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Viewpoint: Greenlight the pro-shipper CP-KCS combination

Benefits for rail customers are significant

North Motors Group EVP Dennis Manns argues how the CP-KCS merger might benefit shippers. (Photo: North Motors Group & Canadian Pacific & Jim Allen/FreightWaves)

Dennis Manns is the executive vice president of North Motors Group, which advises automotive OEMs and logistics supplier groups. The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates. 

By Dennis Manns

It is an important time for rail customers to think critically and play the long game. Recently, Canadian Pacific (NYSE: CP) announced that it would acquire Kansas City Southern (NYSE: KSU) [KCS], triggering review by the Surface Transportation Board (STB).  

The CP-KCS transaction is the one and only transaction among large U.S. railroads that is unquestionably beneficial for automotive and other customers. It involves the two smallest railroads. They connect only in Kansas City, with no competitive overlap so that no customer loses access to its existing rail service providers. In fact, by providing new single line services, it enhances competition against existing rail and truck options.

So regardless of which STB rules apply, this transaction clears the hurdle. The benefits of the transaction are simply compelling for rail customers.

I understand the landscape and opportunities and struggles of the original equipment manufacturers in the automotive industry. In my 35 years of experience with American Honda Motor Co. and suppliers that I work with, it is clear to me that this merger will make logistics and distribution easier. It is a great transaction that will benefit the automotive supply and distribution network throughout North America. This will solve a lot of challenges rail customers face.

In 2001, the STB adopted new, more stringent rules to govern the evaluation of future mergers involving the largest (or Class I) railroads. The STB waived the application of those new merger rules to transactions involving KCS because KCS was and remains the smallest Class I railroad, was and remains unaffiliated with one of the six large railroads, and a potential merger between involving KCS would not necessarily have the same impact as other major mergers.

Those reasons for giving KCS a waiver remain applicable today.  

I worry that some customers or customer associations, which are fearful of transcontinental rail mergers, might consider opposing the waiver the STB granted for transactions involving KCS.  That reaction would not be in those rail customers’ best interests because this transaction should be approved under either set of rules, as it strengthens competition with other railroads, strengthens competition with trucks, produces environmental benefits, involves two growing railroads with strong safety and service cultures, and there is no competitive overlap.  

Once you recognize this fact, for any shipper concerned about mergers among the larger Class Is, it would be a shortsighted mistake to ask the STB to eliminate the waiver for KCS and to apply the new merger rules, which have thus far discouraged any further consolidation involving the largest Class I railroads.

On the one hand, if the STB applies the “old rules” to CP-KCS, the new requirements of the “new rules” will remain untested and their uncertain implications will continue to deter further consolidation.

On the other hand, if the STB approves the CP-KCS transaction under the new rules, it may create hope in the rail industry that other mergers can also be approved under those rules. 

Thus, customers fighting for the new rules to apply may make it easier to trigger the final round of mergers that those same customers fear.  

My advice would be to slow down and think it through. When the benefits of the CP-KCS transaction are so strong, do not risk cracking the dam that has held back the final round of mergers customers might really oppose.

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Note: FreightWaves occasionally publishes commentary from industry sources with expertise, information and opinion on current transportation topics. The opinions expressed in the article are solely those of the author and not necessarily those of FreightWaves. Submissions to FreightWaves are subject to editing.