Viewpoint: CP-KCS merger makes sense; CN takeover does not

Former senator asserts CN takeover of Kansas City Southern would extinguish competition and risk further consolidation

By Byron L. Dorgan, retired U.S. senator from North Dakota

Making an exception is different than changing one’s mind. That’s how I came to the conclusion that, although I have been a strong and relentless critic of mergers by big Class I railroads, the recently proposed merger by Canadian Pacific (CP) and Kansas City Southern (KCS) is an exception that makes good sense for American shippers, consumers and the economy at large.  The recent proposal by Canadian rival CN to buy KCS instead would be exactly the kind of big rail merger that I would oppose.

My history with railroads dates back to my small North Dakota hometown of 300 people. We had train service in our little town. In the middle of the last century, there were many trains connecting big and small towns across America. That big locomotive smoking its way down the tracks made quite an impression in our town. Those train tracks looked to us like they stretched forever. And that train whistle is still an indelible memory. But of course, things changed.  

These days the big rail lines have divided the country and they largely decide where they stop and what they carry.

I don’t denigrate those companies. But as a U.S. congressman and senator, I was never supportive of the major rail mergers that made the big railroads bigger and eliminated the small ones. I was an aggressive opponent of that concentration in rail service.

But to me, the proposed merger announced recently by CP and KCS is different. If this merger is approved, the new railroad will still be the smallest Class I railroad in our nation, not a behemoth like the Big Four that dominate the East and West.

But that isn’t the most telling point.

The question that matters most is this: What will this proposed merger mean for shippers and for our economy? Candidly, I think the evidence is clear. The CP-KCS merger will be beneficial for shippers and for our national economy. For that reason, this is the rare exception to my consistent opposition to big railroad mergers.

The opportunity to use a Canadian east-west railroad to connect with a U.S. north-south railroad and open new markets in the North American continent with new and faster service for farmers and manufacturers creates an opportunity for more competition rather than less and it should be approved by the Surface Transportation Board.

While serving in Congress, I pushed back hard against the major rail mergers that were occurring. I viewed all of those mergers as just creating bigger rather than better railroads.  

But this CP-KCS merger is very different. I believe it will provide a type of service that does not now exist and in nearly every sense it will provide better and more competitive service. It is the first creation of a U.S.-Mexico-Canada rail network that will create an opportunity for the trade patterns that are set to increase substantially with the USMCA trade agreement. It will allow direct connections to markets where shipments are now slowed by choke points in certain cities.  Those direct connections and a resulting more rapid service is clearly beneficial to shippers.

In short, it seems to me the combination of these two railroads will create much needed additional transportation competition as well as expanding access to both growing and new markets. Premerger, CP is the only major railroad that does not reach the Gulf of Mexico, and KCS is the only major railroad that does not reach Chicago. The two do not overlap but meet only at one place — Kansas City — making this the perfect hand-in-glove fit of all the railroads in North America. Any other combination would involve competitive overlaps; this one has none.  

I understand that the CP-KCS combination has garnered a lot of support and enthusiasm, including from groups like North Dakota’s grain shippers. And that’s for good reason! For the first time, these grain shippers in the Dakotas will have a real single-line option to reach their end markets rather than having to rely solely on UP or BNSF. Manufacturers in Minnesota, Wisconsin and Iowa will gain new single line routes to the Gulf and to Mexico, expanding options.  And in no case will shippers have fewer options. 

The CP-KCS proposal stands in stark contrast to the new proposal announced by CN in its attempt to acquire KCS. That proposal may sound similar in that CN is a Canadian railroad, but that’s where the similarity stops.  

CN’s proposed takeover raises all of the concerns that I, and many shippers, have voiced about further Class I consolidation: it would extinguish competition options and it would risk a final round of further consolidation that leaves us with just two networks spanning the continent.  That is exactly the type of additional rail concentration that will injure shippers.

The competitive harms from a CN-KCS transaction should be obvious. Combining CN and KCS would reduce the number of independent rail routes between the Upper Midwest and the Gulf Coast from four to three.  

Shippers in North Dakota are excited about the CP transaction precisely because it would strengthen one of those four routes — making CPKC a stronger competitor against the other major rail systems. The CN proposal not only takes away those gains — by eliminating the possibility of a CP-KCS deal — it also takes away the benefit of the competition between KCS and CN that shippers already have today. 

Equally important, a combination of CN and KCS has the potential to create a major disruption  in the balance in the North American rail network that has prevented the other big Class I railroads from believing they can successfully continue to satisfy their appetite for more mergers that result in bigger and less competitive railroads. 

Not only would a combined CN-KCS be much bigger than an independent CP, it would leave CP without a friendly connection to the Gulf of Mexico and other points. That unique disadvantage would create new pressure for a cascade of further consolidation. That clearly is not in the public interest.

In light of the substantial competitive benefits from a CP-KCS organization (and in recognition of the grave competitive and public interest concerns posed by the CN bid for KCS), I urge the STB to take action to approve the CP-KCS combination.  

And it is very important that the board do this in a way to make it clear that this CP-KCS merger is a rare exception to the rule and one that does not send any signals to the other larger rail carriers that more mergers might be acceptable. 

I believe the CP-KCS transaction is the rarity that makes sense for shippers and provides options to serve new markets and better serve existing markets. It connects the North American continent in a unique way to create more competition in domestic markets and more opportunities in international trade.

Former Sen. Byron Dorgan has had a lengthy career in public service. He was a congressman and senator for North Dakota for 30 years before retiring from the Senate in 2011. He served on congressional committees and subcommittees with oversight on transportation and energy issues. Dorgan has consulted with CP about the proposed transaction.