The Last Thing the Railway Industry Needs Is Another Giant Merger
The only win if Canadian Pacific acquires Kansas City Southern is for freight rail's hedge fund investors, who are squeezing operating cash out of these railroads at the expense of workers, community safety, and the overall economy.
On March 15th, the Surface Transportation Board (STB)—the federal agency that regulates the U.S. freight rail industry—gave final approval to the acquisition of Kansas City Southern by Canadian Pacific. Approving this merger between America's sixth- and seventh-largest railroads was a dire mistake, which will have enormous economic and social costs that resound for decades.
In a nation committed to a competitive market, in a sector that's already as consolidated as American freight rail, it's important to evaluate mergers very carefully, because once big companies absorb smaller ones, it becomes impossible to pull them apart again. And as economics researcher Eric Peinert of the American Economic Liberties Project puts it, "Nothing in the history of rail consolidation suggests this particular merger is a good idea."
Allowing these two railroads to merge is likely to reduce competition in the industry, leading to higher shipping prices, reduced service, and job cuts. It will impair the ability of small businesses to operate. It will lead to increased safety risks and have environmental impacts on the communities where rail traffic will increase. And as cost-cutting pressure from railroads' predatory hedge fund investors continues to mount, it will likely contribute to even more aggressive cuts in service than we have seen over the past five years.
The STB knew all that. They got 2,000 public comments about the merger, from industry experts, researchers, lawmakers, and the general public—hundreds of them laying out reasons why it shouldn't get the green light. On behalf of people across America, U.S. Senators and Representatives weighed in with their concerns, which the STB ignored.
"Cost-cutting demanded by the industry's hedge-fund investors—while generating a cash windfall for them personally—has resulted in safety compromises that risk the lives of employees and the well-being of the densely settled communities freight railroads pass through..."
The most obvious risks are to the competitive marketplace, with both rail customers and rail workers paying the biggest price. Sen. Elizabeth Warren (D-Mass.) called for the merger application to be denied outright on antimonopoly grounds. As Rep. Katie Porter (D-Calif.) put it, as America's Class I freight railroads have dwindled from 33 to just seven, "lack of competition has allowed railroads to gut capacity, capture and extort businesses, fire thousands of workers, and threaten the integrity of America's freight transport network and supply chains – all while extracting monopoly profits."
For American businesses, precision scheduled railroading (PSR), the approach these giant railroads are taking to providing as little service as they can get away with and doing it as cheaply as possible, has meant less frequent, less reliable, and more expensive shipping options. And for the freight rail workforce, it's meant job cuts of 28% across the industry with onerous contract terms and more dangerous working conditions for those who remain.
In the wake of the hazardous Norfolk Southern derailment at East Palestine, Ohio and a string of other high-profile derailments earlier this year, industry-watchers of all stripes have noted that cost-cutting demanded by the industry's hedge-fund investors—while generating a cash windfall for them personally—has resulted in safety compromises that risk the lives of employees and the well-being of the densely settled communities freight railroads pass through, like the Chicago suburbs.
According to employees, extreme schedule pressures under PSR push workers to their physical limits, leaving them with as little as 60 seconds to conduct railcar safety inspections. And due to investor pressure to save money by running fewer, longer trains, it's more and more frequent to see trains as long (150 cars) as the one that derailed in Ohio. Sarah Feinberg, former head of the Federal Railroad Administration (FRA), says that even trains as short as 80 cars can pose size risks.
The American Economic Liberties Project describes the hyper-consolidated U.S. freight rail giants as operating under a "financially extractive business model," which makes but money for the railroads' hedge fund investors at great cost to the public welfare. And Peinert says yet another merger will make things even worse. "This deal sets the stage for future disasters like East Palestine, and will likely lead to even further railroad staffing cuts, even higher cargo loads, and other profit-driven safety shortcuts."
Despite the recent statement by STB chair Martin Oberman that this merger "will be an improvement for all citizens in terms of safety and the environment," their own environmental impact study found that the opposite would be the case in numerous communities along busy rail routes: the merger will increase hazardous cargo transportation along 141 of the 178 rail segments, totaling 5,800 miles of track in 16 states. And even basic public services like Metra passenger rail service—a critical economic engine for the 10-million-population three-state Chicago metro area, which operates on Canadian Pacific tracks, competing with freight services—are at risk. Along some of those track segments, freight traffic is projected to triple, with much of the new cargo slated to include hazardous materials.
In response to the market consolidation concerns raised by merger opponents, the STB has imposed some conditions. They will require that interchanges within other railroads be kept open, that a process be provided for challenging rate increases, and that the companies provide data so the STB can monitor compliance. But as Sen. Warren noted, these measures are insufficient. That's especially true given that there's already evidence that Canadian Pacific and Kansas City Southern may have been violating antitrust law against collusion, by sitting down together at a luxury hotel in Florida to plan the future of the company in early February, even before the merger was approved.
Cutting routes, service, and workers may be good for profits, but it's bad for American competitiveness, for workers, for industry, and for public safety and quality of life. The only win here is for freight rail's hedge fund investors, who are squeezing operating cash out of these railroads—cash they used to use to pay employees, fund service, and finance safety improvements—and taking it to the bank.
