Contrary to assertions by Canadian Pacific and Kansas City Southern, shipper groups’ filings with the Surface Transportation Board say that the railroads’ proposed merger could harm competition in a number of ways.
CP is seeking approval from federal regulators of its $31 billion merger with KCS. As the process plays out, shippers, other Class I railroads, local communities and other stakeholders are asking that CP meet certain conditions before STB approves the merger.
One shipper concern is how CP (NYSE: CP) will treat access to interchanges by potentially disincentivizing shippers to interchange from CPKC — as the merged company would be known — to a competing rail carrier.
“The CP/KCS combination will harm vertical competition. CP and KCS connect at a single location today, Kansas City, MO. KCS, however, has multiple connections with other Class I railroads that serve the same territories as CP. Conversely, CP has connections with other Class I railroads that serve the same territories as KCS,” said a joint filing from the American Chemistry Council, the Fertilizer Institute and the National Industrial Transportation League.
“Pre-merger, both railroads are neutral as to whether they connect with each other or another Class I railroad to provide through route transportation services. The proposed merger will destroy that neutrality, as the combined KCS and CP will have strong incentives to favor their long-haul route,” the groups said.
But “Post-merger, KCS and CP could close those interchanges for traffic that today has the option to use an alternative Class I carrier. … Absent conditions to protect these pre-merger competitive options, those consequences could go unaddressed in the instant transaction,” they continued.
Another concern is how CP would handle traffic for Canadian grain shippers, who might be captive to CP’s network, versus American grain shippers since there might be more of a financial incentive to give preference of service and capital investments to Canadian shippers.
The North Dakota Wheat Commission addressed this issue in its Monday filing to the board.
The commission “is concerned that Canadian shippers may gain an unfair advantage over North Dakota wheat shippers. Our concern is that the direct benefits to the CP captive shippers, and their respective producers, as it relates to wheat specifically, will be significantly offset by disproportionate gains from Canadian wheat producers and shippers.”
“Canadian railroads, including the CP, have a recent history of involvement from the Canadian government. Revenue caps on grain transportation movements and mandated grain shipping minimums are two prime examples,” said the commission, whose members export wheat via the Pacific Northwest or send wheat for domestic processing to the western U.S. or Upper Midwest. “In addition, Canadian shippers currently have access to policy tools such as their final offer rate arbitration and competitive switching that already provide them with an edge vis a vis North Dakota producers.”
Furthermore, while CP could serve as a competitor to BNSF (NYSE: BRK.B), the dominant railroad operating in the state, the commission “has still not seen enough commitments or prioritization by CP to bring those realities via this merger to fruition,” the commission said.
“In recent years, CP equipment quality and car service have been inferior to the BNSF in North Dakota, and at times, CP origins have been discounted at key demand destinations, due to this poorer service and reliability. Without a promise by CP to improve how it serves North Dakota wheat shippers, it is difficult to support this transaction that could bring certain advantages to North Dakota wheat,” the commission said.
The filing from the Private Railcar Food and Beverage Association (PRFBA) expressed concern that the reduction of Class I railroads from seven to six could exacerbate existing service issues and raise new ones, as well as increase railroads’ pricing power.
“Additional service disruptions at the present time would be devastating to the U.S. supply chain. There are already major service issues on the U.S. rail network brought on by the pandemic and the widespread adoption of Precision Scheduled Railroading as the Board has noted,” said PRFBA, whose 18 members include PepsiCo, Molson Coors Beverage Co., KraftHeinz and General Mills, among others. “The prospect of reducing the already small number of major Class I railroads even further is deeply concerning. As a result of the intense merger activity that took place in the 80s and 90s, the number of overall railroad companies has been reduced dramatically, and the size of the remaining carriers has increased correspondingly. This consolidation has resulted in less competition, higher rates, and poorer service over the last twenty years.”
To address potential service issues and temper railroads’ market advantage, PRFBA recommended that STB require that shippers using CPKC have reciprocal switching as an option for poor service. Reciprocal switching occurs when a shipper has access to one freight railroad but wants access to a nearby competing freight railroad in order to cultivate a competitive pricing environment. STB is currently considering whether this should be an option for all shippers, and a public hearing on the issue is scheduled to occur later this month.
“This crucial condition will help to alleviate the inevitable service issues that will occur when the two railroads begin to merge their operations. This outcome is one of the major reasons behind why the new merger guidelines were created and should not be taken lightly here. … By providing these captive or inadequately served shippers on the CP/KCS network with access to competing railroads, the Board would be ensuring a better transition during the implementation of this merger and protecting the U.S. from additional mayhem brought on by the service issues that will occur from this transaction during a time when the national supply chain cannot afford any additional issues,” PRFBA said.
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