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Railroad Merger Raises Larger Concerns About Competition on the Tracks

Last Monday, the sixth-largest North American railroad, Canadian Pacific, announced plans [[link removed]] to buy the seventh-largest, Kansas City Southern, for $25 billion. If approved, this will be the largest railroad deal in nearly 15 years, creating a system that will stretch from the Atlantic to Pacific and into Mexico.

Farmers and other producers of heavy, lower-value commodities who rely on railroads to transport their products have mixed feelings about this proposal. Decades of railroad consolidation and Wall Street-driven cost cutting [[link removed]] have diminished railway capacity and cut or degraded service, especially to small towns and rural areas. Some agricultural shippers are skeptical of any further consolidation, both from this merger and the future deals it could encourage.

Others argue that the merger may be neutral, even positive [[link removed]], since Kansas City Southern and Canadian Pacific’s networks do not overlap, the combined railroad would still be the smallest of six, and a new connected railway linking Canada and the Gulf of Mexico could provide a competitor to the Canadian National. But it raises the question – is more consolidation truly the best way to improve competition in monopolistic railroading?

“When you’re operating in an environment where [there are] monopolistic behaviors everywhere and at the best you may have a duopolistic set of behaviors, shippers are still operating in a consolidated environment and I just think that that presents overall concerns,” says Ann Warner, spokesperson for the Freight Rail Customer Alliance. “This merger needs to be reviewed under the utmost scrutiny as to how it could enhance competition.”

In 1980, Congress tried to save a then-ailing rail industry by cutting back on many regulations and allowing wave after wave of mergers. Deregulation allowed railroads to abandon unprofitable routes and services, while the mergers gave remaining railroads increasing monopoly power. In 1976 there were 63 major railroads operating in the U.S., [[link removed]] and much of the industry was in bankruptcy. Today there are only seven major railroads left in North America, and they are all highly profitable. Over the same period, railroads have abandoned nearly 100,000 miles of track [[link removed]], leaving many cities and regions with a single monopoly carrier, or no service at all.

Large grain traders and agribusinesses are big enough to negotiate better deals and service with consolidated railroads, but smaller traders and farmers are the first to suffer from service cuts or higher rates. Grain farmers without access to river or lake barges are particularly reliant on rail [[link removed]]. In landlocked states such as Montana [[link removed]] and the [[link removed]] Dakotas [[link removed]], where most farmers have to rely on a single monopolistic railroad [[link removed]], they pay twice the rate [[link removed]] of those in areas where competition still exists.

Limited rail capacity also contributes to global climate change by putting more trucks on the highway. In 2008, the Millennium Institute estimated that a $500 billion investment in rail infrastructure could move 83 percent of long-haul trucks off the road in two decades [[link removed]], bringing about huge reductions in carbon emissions [[link removed]] and other forms of pollution while also making driving safer. But because the rail industry has come under the control of hedge funds [[link removed]] and private equity firms [[link removed]] focused on maximizing short-term profits, these transformative long-term investments do not get made.

Instead, under pressure from Wall Street, rail capacity and service levels continue to deteriorate. The latest example comes in the form of so-called Precision Scheduling Railroading [[link removed]]. Introduced by railroad executive Hunter Harrison, PSR is a strategy that involves driving up short-term profits by tearing out track on secondary lines, scrapping locomotives and rail cars, and running fewer, longer trains to fewer places [[link removed]]. By cutting their cost of business, railroads’ short-term profits go up, even as they turn away some business, lose revenue, and cut their services in the long run.

Since implementing PSR, the third-largest railroad CSX has [[link removed]] cut capital investment by 14 percent and eliminated more than 550 intermodal routes [[link removed]]. Across the industry, more than 20,000 rail workers lost their jobs in 2019 [[link removed]] alone. Resulting service and scheduling changes have upset many rail customers [[link removed]], but they’ve boosted stock for investors [[link removed]]. For instance, CSX stock more than doubled [[link removed]] between 2016 and 2019.

Against this backdrop, the recent announcement of the largest railroad merger in more than 15 years naturally raised eyebrows, particularly for agricultural shippers. “Given the fact that consolidation has resulted, at times, with an increase in rates or a decrease in service … there is a healthy degree of concern whenever you see another proposed merger within the freight rail industry,” said Mike Steenhoek, executive director of the Soy Transportation Coalition.

Steenhoek also said some agriculture shippers are worried this merger could prompt other, larger rail takeovers. “If you have one merger or acquisition that occurs, that often inspires further consolidation,” Steenhoek said. “I don’t know many agricultural shippers that would embrace the prospect of another wave of consolidation within the rail industry.”

Canadian Pacific and Kansas City Southern executives argue [[link removed]] that this merger could increase competition in rail by providing the first single-carrier line between Canada and Mexico. This new track would compete with Canadian National, which provides continuous service from Canada to the Gulf of Mexico. A group of Canadian wheat growers [[link removed]] and the president of the U.S. Soybean Export Council [[link removed]] both spoke positively of the merger. Steenhoek and Warner said shippers are also weighing the benefits of more continuous service, but there is still uncertainty.

“If you have a seamless process of transporting your goods … in theory that should make it easier for the shipper, but does that necessarily mean it is going to be reliable service at competitive rates? You just don’t know,” said Warner.

The focus on connectivity can also be a red herring. Back when there were still many railroads, shorter lines often cooperated to provide faster and better service than what consolidated railroads offer today. For nearly 50 years eight separate railroads worked together [[link removed]] to offer the “Alphabet Route,” which moved perishables like fresh meat and vegetables from Boston or New York to Chicago or St. Louis. Today, most produce companies [[link removed]] ship by truck [[link removed]] as railroads deprioritize these time-sensitive, higher-cost trips.

Despite decades of deregulation, the Surface Transportation Board still has a lot of authority to regulate and improve competition in the rail industry, including the power to block this merger. The STB also has underused authority to adjudicate disputes between shippers and railroads over unreasonable rates or unfair terms. In cases where shippers are served by a single railroad, the STB can also compel that railroad to share its tracks with other lines, thereby preserving competition.

Going forward, if Congress picks up President Joe Biden’s recent plan [[link removed]] to pour billions of tax dollars into private rail infrastructure, it should also demand that private rail companies become more accountable to the public. This could include reinstating common carriage requirements [[link removed]] and bans on price discrimination. Before the era of rail deregulation and monopolization, these were important public policy tools that ensured everyone who depended on railroads, regardless of size or location, could compete for service on equal terms. If we hope to get more freight off of highways and on to more energy-efficient, environmentally friendly trains, it might be time to bring those principles back.

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What We're Reading

In a win for workers, a federal district court judge in Minneapolis stayed a 2019 USDA rule that lifted all processing-line speed limits in pork plants, following a legal challenge by the United Food and Commercial Workers union and Public Citizen. ( Public Citizen [[link removed]])

A new study in Nature Sustainability finds that smaller, more biodiverse farms can actually have higher yields than large ones, bucking conventional wisdom about scale and efficiency. ( Nature [[link removed]])

The Supreme Court will consider the boundaries of property rights in a case that could overturn farm union organizing rights won by Cesar Chavez and limit food business oversight, more broadly. ( National Public Radio [[link removed]-])

About the Open Markets Institute

The Open Markets Institute promotes political, industrial, economic, and environmental resilience. We do so by documenting and clarifying the dangers of extreme consolidation, and by fostering discussions of ways to reestablish America’s political economy on a more stable and fair foundation.

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Written by Claire Kelloway

Edited by Phil Longman and LaRonda Peterson.

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