Shippers Line Up Against Railroad Mergers
Groups representing rail shippers say they would be opposed to the creation of a transcontinental railroad in the U.S., arguing that further consolidation in the industry would reduce their competitive options, lead to higher rates, and worsen service.
Union Pacific (NYSE: UNP) and Norfolk Southern (NYSE: NSC) announced Tuesday that they had come to an agreement for UP to acquire NS for stock and cash worth $85 billion.
It’s further expected that BNSF and CSX (NASDAQ: CSX) for competitive reasons would eventually pursue a similar agreement.
The National Industrial Transportation League, the American Chemistry Council, and the Freight Rail Customer Alliance are watching warily as a final round of mergers would leave the U.S. with a pair of transcontinental Class I systems.
Railroads have traditionally said that end-to-end mergers help improve service by eliminating costly and unreliable interchanges. Shipper associations don’t see it that way.
“NITL has been on the record wanting no more rail mergers,” said Nancy O’Liddy, the group’s executive director. “Generally shippers oppose continued consolidation in the rail industry based on past experiences resulting in increased rates, higher fees, and unreliable service.”
Scott Jensen, a spokesman for the American Chemistry Council, said chemical manufacturers would “oppose any merger that would boost railroad monopoly power.”
Chemical shippers are highly reliant on railroads for the shipment of hazardous materials as well as plastics and other petrochemical products.
“Our industry is one of the largest users of the U.S. freight rail system, and we need efficient and reliable service to deliver products that make people’s lives better, healthier, and safer,” Jensen said. “The four largest freight railroads already control more than 90% of U.S. rail traffic, with two dominating in the eastern U.S. and two dominating in the west. A merger between two of these railroads threatens to leave American manufacturers, farmers, and energy producers with even fewer options to ship by rail.”
The Freight Rail Customer Alliance, an umbrella group that includes trade associations representing 3,500 companies in the manufacturing, agricultural, alternative fuels, and electric utility sectors, said railroads already have too much market power.
Railroads are able to use that market power to force shippers into contracts, which fall outside of the jurisdiction of the Surface Transportation Board, said Ann Warner, the FRCA’s executive director. The STB can only regulate shipments that move under tariff rates, which are typically more expensive than contracts.
Shippers have not seen the benefits of efficiencies that railroads have gained through the spread of the low-cost Precision Scheduled Railroading operating model, Warner added. Railroad profits keep rising, she said, despite the industry losing market share to trucks.
The devil will be in the details of a merger application, such as what concessions the railroads may be willing to make to enhance competition, which is required under the STB’s tougher and untested 2001 merger review rules.
“NITL shipper members will have to see if an application(s) is filed and then what is offered and what the STB might prescribe and what enforcement mechanisms are put in place,” O’Liddy said. “All freight rail shippers need guaranteed competitive solutions.”
In prior mergers, regulators have imposed conditions to protect shippers who otherwise would see their options shrink from two railroads to one. In many instances that has meant giving a second railroad trackage rights and access to affected customers.
Analysts have speculated that some form of expanded reciprocal switching, which provides sole-served customers with access to a second railroad, may be a potential way to enhance competition for carload shippers — and therefore help a merger application meet regulatory hurdles.
FRCA’s Warner said many of the group’s members rely on unit train service, which has not benefited much from reciprocal switching.
A majority of shippers who responded to a survey by Wall Street firm TD Cowen said they would back a transcon merger, so long as it included significant concessions. Shippers said their support would hinge on gaining things such as access to a second railroad, rate case reform, and provisions that would force railroads to pay penalties for service failures.