Canadian Railroads Competing to Acquire Major U.S. Freight Line

Canadian Railroads Competing to Acquire Major U.S. Freight Line

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INSIGHTi

Canadian Railroads Competing to Acquire
Major U.S. Freight Line
Updated September 2, 2021
Canadian Pacific Railway (CP) and Kansas City Southern (KCS), two of the seven Class I companies that
handle long-distance U.S. rail traffic, announced a merger agreement in March. In April, another Class I
carrier, Canadian National (CN), submitted what it termed a “superior proposal” to acquire KCS, which
was accepted in May.
Either deal, if approved by shareholders and federal regulators, would be the largest consolidation of
major railroads in several decades, and would create the first railroad network to serve Canada, the United
States, and Mexico under a single corporate owner. While this could lead to better service for some
shippers, it could also have adverse consequences for competition in freight transportation. Any
transaction is likely to undergo lengthy review by the Surface Transportation Board (STB). On August 31,
all five STB commissioners voted to deny CN’s request to create a “voting trust” to hold shares of KCS,
an arrangement that would have allowed CN to acquire shares while the merger is still pending before the
Board. The decision follows President Biden’s July executive order encouraging federal agencies to take
steps to preserve competition throughout the economy. While STB’s decision may or may not reflect the
merger’s prospects, it signals that regulators are considering the potential implications closely.
Background
CP and CN, both based in Canada, are among the survivors of the extended consolidation in the U.S.
railroad industry, along with Union Pacific and BNSF in the western United States, CSX and Norfolk
Southern in the East, and KCS running north-south through the middle of the country and into Mexico.
Since the 1990s, only smaller carriers have changed hands. Potential mergers among Class I carriers—for
example, CP explored a merger with CSX in 2014 and with Norfolk Southern in 2020—have triggered
vociferous objections and have not come to fruition.
CP and CN both serve Canada from coast to coast, but also own railroads and trackage rights in the
United States (Figure 1). Both carry significant traffic between U.S. points and Canadian ports. CN also
controls a north-south freight corridor connecting Chicago to New Orleans, which it acquired in 1998. In
approving that transaction, STB pointed to the importance of having KCS as a competitor in the same
markets. KCS, meanwhile, controls around 6,700 miles of track in the United States and Mexico,
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connecting Mexico’s Pacific coast with ports in Texas and Louisiana, and destinations as far inland as
Kansas City and St. Louis. Some traffic from Mexico is handed off to railroads other than KCS for part of
its journey in the United States.
Figure 1. CN, CP, and KCS Systems

Source: CRS, using data from U.S. Department of Transportation Bureau of Transportation Statistics.
Note: Includes certain trackage and haulage rights.
One reason for interest in KCS is the uncertain future for pipeline projects linking Canadian oil and gas
fields with Gulf Coast refineries and ports. With new pipeline projects stalled, railroads may assume a
greater role in transporting oil and gas for refining and export. Concerns over trains carrying hazardous
materials have yet to generate notable opposition to the merger, but could come to light during the
environmental analysis phase of the STB evaluation process.

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STB Merger Rules
Any merger involving more than one Class I railroad is automatically considered a “major” transaction
subject to the highest level of STB scrutiny. KCS and CP had targeted mid-2022 for completion of their
merger, and it is unlikely CN would be able to complete a deal with KCS any faster. However, when STB
adopted stricter merger regulations in 2001, it granted KCS—the smallest of the Class I railroads—a
waiver that allows it to meet pre-2001 standards in the event of a merger. The reasoning at the time was
that KCS was small enough that its involvement in a merger would present fewer anticompetitive effects
than a merger between two larger railroads. As a result, KCS and its proposed merger partner must
demonstrate to STB that the level of competition would remain unchanged following the transaction,
whereas mergers among other Class I carriers will be approved only if they can demonstrate that
competition would be enhanced as a result.
On April 23, STB affirmed that it would allow KCS and CP to invoke this waiver, noting that the
combined system would still be the smallest Class I railroad based on U.S. operating revenue. The end-to-
end, as opposed to overlapping, nature of the merger also influenced the board’s decision. However, the
potential overlap in the north-south market factored into STB’s May 17 decision to apply the newer set of
rules in CN’s case. (A combined KCS-CN system would become the third-largest Class I railroad.)
Potential Economic and Competitive Implications
KCS is one of the two largest railroads in Mexico and the only one that connects to all other Class I
railroads. (KCS-owned tracks in Mexico and the United States are noncontiguous, separated by a short
segment owned by Union Pacific and used by KCS under a trackage rights agreement.) Its network allows
KCS to play an important role linking Mexican manufacturers—notably in the automotive sector—with
customers anywhere in North America. If either CP or CN were to gain control of KCS, it could result in
unequal terms for competing railroads seeking to preserve access to Mexican markets and manufacturers.
A combined CP-KCS railroad system would have a T shape on the North American map, similar to CN. If
CN were to acquire KCS, it would effectively eliminate a competitor for north-south shipping between
the Midwest and Gulf Coast. These connections are especially important for grain producers in the upper
plains states and the fossil fuel refineries on the Gulf. Groups representing many customers in these
industries have voiced their support of a merger with CP in letters submitted to STB; a merger with CN
has received many letters of support as well.
The merger is not likely to affect passenger service to as noticeable an extent, as KCS is not a major host
of Amtrak traffic.

Author Information

Ben Goldman

Analyst in Transportation Policy

Disclaimer

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This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United
States. Any CRS Report may be reproduced and distributed in its entirety without permission from CRS. However,
as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the
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