STB hearing: CP, KCS make their case for approving a Class I merger
9/30/2022
By Julie Sneider, Senior Associate Editor
The Surface Transportation Board (STB) yesterday began its multiday hearing of the proposed merger between Canadian Pacific and Kansas City Southern, which when combined would create a railroad that stretches from Canada, across the United States and into Mexico.
The board heard testimony from CP and KCS executives who explained how combining North America’s two smallest Class Is would benefit the public interest, and from public, private and government officials who laid out their cases in favor or against the proposal.
The hearing kicked off with statements from U.S. Rep. Raja Krishnamoorthi (D-Ill.), whose district covers the Chicago metro area, and Federal Maritime Commissioner Carl Bentzel. Krishnamoorthi told the panel he remains concerned about how the increase in freight-rail traffic that will come with the merger will “substantially impact” residents, commuters and Metra’s commuter train operations in the area.
The congressman told STB members that the board has not verified what CP’s train count or freight tonnage projections would be post-merger, and noted CP’s three freight trains that operate daily along Metra-owned track already cause commuter-rail delays. If the STB approves the merger, Krishnamoorthi said it should require that Metra be granted train dispatch authority over those tracks, an authority CP now has.
Next to speak was Bentzel, who urged the board to reject the merger because of the negative effects he believes it would have on U.S.-based ports and U.S. cargo traveling to and from those ports.
“Specifically, I believe the proposed merger will adversely impact U.S. ports and primarily U.S.-based intermodal railway systems that serve our ports, and would disproportionately benefit Canadian ports and the primarily Canadian-based intermodal systems that service those ports,” Bentzel said.
Although certain U.S. shipper groups might benefit from the merger, “overall there would be a greater negative impact” on the nation’s ports, the people who work there, long-term investments affecting internal shipments through the ports and on the warehousing companies, distribution centers and other businesses that handle port-bound cargo, he said.
CP, KCS execs state their case
Most of the first half of the hearing on Day 1, however, was devoted to CP and KCS executives making their presentations on how the merger would increase competition and improve rail service and safety for the benefit of shippers, customers and consumers.
Combining CP and KCS into one railroad would create huge benefits that could not be achieved without the merger, said Keith Creel, CP’s current president and CEO who would be the top executive of CPKC if the merger is approved.
“We will build a railroad for the future, one that will serve customers better, create new competition and serve the public interest by creating new markets, new access, new shipper options and new capacity that would not be available otherwise,” Creel said. “Our entire industry will have to compete harder than before to become better railroads to be able to compete with CPKC.”
The combined railroad will make “significant” capital improvements to strengthen its U.S. rail network, which will prompt investments by other stakeholders to take advantage of the improved transportation options. As more shippers take advantage of the new rail options and shift more of their business from trucks to rail transportation, the merger will generate environmental benefits by helping to reduce greenhouse gas emissions, Creel said.
Moreover, the merged railroad would help facilitate the expansion of Amtrak passenger-rail service, with Creel noting CP has received Amtrak’s best-in-class service award for co-existing with passenger trains on its tracks while providing “excellent” freight service at the same time. And, Creel — in response to what he anticipated would be Metra’s concerns that were scheduled to be aired later at the hearing — said CPKC would not have an adverse impact on Metra service.
In terms of relationships with its employees and train crews, CP already has made progress in securing new agreements with represented CPKC employees in the consolidated territories, who will receive pay raises, scheduled time off and “enhanced quality of life,” Creel said — issues that were points of contention in the recent contract negotiations between the major U.S. freight railroads and rail labor unions.
“In turn, with our simplified agreements and scheduled service, our customers will experience much better and more reliable service,” Creel said.
And, unlike other past rail mergers that resulted in disruptions to rail service during transitional periods, no such disruptions are expected due to the companies’ careful planning for the implementation, he said.
“We will build a railroad for the future, one that will serve customers better, create new competition and serve the public interest.” — Keith Creel, Canadian Pacific sustainability.cpr.ca Creel also addressed the fact that many communities oppose the merger. Community officials have cited concerns about increased freight-rail traffic and a lack of sufficient infrastructure to handle the growth. Others are concerned about increased noise and pollution, and the potential for blocked grade crossings.
“Not all see the public benefits of this merger that we do,” Creel acknowledged. “We remain committed to addressing communities’ concerns about the merger’s impact. We’ve engaged proactively with all parties that are expressing concerns. We’ve consistently been open to reasonable steps to address those concerns. As a testament to our commitment, in many cases we have reached formal agreements with numerous parties.”
Despite the challenges the CP-KCS merger efforts faced over the past year, CP has been “steadfast in pursuing the opportunity because it’s transformative,” Creel concluded. “It’s truly a once-in-a-lifetime opportunity for Canadian Pacific and our shareholders.”
After Creel spoke, KCS President and CEO Patrick Ottensmeyer described to the board how KCS’s network evolved over the years to the point where a merger with CP is the best next step to become the first North American rail network that stretches from Canada, through the United States and into Mexico.
When KCS acquired its Mexican operations several years ago to create Kansas City Southern de Mexico, Union Pacific Railroad and BNSF Railway fought it vigorously using the same arguments against the proposal they’re using now to oppose the CP-KCS combination, Ottensmeyer noted.
“The [STB] rejected those arguments then and should reject them now,” he said. “None of the harms occurred that [UP and BNSF] said would happen. … We created a strong independent competitor for traffic to and from Mexico.”
