Surface Transportation Board Approves Rail Merger After Two-Year Review

In a decision that has been pending for two years, the Surface Transportation Board approved the acquisition of Kansas City Southern Railway Company (KCS) by Canadian Pacific Railway Limited (CP), with oversight and conditions, on March 15. The deal is worth about $31 billion; the approval takes effect April 14. Besides releasing its decision, STB chairman Martin Oberman announced it in a press conference—the first-ever by the normally little-noticed STB, which has sole authority from Congress to approve, disapprove and regulate rail mergers.

The decision follows a two-year period of fact-gathering, public hearings and information sessions. Oberman said board members had received 2,000 comments, engaged in seven community hearings and heard from” hundreds of concerned citizens.”

One member of the board, Robert Primus, dissented, saying the merger increased consolidation and could harm communities along its routes. Sen. Richard Blumenthal,(D-conn.), who sits on the Senate committee that oversees railroads, said the approval decision “needs to be scrutinized.”

The approval process began March 21, 2021, when Canadian Pacific announced the agreement between the two railroads. A rival bid by Canadian National worth $33 billion was withdrawn after the STB rejected parts of the proposal. The CP proposal was then considered by the STB.

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The STB, an independent body but affiliated with the U.S. Department of Transportation, announced it will oversee the merger for seven years–the first three years of implementation and an additional four years.

It’s the first major railroad merger in more than 20 years. The new entity will be known as Canadian Pacific Kansas City (CPKC) and will be the first railroad providing single-line service spanning Canada, the United States and Mexico.  Yet CPKC will continue to be the smallest Class I railroad, with a network a few thousand route miles shorter than the next smallest Class I and half the size of the western railroads. KCS has about 7,000 route miles and CP has 13,000. Their two competitors, Burlington Northern and Union Pacific, have about 32,000 route miles between them.

The largest railroad, BNSF, has annual revenues of about $25.6 billion; the new railroad will have revenues of about $10 billion.

The fact that the merger was “end-to-end”–that is, the two railroads had no overlapping routes—was a “central fact” of the merger approval, said Oberman. “This was different from all past rail mergers,” he said, and added that the board was convinced that the merger would actually increase competition among the rail majors. In particular, he said, the board required that no gateways—connection points between the new railroad and others–be closed. They connect only in Kansas City.

Oberman said he understood skepticism about railroad consolidation, and that he himself had often voiced it. But the STB had to work with the landscape it was given, he said, and the board concluded the merger would increase competition rather than reduce it.

Data submitted by the railroads led the board to conclude that the average length of trains would decrease in most areas.

Rate Appeal Procedure

One of the conditions of the merger is a never-before-established procedure that will allow shippers to require written justification from the railroad for any gateway rate increases greater than inflation. If the shippers are dissatisfied by the response, they can appeal directly to the board for action. “This is a fast, economical way for shippers to challenge” rate increases that is an improvement over past procedures for appealing rate increases, Oberman said.