Proposed CP-KCS rail merger to benefit shippers but will take time, competitors say

Rivals and shippers say the proposed $25 billion rail merger between the Kansas City Southern and Canadian Pacific (CP) will have a positive effect on shippers even though the merger will reduce the number of Class 1 railroads in North America to six.

To put that number in perspective, there were about 1,200 railroads in 1900. That number dropped to around 410 by 1955. Then the number dropped to just 76 Class I railroads. Today, pending approval of the KCS-CP merger, there would be just six Class 1’s, plus about 500 Class II and Class III carriers.

CP management is estimating as much as $800 million in synergies will be realized within three years of the deal, if it is approved by regulators on both sides of the border.

But don’t hold your breath quite yet if you’re waiting for this new “North American Railroad” to appear overnight. The Surface Transportation Board (STB) has indicated it will not issue approval for this merger until 2022, at the earliest.

Cowen & Co., a stock and research company, released a survey that showed the majority of shippers said they had a positive opinion of the megamerger and said those synergies “look promising.”

The National Industrial Transportation League (NIT League) recently took a cautious wait-and-see approach to the merger.

“Given the scale of the announcement of the merger between Canadian Pacific and Kansas City Southern and many details yet to be learned, it’s too early to take a position on the favorability of this merger to the rail shipping community,” the NIT League said in a statement.

The NIT League said it and its members have “outstanding relationships” with both railroads—and are optimistic about this new venture—“any merger in this industry and on this scale will be viewed with healthy skepticism based on prior history and experience of rail mergers,” it added.

Past rail mergers have been hampered, especially in the early days of the combination, by severe service failures due to different operating systems, varying work cultures and other differences.

This latest proposed rail merger would connect customers with six of the seven largest metropolitan regions in North America. It could potentially reduce transit times and provide new services, such as possible long-awaited intermodal service between Dallas and Chicago, for example.

Greg Orr, president of CFI, a unit of Canada-based TFI International, parent of North America’s 17th-largest truckload operation with $756 million in revenue in 2020, said he believes ultimately the CP-KCS merger will be approved.

 “I think it will be a benefit to shippers,” Orr told LM. “It’s another outlet for capacity instead of relying on truckload and LTL over-the-road freight.”

 Of course, he said, execution at the border will be crucial.

“The challenge in past experiences is transit on that route is not a lot quicker than a truck van going across the border,” Orr cautioned. “You have potential for slow-moving freight, not Just-in-Time deliveries as truck customers can get. But it does give shippers another outlet.”

Still, from a competitive standpoint, the rail merger wouldn’t be a major detriment to the trucking industry, Orr said.

“When you look at capacity, there is not a lot of new entrants that want to run in and out of Mexico or Canada unless there is a transload opportunity at the border,” Orr said. “There’s not a lot of new interest in that marketplace. Your big players—Werner, Schneider, Swift, CFI—will continue to be very positive in their market share.”

That’s largely because those U.S.-based truckload giants have spent decades honing relationships with reliable, sound trucking partners domiciled in Mexico. Typically, when a southbound U.S. truck reaches the Mexican border, the trailer is dropped and picked up by a Mexican carrier for haulage south of the border.

CFI, for instance, relies on a core of about 50 Mexican carriers to haul within that country. But Orr said it can count on another 200 Mexican carriers in times of heavy demand or other tight capacity.

Whether a huge conglomerate that would be the KCS-CP rail merger could act as expeditiously is an open question, transportation officials said.

“This is not like it’s two small companies merging,” CFI’s Orr said. “It will definitely take time. There are definite efficiencies they will gain quickly, especially at the southern border.”

Still, Orr had a message for shippers: be patient. “This won’t be something that happens in 90 or 120 days. Most likely, it will take 18 to 24 months.”