Latin America Advisor

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Is a Proposed Rail Merger Good for North America?

A red train is pictured against a landscape background. File Photo: Canadian Pacific Railway.

A merger agreement announced in March between Canadian Pacific Railway and Kansas City Southern, if approved, would create the first freight rail network connecting Canada, the United States and Mexico. The $25 billion merger could open up opportunities for increased trade between the three countries, the companies said. How likely are U.S. regulators to approve the merger, given concerns over antitrust issues related to similar agreements in the past? In what ways would the combined railway increase and facilitate commerce and trade across North America, and which sectors would benefit the most from it? What implications could the new rail network have on other aspects of the countries’ transportation sectors, particularly the trucking industry?

Antonio Ortiz-Mena, senior vice president at Albright Stonebridge Group: “Should it come to fruition after pending regulatory reviews, the North American rail network could be a game changer for regional competitiveness. It is a market-led trilateral approach that will reduce transportation emissions and transaction costs for intra and extraregional trade in agricultural products, energy, and auto parts, among others. Under NAFTA, there were myriad trilateral summits and statements about enhancing regional competitiveness, but the region remains a laggard on rail infrastructure: out of 103 countries in the 2019 WEF Report, the United States, Canada and Mexico rank 37th, 56th and 69th, respectively. The new network would connect North-South trade and also with the Asia-Pacific region; for the Pacific, Vancouver and Lázaro Cárdenas are included, but a connection to Salina Cruz via the Trans-Isthmus corridor would be ideal (it is in its initial phase and would require connecting the Veracruz and Coatzacoalcos ports). To enhance the potential of the new North American rail network, USMCA Chapter 7 could be used to harmonize all rail cargo manifests, Chapter 28 to streamline other regulations affecting rail connectivity and Chapter 26, on competitiveness, to deal with other legal or regulatory issues impeding seamless connectivity, such as obviating the need for changes of locomotive engineers, crew and equipment throughout the region. Pending issues in Mexico would drastically reduce train robberies, which remain at unacceptably high levels, and would determine if and how the North American rail system can connect with the Mayan train, which will be for passengers and cargo and operated by the Mexican military.”

Francisco Sánchez, partner at Holland & Knight and former U.S. undersecretary of trade: “The combined Canadian Pacific-Kansas City (CPKC) railroad network would be the first to connect the United States, Mexico and Canada through 20,000 miles of rail. The U.S. Surface Transportation Board (STB) still must approve the merger. The STB will determine whether the merger would unduly affect customers by decreasing independent rail options. The STB is expected to use much of the 16 months it is allowed to make the decision, meaning that the outcome of this merger will be unclear until mid-2022. A successful merger would likely spur North American trade by taking advantage of the 2018 United States-Mexico-Canada Agreement, which updated NAFTA. The grain, auto and energy sectors, with supply chains and customers spanning North America, would have single-haul options connecting the Pacific Ocean with the Gulf Coast. This would decrease costs and boost efficiencies. For example, Canadian auto parts manufacturers would have more direct links to Mexican auto manufacturers. In turn, those auto manufacturers would have more direct links to customers in the United States and Canada. The merger would position CPKC to compete directly with the trucking industry, especially in the Midwest and Southern region of the United States, by increasing the ease of intermodal shipping. In the past, the STB has denied other merger attempts by Canadian Pacific. However, industry analysts have noted that this deal is smaller than those proposed in the past, meaning there is reason for cautious optimism for the merger in 2022.”

Ellen Voie, president and CEO of the Women In Trucking Association in Plover, Wis.: “The merger agreement between Canadian Pacific Railway and Kansas City Southern would align with the trucking industry’s need to leverage intermodal operations for cross-border commerce. The benefits for trucking companies would be numerous, including addressing the concern about the need for more drivers. For Women In Trucking, the initiative will reduce current truck congestion at the borders due to both Covid restrictions and customs requirements. Additionally, placing longer-haul loads on rail would allow the industry to focus more on shorter, more regional truck moves, which allow drivers to have a better work-life balance by working in operations closer to home. There is also the concern about safety, and for female drivers this is a top priority. Crossing or delivering trailers to the U.S.-Mexico border is not always safe, so putting the shipments on rail would alleviate some of these issues as well. A North-South rail network would positively change the current challenges facing drivers who haul cross-border loads and would ease some of the concerns facing both women and men in the trucking industry.”

Mike Steenhoek, executive director of the Soy Transportation Coalition: “I have reached out to a number of prominent agricultural rail shippers to solicit their initial perspective on the proposed merger. At this moment, it is too early to make a definitive conclusion on whether the merger, if approved, will primarily benefit shareholders, customers or both. Whenever a merger or acquisition among large providers of a particular service occurs—including within the railroad industry—it is healthy to have some degree of concern given how mergers and acquisitions in the past have indeed resulted in a reduction of rail service access or increased rates among agricultural shippers. In addition, a particular merger or acquisition often inspires and motivates additional mergers and acquisitions. Will this merger, if approved, result in increased energy for further consolidation among Class I railroads? I do not know of many agricultural shippers who would welcome such a prospect. It obviously remains to be seen whether this will occur. Among current Canadian Pacific customers, the proposed merger could very well result in greater access to new markets in the southern United States and Mexico. Many of these current Canadian Pacific customers currently only have access to export terminals in the Pacific Northwest. Similarly, current Kansas City Southern customers may enjoy new access to markets served by the Canadian Pacific network. Whenever a merger or acquisition is proposed, red flags are particularly raised among customers when the two companies have a similar geographical footprint. This does not guarantee that significant portions of service will be disbanded or eliminated, but it often portends that. These two railroads currently have very little service overlap. This provides some degree of encouragement among customers—including agricultural shippers—that this particular proposed merger may result in increased service options. If approved, the new Canadian Pacific/Kansas City Southern railroad will still rank as the smallest Class I railroad in terms of operating revenue. Mergers and acquisitions usually elicit more concern when the two companies currently possess a higher percentage of the overall market share.”

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