Analysis/Commentary
The merger sought by the Union Pacific and Norfolk Southern railroads has raised plenty of dread among shippers who at present are forced to live with the mess created by the most recent rail merger, the accelerating deterioration of service provided by the current Class 1 railroads, and for some, nightmarish memories of the disastrous service failures that followed the wave of major rail mergers in the 1990s.
If allowed to happen, the UP-NS combination would create a massive rail system said to be worth a total of $250 billion. It would result in a continent-spanning rail line concentrating massive resources and power in one company—but only if the proposed deal succeeds in being approved by federal officials after a process that could take two or more years to complete.
Unfortunately, the regulators are confronted by three facts that, in a just and proper world, would spur them to put this merger on hold—perhaps indefinitely.
One fact they will be confronted by is the sorry record of the first wave of rail mergers in the modern era that took place in the 1990s. The widespread disruption they caused should serve as ample warning to regulators about how easily rail mergers produce disastrous results.
Rail management’s failure to gain control over the combined operations was a just blow not to their shareholders, but to companies dependent on rail transportation and ultimately the economy itself. Late deliveries were not the only problem. In some cases, trains were left stopped in the middle of farmlands when their crews ran out of legal hours of service and were forced to abandon them.
During that period rail management had no idea where freight was (they still find it difficult to track equipment today, according to shippers). In one case where a shipper’s office happened to overlook a rail line, he could see his cars traveling back and forth under his window for weeks while the railroad told him they had no odea where they were or when they would reach their destination.
These extensive and massive disruptions are still recalled today by those who were forced to live through them at the time. Not long afterward, federal regulators adopted new merger regulations, but given the subsequent history of rail regulation at the national level, it is doubtful they will do much good when it comes to UP and NS.
Second, the current state of rail service is abysmal and has been wretched for years, driven by the rail industry’s embrace of a cost-cutting operations model called Precision Scheduled Railroading (PSR) that sought to boost company stock prices on the backs of shippers since it first reached prominence following its adoption by CSX Transportation in 2018.
The extreme cost cutting reached beyond shutting down facilities and mothballing rolling stock to deep cuts in the workforce as well, which later sparked a labor crisis when collective bargaining between rail management and the rail unions broke down and the Biden Administration had to step in to prevent a nationwide strike.
Third, the most recent major rail merger between Kansas City Southern and Canadian Pacific in 2024 has been an ongoing disaster since joint operations began. At last report, the disastrous attempt to meld the two railroads’ incompatible computer systems resulted in chaos that has not been fully resolved, creating a continuing series of service failures the length of the new system, according to rail customers.
What Should Regulators Do?
All of this must be acknowledged and taken seriously by regulators while they ponder whether to grease the way for further concentration of North America’s remaining Class I freight railroads. As the American Chemistry Council puts it, “Many rail customers are currently dealing with high rates and unreliable service. Further consolidation within the rail industry is likely to make these problems worse as was the case with prior mergers We call on policymakers to help create more competitive and reliable transportation options, not less.”
Looking over the desolate landscape following previous mergers, the National Industrial Transportation League (NITL) notes, “Despite the promises that rail customers would benefit from mergers through more efficient service, in reality captive rail customers must pay increasingly higher prices for unreliable and inadequate service.”
Many shippers are captives of a single rail company due to the industry concentration that already has taken place, NITL points out. “With only five Class I carriers remaining, and where four of them are responsible for handling 90% of our nation’s freight rail movements, further consolidation of the industry will boost railroad profits and benefit Wall Street at the expense of shippers, especially captive rail customers.”
The largest of the many unions representing rail workers, the International Association of Sheet Metal, Air, Rail, and Transportation Workers (SMART), has been unstinting in its opposition to the merger since the idea was floated earlier this year. The union predicts that if the NS-UP merger is approved, BNSF and CSX can be expected to follow suit.
When it announced the proposed merger, UP crowed, “Together, the companies aim to be the safest railroad in North America and deliver the service customers rely on with operational excellence,” But the SMART union is having none of it, pointing to what it terms UP’s “troubling safety record,” alleging that the railroad leads the industry in accidents, incidents, injuries and fatalities
What is the answer? So far, the industry’s economic regulator, the Surface Transportation Board (STB), has lacked the authority to enforce measures taken to rein in these multibillion dollar companies, and was rendered toothless by Congress when it established the board as the successor to the old Interstate Commerce Commission when the ICC went out of business in 1988.
Over the years, this board held regular hearings in which shippers laid out in great detail the economically damaging service failures, inadequate communications, and unfair and costly demurrage and detention fee practices. Congress has held similar hearings as well. But in their wake little has been attempted and less accomplished by this small, underfunded agency. At one point the STB ordered certain railroads file regular service reports which frequently arrived late, were incomplete and difficult to confirm, and which at least one railroad regularly failed to even turn in.
Congress needs to step in again to address the current untenable situation, which further mergers would only worsen. Seeking additional competition among the rail companies, shippers for decades had begged the STB to mandate reciprocal switching, where one railroad would be required to allow another to use its tracks. The board ordered that last year, but it was struck down this June by a federal appeals court, which ruled that the STB exceeded its authority by requiring the practice.
At one point in the annals of this publication I suggested that Congress eventually might need to adopt a public utilities approach to rail regulation, which afterwards the then-leader of the House Transportation Committee publicly rejected. We are rapidly reaching the point when policymakers will have no choice but to adopt this or some similarly radical change in rail regulation.
No one wants to see nationalization of the freight railroads. One Conrail was enough, and Amtrak, although it continues to operate, is hardly a shining example of success. But something must be done.