KCS has an “outstanding record” for being involved with mergers that don’t result in service disruptions. He also refuted the claims of Norfolk Southern Railway and CSX that the CP-KCS merger would harm competition along the Meridian Speedway and Meridian-Wylie routes.
In closing, Ottensmeyer said creating an independent, single-line route that stretches across North America would facilitate trade flow between the three nations; inject new competition and new capacity into the U.S. rail network; improve safety; grow employment; facilitate new passenger-rail service and benefit the environment.
“It puts two well-managed, well-run, like-minded railroads — who both have a commitment to safety and customer service — together,” he said. “I urge the board to approve the transaction without conditions” other than those already agreed to.
Brooks: Success depends on service delivery
After the railroads’ two top guns spoke, CP and KCS executives went into further detail about the merger’s benefits from their perspective.
CP Executive Vice President and Chief Marketing Officer John Brooks told the board the merger will “offer new and improved transportation options to better meet and service customers” at a time when supply-chain problems over the past year have become well known and publicized.
“The only way I see [CPKC] achieving our ambitious goals is by offering more and better options, not taking away any of their existing options,” said Brooks. “Our success will depend on our ability to deliver capacity and service at competitive economics. The only obstacle we see are requests for protection from some of the other Class Is who are now going to have to compete at a higher level.”
Brooks said he’s met with hundreds of customers since the proposed merger was announced to learn what they believe the benefits would or should be. They confirmed that their preference is to have single-line haul transportation options over most interline service options when it comes to shipping their goods.
“At CPKC, we’re kind of like the short lines of the Class I industry. Because of that, our reach is limited,” Brooks said. “Our customers [currently] depend on our ability to create those interline solutions.”
But being able to offer single-line hauls would improve service reliability, increase efficient use of capacity, decrease cycle times, improve the economics and enable investment for growth, he said.
“It puts two well-managed, well-run, like-minded railroads — who both have a commitment to safety and customer service — together.” — Patrick Ottensmeyer, Kansas City Southern kcsouthern.comFor intermodal customers, CPKC would create a north-south “super-highway” linking producers and customers across all three countries, Brooks said.
“Our new intermodal product will create new single line haul competition for the existing Class Is and trucks by offering services that don’t exist today,” Brooks said. “We will offer seamless service between terminals and major markets, such as Mexico City, Monterrey, up to Dallas, Chicago and into Canada. These new routes are in addition to the interline routes that exist today and this means customers will have more choices.”
For example, CP is working with customers that are currently shipping nearly all of their cross-continent freight by truck to develop an intermodal product to better suit those customers' needs. One large produce customer at peak season ships its goods with 50 to 100 trucks per day from Mexico to the United States and then Canada.
“This non-rail-served customer today would convert to intermodal by loading [refrigerated containers] in Mexico at the border, and ride our new route to Chicago for distribution to upper Midwest markets,” Brooks explained. “Then this [refrigerated container] that’s used for this route will be repositioned and reloaded with other perishable goods to return shipments to Texas and Mexico for delivery in those markets.”
Today, that customer’s freight is moved by truck all the way from Mexico to Chicago, Brooks said. If that customer used intermodal service, it would remove 15,000 to 20,000 trucks alone from the highways currently used.
“And that’s just this one customer,” he added.
On the menu: Expanded access to, from ports
On the international side of the business, CPKC would offer a new menu of 11 port options that span North American and would give U.S. consumers more choices to receive their goods, according to Brooks.
“We are particularly excited about the link between the Port of Lazaro Cardenas, up into Texas and also into the upper Midwest,” he said. Such a service would provide another competitive option and “escape valve” for freight traffic that flows via many other ports, he said.
“Lazaro would not come close to replacing the West Coast or put U.S. ports out of business,” Brooks said, in a nod to those who claim U.S. ports would be hurt by the competition. “Rather, it will provide new capacity. … Our discussions with the steamship line carriers and cargo owners (such as retailers) indicate they want more options. They want to be able to turn their assets faster.”
Brooks also addressed the new options and market outlets CPKC could offer to agricultural and grain customers. Merging the railroads would link the grain receivers on the KCS system with the grain producers on CP’s network. Separately, the railroads — dependent on interline carriers — have limited options to provide farmers and merchandisers with the market outlets they want.
“But, combined, the two networks will offer new single-line service to markets for grain and ag products originating across the upper Midwest with consumers in St. Louis, the south-central states, down to the Gulf and ultimately into Mexico,” said Brooks.
Key to its grain-shipping options are CP’s new high-capacity hopper cars and the KCS St. Louis-Springfield Line, a main artery that would support single-line market access. CP is in active discussions with customers willing to invest in CP’s 8,500-foot high-efficiency product train model.
“It will deliver new capacity to grain-handling facilities,” Brooks said of the merger. “We see an opportunity for over $250 million in investment from customers in grain elevators, crush plants and new terminals.”
Brooks explained other opportunities available to shippers and customers of other commodities, including auto, energy, chemicals and merchandise. He wrapped up his presentation by addressing concerns raised by some who want the STB to reject the merger.
After spending several hours listening to the CP and KCS presentations on the benefits of their proposed combination, the STB heard from two organizations opposed to the merger: the Coalition to Stop CPKC, a group of Chicago-area municipalities, and Metra. Their stories and more coverage of the STB hearing will appear in subsequent reports on RailPrime.
