NEW YORK — With the merger of Canadian Pacific and Kansas City Southern awaiting final U.S. government approval in 2023, the CEOs of both companies presented their case about the benefits of the deal Tuesday to an audience of rail executives.
The presentations at Progressive Railroading’s RailTrends conference by Keith Creel, CEO of Canadian Pacific (NYSE: CP), and Patrick Ottensmeyer, CEO of KCS, both highlighted on a screen the map that drove the $31 billion merger that was completed about a year ago.
That map shows the roughly Y-shaped network that will be at the heart of the merged companies, extending to both coasts of Canada and down into Mexico. In his remarks, Creel often referred to “nation” in the singular and explained later it was a reference to the more unitary nation of North America — the U.S., Canada and Mexico — that he sees as benefitting significantly from the merger.
The merger closed about a year ago and KCS is part of CP, but it still needs Surface Transportation Board (STB) approval for its operations.
However, just putting the network together won’t be enough, Creel said. The opportunities that can be offered through the merger can only be capitalized on “if we become truck-like and create options for our shippers.”
“This is not a horizontal merger,” said Creel, echoing a phrase he has used in the past. “It does not deal with rationalization. It unlocks an opportunity to develop two underutilized routes.”
Creel also said he “underestimated the enthusiasm” seen for the merger.
“We’ve been embraced by customers and employees,” he said. “[Workers at CP are being presented with] an opportunity to be something bigger than yourself and that touches an emotional connection with them.”
One of the key offerings that CP has spoken about is the ability to turn the Port of Lazaro Cardenas in Mexico into an alternative to the ports of Los Angeles and Long Beach. Lazaro is located on the west side of the Panama Canal, so it does not have the drawback of transiting the waterway that East Coast U.S. ports must deal with. According to the port’s website, Lazaro handled 1,318,632 twenty-foot equivalent units in 2019.
Stressing that Lazaro is not going to replace Los Angeles or Long Beach, Creel did talk up its strengths.
“You can unload a container in Lazaro, put it on a rail car and take it all the way to Chicago in seven days,” he said. “That’s phenomenal.”
By being able to offer that Lazaro-Chicago connection without a transfer, the CP-KCS combination will represent a “complement” to west-east rail service out of the Southern California ports, Creel said.
Another west-to-east path created by the merger, according to Creel, would be additional service out of the ports of Vancouver and other Canadian ports in British Columbia. Single-line moves out of those ports to distant locations in other parts of North America are “just not possible today,” Creel said.
Sentiment at the RailTrends conference has tended to be that STB will ultimately approve the CP-KCS merger. CP expects a decision sometime in the first quarter of next year. The board conducted public hearings in September and October on the merger.
Creel said he knows there have been “a lot of concerns about the foreclosing of gateways and forcing businesses to this network” by shippers who are customers or potential customers of the two separate railroads. But he pushed back against that.
“This team of railroaders is going to maintain fluidity,” he said. “We’re going to be entrepreneurial and we’re going to earn the business. We’re not going to force any business. We’re going to compete and we’re going to partner.”
For Ottensmeyer, his address at the conference harkened back to the day after Donald Trump was elected president in 2016. Kansas City Southern stock was hammered then on the assumption that an end to the North American Free Trade Agreement, or NAFTA, at the hands of a Trump, who had run while being heavily against the deal, would be disastrous for a company that had billed itself the “NAFTA railroad.”
NAFTA has been replaced by the United States-Mexico–Canada Agreement (USMCA). Ottensmeyer steered clear of declaring whether USMCA was better or worse than NAFTA.
But given the company was staring into a world without a trade agreement among the three nations — and had built about 50% of its business around Mexico — he said the fact that USMCA exists and passed by an overwhelming majority remains a significant factor.
“We should have trade certainty for several years to come,” Ottensmeyer said. “Mexico has that installed base of manufacturing and it isn’t going away. It is a critical part of the North American supply chain.”