Talk of the next Class I rail merger is steadily moving beyond backroom chatter and into public conversations.
With only six Class I freight railroads remaining and stringent merger rules set by the Surface Transportation Board’s 2001 framework, the consensus largely held that the window for large-scale transactions was effectively closed. Any potential merger, under these rules, must not only demonstrably enhance competition but also clearly articulate public benefits, typically manifesting as improved service or gains for shippers. This high bar has historically kept serious engagement with the concept of consolidation at bay. However, this long-held view is beginning to undergo a significant transformation.
A recent surge of interest from a diverse array of investors, ranging from long-only funds to event-driven specialists, has prompted a fresh examination of the U.S. rail sector, said London-based analyst MKP Advisors, in a research note. This renewed engagement signals a potential shift in how market participants perceive the viability of rail mergers. Instead of merely relying on a strategic framework, the current analysis is focused on identifying combinations that could credibly be executed within the prevailing political and regulatory environment. While the fundamental logic for consolidation may exist, the thinking goes, its realization hinges on navigating a complex web of governmental oversight and stakeholder interests.
“There’s been speculation about eastern and western Class I railroads merging for years,” said Mike Baudendistel, head of intermodal solutions at FreightWaves and former vice president of equity research at Stifel Financial Corp. “My sense is that the CP-KCS deal was the last Class I merger. I understand that some might look at the STB and say that it’s more likely with [Patrick] Fuchs as chairman than it would have been under [previous chairman] Martin Oberman, but a potential merger would still have to meet very high standards including demonstrating that it would increase competition between the railroads.”
Structurally, MKP said, the rail industry remains one of the most consolidated and profitable segments within the broader transport sector. The six Class I carriers – Norfolk Southern (NYSE: NSC), CSX (NASDAQ: CSX), Canadian National Railway (CNR.TO), Canadian Pacific Kansas City (NYSE: CP), Union Pacific (NYSE: UNP), and BNSF Railway (owned by Berkshire Hathaway) – collectively control the entire long-haul network effectively as regional operating duopolies.
The advisor noted that these carriers consistently achieve strong margins, typically in the mid-30% to low 40% range for pre-tax earnings, a testament to their entrenched market position. Yet, despite this profitability and strong competitive standing, the industry has grappled with flat volumes over the past decade. More critically, service performance has become an increasingly significant liability. Frustration among customers, particularly shippers, continues to mount, largely centered on poor on-time performance and limited visibility into freight movement, areas where trucking often presents a superior alternative.
This growing dissatisfaction has shifted investor pressure from pursuing incremental margin improvements to demanding more fundamental, structural change within the industry. MKP framed large-scale M&A as the ultimate expression of such structural transformation.
The natural extension of this line of thinking regarding mergers is that only a select few pairings plausibly meet the rigorous threshold for approval. Its sector analysis points to two east-west combinations as possessing a viable path forward under existing rules: CSX-UP, and NS-BNSF.
A lower-probability scenario involving a pairing of NS-UP also remains a possibility. Every other conceivable combination, it is argued, encounters insurmountable challenges, ranging from significant operational overlap to substantial political resistance or regulatory dead ends. This narrow set of potential outcomes highlights the demanding nature of the regulatory landscape and the specific criteria that must be met for a deal to even be considered.
Adding another layer of complexity and opportunity, the advisor pointed out, the broader policy environment is also undergoing a notable evolution. The post-pandemic emphasis on supply chain resilience, it argued, coupled with renewed federal attention to domestic manufacturing and infrastructure development, has created a more receptive atmosphere for consolidation discussions. Union Pacific Chief Executive Jim Vena, for instance, recently voiced support for potential east-west combinations, although other executives weren’t as optimistic.
Crucially, a second Trump administration is expected to lean into “American Champion” narratives, said the advisor, particularly where a transaction can be framed as directly supporting industrial growth and job creation. This political alignment is significant. Moreover, existing inefficiencies within the current rail system, such as freight handoffs through critical chokepoints like Chicago or St. Louis that can delay east-west movement by several days, could now be reframed as fixable bottlenecks rather than unavoidable friction. The creation of a truly end-to-end network, complete with unified dispatch, scheduling, and service, MKP claimed, would not only unlock substantial operating synergies but could also potentially meet the STB’s public-interest threshold, especially if shippers experience tangible and consistent reliability gains.
MKP pointed out how historical precedent and rigorous network analysis suggest large-scale rail consolidation could realistically unfold under current conditions. It examines why certain combinations may be more feasible than previously assumed, and outlines how a transaction would need to be meticulously structured and strategically positioned to garner the necessary support.
This perspective is not solely based on theoretical models or geographical maps, but on insights gleaned from several months of direct engagement in Washington. It said this involved meetings with federal transportation regulators, policymakers actively shaping freight and infrastructure policy, congressional staff, industry executives, and seasoned journalists with decades of experience covering the rail sector. These conversations have provided a deeper understanding of how the STB is likely to evaluate a potential deal, which narratives are most likely to resonate politically, and where the primary focus lies for shippers and other key stakeholders. The result is a perspective grounded in first-hand insight from those closest to the regulatory process.
[FreightWaves did not take part in discussions with MKP.]
It now appears possible, the advisor said, that while the number of truly executable rail mergers remains extremely limited, it may no longer be zero. BNSF and Union Pacific maintain dominant positions in the west, while CSX and Norfolk Southern control the east. Canadian Pacific Kansas City and Canadian National Railway, meanwhile, remain cross-border players with more constrained domestic latitude. Only a small, select set of combinations offers the strategic complementarity, operational benefit, and political palatability required to secure regulatory approval.
