Canadian Pacific Railway CEO and Director E. Hunter Harrison told investors last week that he expects rail consolidation among the largest North American railroads within six years, but his ideas are more than just the usual rumors. One of which is that Kansas City Southern Railway, the smallest of the major railroads, will merge with one of the five other Class I carriers or a third-party that merges two railroads. The major benefit to a KCS buyer would be gaining the only cross-border rail network that connects the U.S. to Mexico’s rapidly growing manufacturing base.
What if each of the western U.S.-based Class I railroads — BNSF Railway and Union Pacific Railroad merge with an eastern counterpart. BNSF or UP, for example, could merge with CSX Transportation or Norfolk Southern Railway. Such a merger wouldn’t “impact the competitive environment,” and shippers would gain better service by having two transcontinental lines. Shippers with access to only one line, who refer to themselves as “captive shippers,” could benefit as well.
Under a dual transcontinental merger scenario, the need for handoffs at the Mississippi River or in Chicago would be reduced, speeding up transit times. The mergers also would reduce corporate costs, because two sets of management would be redundant, and some railyards could be consolidated.
Traditionally, Chicago was the Rail Capital of the United States. Will new Chicago Bypasses develop? What about companies like UPS who rely on Chicago traffic? Union Pacific was created by Abraham Lincoln and Congress to “span the Continent”.Will this happen? A transcontinental merger wouldn’t create major cost savings, nor would it greatly improve service, because interline traffic generally runs smoothly.. Railroads’ differing cultures would only complicate a process. I remember when CSX had just taken over the Selkirk Yard near Albany. There was a blizzard and Selkirk shut down. CSX sent a team of executives to solve the problem. They arrived at the Albany County Airport (built in the 1930’s and not shut because they used strange contraptions called snow plows. These characters arrived in raincoats and rubbers and carrying umbrellas.
The most likely consolidation scenario is a merger or acquisition involving KCS, but the railroad’s high valuation likely is keeping suitors at bay. Acquiring or merging with KCS seven or eight years ago before the railroad’s cross-border business began to take off would have made sense.
The greatest potential for rail consolidation isn’t in the Class I industry but within the small lines that connect to the major railroads. Let’s start with Florida East Coast Railway. Not likely. They are gearing up for the Panama Canal expansion plus their parent company is building a Miami to Orlando passenger train. Just announced purchase of 24 new GE locomotives (see picture at top) .
Genesee & Wyoming, an owner and operator of short lines and regional freight railroads, is best poised to swallow up other lines because the company has access to some $400 million in capital and is the largest strategic player, according to a Stephens research note. Of the 459 privately owned U.S. regional and short lines, which make up about 80 percent of the market, G&W’s network connects with 48 of the lines. Like the larger railroads, many of G&W lines, which total 98 in North America, are seeing intermodal traffic growth.
See more about railroad mergers over history.