Canadian Pacific, Kansas City Southern rail merger gets green light
Decision includes unprecedented seven-year oversight period and contains many conditions
By Krissa WelshansThe U.S. Surface Transportation Board (STB) today issued its decision to approve the acquisition of Kansas City Southern Railway Company (KCS) by Canadian Pacific Railway Limited (CP). The decision, which comes with conditions, includes an unprecedented seven-year oversight period and contains many conditions designed to mitigate environmental impacts, preserve competition, protect railroad workers, and promote efficient passenger rail.
While CP’s $31 billion acquisition of KCS was completed on Dec. 14, 2021, CP and KCS had filed their merger application with the board on October 29, 2021. Since that time, the board has received nearly 2,000 comments and other filings, held a seven-day public hearing and conducted an environmental impact assessment.
“The board has carefully considered the full record, weighed the public benefits against potentially harmful impacts, and imposed appropriate conditions to mitigate those impacts in its approval of the merger,” STB said. “The board expects the merger and imposed conditions to result in an overall public benefit.”
The combination of the two railroads, to be known as Canadian Pacific Kansas City (CPKC), will create the first railroad providing single-line service spanning Canada, the United States, and Mexico. Yet, CPKC will continue to be the smallest Class I railroad, with a network that is a few thousand route miles shorter than the next smallest Class I and half the size of the Western railroads.
STB said the transaction is end-to-end, meaning there are little to no track redundancies or overlapping routes between the railroads; they connect only in Kansas City. It will also reduce travel time for traffic moving over the single-line service, should result in increased incentives for investment and will eliminate the need for the two now-separate CP and KCS systems to interchange traffic moving from one system to the other. This, STB noted, will enhance efficiency and enable the new CPKC system to better compete for traffic with the other larger Class I carriers.
STB received more than 450 letters from shippers, with the majority showing support for the merger. Class I railroads opposing the transaction “are simply seeking conditions and other remedies that appear aimed at protecting their own traffic from competition with CPKC and at limiting the ability of the combined CPKC to meet its potential,” STB relayed.
“Consistent with the board’s policy to protect competition and not competitors, the board is denying those requests while also ensuring that existing competitive gateway options are preserved,” it added.
Nevertheless, STB said it recognizes that even end-to-end transactions such as this one may pose some anticompetitive risks. To mitigate those risks, the board is imposing numerous conditions to preserve existing rail service options at affected “gateways”—interchange points between CPKC and other railroads—on commercially reasonable terms, which should ensure competitive options are not reduced for shippers served by CP or KCS. This condition applies equally to existing and new service.
In particular, if CPKC increases its rates to an affected gateway by more than inflation, STB is providing shippers with an unprecedented right to require CPKC to provide the shipper with written justification for the increase so that shippers can evaluate whether the increased rates are challengeable.
“The shipper may bring challenges to the commercial reasonableness of CPKC rates or service at affected gateways directly to the board in a streamlined process, or in arbitration.”
The decision also restricts CPKC from terminating reciprocal switching access for shipper facilities served by CP or KCS that have such access today.
STB said shipping of grain, automotive parts and vehicles, and intermodal goods will improve with new single-line options, and shippers will have opportunities to expand their market reach. Imposed conditions will ensure shippers’ options are not reduced and STB is also requiring CPKC adhere to the terms of the CPKC Service Promise to address any post-transaction service disruptions, including developing and reporting customized “Service Action Plans” to address specific issues when certain thresholds are triggered.
STB said it paid particular attention to community concerns about train lengths. The data shows that the projected average train length is expected to decrease on most CPKC line segments as a result of the merger. Further, included in the environmental conditions is a requirement that, under the General Code of Operating Rules, trains must avoid blocking public crossings longer than ten minutes.
CPKC is being required to establish community liaisons in both Chicago and Houston to consult with community leaders, to be available for public meetings, and to conduct periodic outreach to mayors and local officials. The community liaison role may be extended beyond the initial seven-year period if circumstances warrant.
After lengthy consideration and with the imposed conditions, STB concluded the merger “will result in a net improvement in the performance of the rail industry that will benefit the country as a whole.”
The decision authorizes CP to exercise control of KCS as early as April 14, 2023, at or after which point CP and KCS would combine to create the new CPKC. CP said it is currently reviewing the full 212-page decision in detail and “in the coming days will announce its plans with respect to the creation of CPKC.”
CP President and CEO Keith Creel extended the company's sincere gratitude to the STB board and staff for their hard work as part of the comprehensive review of the combination.
"This decision clearly recognizes the many benefits of this historic combination," Creel said. "As the STB found, it will stimulate new competition, create jobs, lead to new investment in our rail network, and drive economic growth.
He added: "These benefits are unparalleled for our employees, rail customers, communities and the North American economy at a time when the supply chains of these three great nations have never needed it more. A combined CPKC will connect North America through a unique rail network able to enhance competition, provide improved reliable rail service, take trucks off public roads and improve rail safety by expanding CP's industry-leading safety practices."
Patrick Ottensmeyer, KCS president and CEO called STB’s decision “an important milestone” in realizing the benefits of a North American railroad for stakeholders.
"The KCS Board of Directors and management team are very proud of the many contributions and achievements of the people who have made KCS what it is today, and we are excited for the boundless possibilities as we move forward into the next chapter as CPKC,” he said.
Headquartered in Calgary, Alberta, CPKC would be the first railway connecting North America. While remaining the smallest of six U.S. Class 1 railroads by revenue, the combined company will have a much larger and more competitive network, operating approximately 20,000 miles of rail, employing close to 20,000 people. Once combined, full integration of CP and KCS is expected to happen over the next three years.
We talk with Mike Steenhoek to get his take on the rail merger approval along with other transportation-related updates. To view.