[CPKC is struggling with operational issues on former KCS territory after an IT changeover that casts doubt on future mergers.]
For investors, MKP said the paramount challenge will not be merely identifying potential combinations with the greatest synergies; rather, it will be determining which combinations can realistically navigate the intricate political landscape in Washington with the requisite coalition of support.
No recent deal better illustrates the complex realities of rail M&A than the prolonged takeover saga involving Kansas City Southern. This case stands as the clearest modern blueprint for what it truly takes to complete a transaction and why regulatory strategy often significantly outweighs considerations of price. Future rail mergers, MKP said, must be strategically framed by seamlessly combining a compelling strategic logic with unimpeachable regulatory credibility, and critically, by learning from the STB’s decisive rejection of CN’s proposed trust framework for acquiring KCS that derailed the deal.
Similarly, CP’s earlier bid for NS in 2015 offers a stark illustration of what can go awry when regulatory and shareholder dynamics collide.
Despite multiple public offers with generous terms, NS rejected them all, citing valuation and regulatory uncertainty. CP’s use of a proposed voting trust, aimed at sidestepping delays, met resistance from NS, the STB, and even the Department of Justice. A proxy push followed, but pressure from regulators and lawmakers eventually forced CP to abandon the effort.
Activist campaigns, such as Mantle Ridge’s push at CSX in 2017, while relatively rare, proved highly effective as E. Hunter Harrison’s Precision Scheduled Railroading changed the industry’s operational dynamics.
Two viable pathways for approval
MKP said its research revealed two primary pathways for large-scale rail mergers to receive approval under current conditions.
- Gaining executive branch support through policy alignment: Proponents must align the transaction with the current administration’s policy and economic priorities. This involves clearly demonstrating how combining eastern and western networks would reduce inefficiencies, increase freight capacity, enhance reliability, and stimulate investment in domestic infrastructure. Positioning a merger as a driver of national industrial competitiveness and supply chain modernization, the advisor said, could garner support from the White House. The current second Trump administration is expected to favor “American Champion” narratives, particularly if a transaction supports industrial growth and job creation.
- Securing Surface Transportation Board approval via flexible interpretation of merger guidelines: The STB, the economic rail regulator, would need to apply a contemporary interpretation of its 2001 merger guidelines. These rules, designed for a different industry landscape, have never been tested in their current form. The standard requiring “pro-competitive” outcomes is flexible and could be interpreted to reflect the present-day industry structure and performance. The current STB leadership under Chairman Patrick Fuchs, said MKP, is positioned to apply these guidelines pragmatically, rather than as rigid constraints.
While shipper opposition is anticipated, and concerns about consolidation will persist among various political constituencies including coal, utilities, labor, agriculture, oil, and chemicals, the competitive landscape in most regions would largely remain unchanged. A unified network, said MKP, could improve east-west freight flows, reduce handoff delays, and strengthen scheduling integrity, preserving sufficient competition in core corridors.
There is limited concern from labor constituencies regarding M&A, the advisor claimed, either due to expectations of long-term network/volume expansion or because STB rules mandate six years of employment protection under Class I merger provisions. Resistance is more likely from white-collar redundancies in administrative and headquarters functions, which is unlikely to concern the White House.
To address competitive concerns, particularly from shippers, the STB may consider remedies like reciprocal switching or limited open-access obligations. These approaches, though historically resisted, have precedent, such as CP’s proposal of open access in its attempt to acquire NS. Regulatory models internationally, like Canada’s Maximum Revenue Entitlement (MRE) for grain shipments, demonstrate that targeted pricing constraints can coexist with private ownership and operational autonomy, reinforcing that competitive safeguards can be implemented without undermining the rationale for consolidation.
Potential merger combinations
- CSX-UP: Widely considered the most logical and likely pairing, this merger would connect CSX’s Eastern U.S. network with UP’s expansive Western footprint, potentially enabling a more integrated transcontinental corridor for intermodal and bulk freight. Operational efficiencies could include reduced interchange delays and improved coast-to-coast service reliability. However, it would likely face close scrutiny from antitrust regulators, particularly regarding its impact on interline competition in key gateway markets such as Chicago and St. Louis, and potential effects on smaller railroads and terminal operators.
- CSX-BNSF: This merger would form a broad national network linking the Pacific Northwest and California to the Northeast and Southeast, potentially enhancing port-to-port connectivity and strengthening presence in key intermodal corridors. While operationally compelling, the combined network would likely intersect at major interchange hubs Chicago and St. Louis, raising questions about routing flexibility and concentration. The STB may also scrutinize its effects on agricultural exporters and short line railroads in the central U.S.
Potential NS combinations
- NSC-BNSF: Considered the most likely response if UP initiates a merger, with BNSF partnering with the unaligned eastern railroad. This combination would bring together key coal and intermodal corridors, creating direct service between Wyoming’s Powder River Basin and the Southeast. The strategic rationale focuses on merging BNSF’s Western network strengths with NS’s automotive and port-focused operations in the East. While offering operational synergies, the STB would likely examine potential reductions in routing flexibility through joint interchanges, especially in Memphis and Kansas City, and implications for competition in coal and grain shipping routes.
- NS-UP: This merger would grant UP direct access to the Southeast, a fast-growing U.S. freight market, while extending NS’s intermodal reach into the West. The operational rationale appears strong, with the potential for improved network integration. However, overlap in key corridors (e.g., Chicago to Houston) may prompt regulatory review regarding impacts on routing flexibility between the Midwest and Gulf coast. Areas of scrutiny could include service bottlenecks, rail competition in Texas, and how vertical integration might affect access at major intermodal hubs.
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