merchandise side. Further back, the SCL merger also seemed to result in big traffic loss in Florida. Even changes in management with no merger at all are risky.

According to Harvard Business Review, clashes in culture cause most merger problems.  Certainly this is legendary in railroad mergers.  CP-KCS would be more compatible in that regard than CN-KCS.  Or CP and NS or UP for that matter.

But for railroads there is another complication which is the service meltdowns that have accompanied some badly executed mergers – often when changes were forced through with more confidence than calculation.  Even small railroads like NECR can quickly melt down when things go off-plan, putting crews and equipment far from where they are needed.

These larger changes if bigger mergers came would be far-reaching and would affect the commercial economy in every state and province and the overall functioning of the railroad industry and its relationships with shippers.  While the action regarding KCS may now be west of the Mississippi, it is still something to watch.

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Associate Editor; Consultant for Rail Planning & Development
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Christopher has 15 years of railroad experience, starting as a Conductor on Cape Cod and 15 years of public policy advocacy and outreach work. Christopher is Executive Director of Vermont Rail Action Network, communicating the vision of better trains to elected and government officials, community leaders and the public. Christopher is a consultant for freight and passenger planning and development projects including operating planning, federal grant applications, marketing, and public outreach.