Are We Getting Railroaded?

A train merger and the threat of monopolism on the tracks.

Last Monday, the sixth-largest North American railroad, Canadian Pacific, announced plans to buy the seventh-largest, Kansas City Southern, for $25 billion. If approved, this will be the largest railroad deal in nearly 15 years, creating a system that will stretch from the Atlantic to Pacific and into Mexico.

Farmers and other producers of heavy, lower-value commodities who rely on railroads to transport their products have mixed feelings about this proposal. Decades of railroad consolidation and Wall Street-driven cost cutting have diminished railway capacity and cut or degraded service, especially to small towns and rural areas. Some agricultural shippers are skeptical of any further consolidation, both from this merger and the future deals it could encourage.

Others argue that the merger may be neutral, even positive, since Kansas City Southern and Canadian Pacific’s networks do not overlap, the combined railroad would still be the smallest of six, and a new connected railway linking Canada and the Gulf of Mexico could provide a competitor to the Canadian National. But it raises the question – is more consolidation truly the best way to improve competition in monopolistic railroading?

“When you’re operating in an environment where [there are] monopolistic behaviors everywhere and at the best you may have a duopolistic set of behaviors, shippers are still operating in a consolidated environment and I just think that that presents overall concerns,” says Ann Warner, spokesperson for the Freight Rail Customer Alliance. “This merger needs to be reviewed under the utmost scrutiny as to how it could enhance competition.”

In 1980, Congress tried to save a then-ailing rail industry by cutting back on many regulations and allowing wave after wave of mergers. Deregulation allowed railroads to abandon unprofitable routes and services, while the mergers gave remaining railroads increasing monopoly power. In 1976 there were 63 major railroads operating in the U.S., and much of the industry was in bankruptcy. Today there are only seven major railroads left in North America, and they are all highly profitable. Over the same period, railroads have abandoned nearly 100,000 miles of track, leaving many cities and regions with a single monopoly carrier, or no service at all.

Large grain traders and agribusinesses are big enough to negotiate better deals and service with consolidated railroads, but smaller traders and farmers are the first to suffer from service cuts or higher rates. Grain farmers without access to river or lake barges are particularly reliant on rail. In landlocked states such as Montana and the Dakotas, where most farmers have to rely on a single monopolistic railroad, they pay twice the rate of those in areas where competition still exists.

Limited rail capacity also contributes to global climate change by putting more trucks on the highway. In 2008, the Millennium Institute estimated that a $500 billion investment in rail infrastructure could move 83 percent of long-haul trucks off the road in two decades, bringing about huge reductions in carbon emissions and other forms of pollution while also making driving safer. But because the rail industry has come under the control of hedge funds and private equity firms focused on maximizing short-term profits, these transformative long-term investments do not get made.

Instead, under pressure from Wall Street, rail capacity and service levels continue to deteriorate. The latest example comes in the form of so-called Precision Scheduling Railroading. Introduced by railroad executive Hunter Harrison, Precision Scheduling Railroading is a strategy that involves driving up short-term profits by tearing out track on secondary lines, scrapping locomotives and rail cars, and running fewer, longer trains to fewer places. By cutting their cost of business, railroads’ short-term profits go up, even as they turn away some business, lose revenue, and cut their services in the long run.

Since implementing Precision Scheduling Railroading, the third-largest railroad CSX has cut capital investment by 14 percent and eliminated more than 550 intermodal routes. Across the industry, more than 20,000 rail workers lost their jobs in 2019 alone. Resulting service and scheduling changes have upset many rail customers, but they’ve boosted stock for investors. For instance, CSX stock more than doubled between 2016 and 2019.

Against this backdrop, the recent announcement of the largest railroad merger in more than 15 years naturally raised eyebrows, particularly for agricultural shippers. “Given the fact that consolidation has resulted, at times, with an increase in rates or a decrease in service … there is a healthy degree of concern whenever you see another proposed merger within the freight rail industry,” said Mike Steenhoek, executive director of the Soy Transportation Coalition.

Steenhoek also said some agriculture shippers are worried this merger could prompt other, larger rail takeovers. “If you have one merger or acquisition that occurs, that often inspires further consolidation,” Steenhoek said. “I don’t know many agricultural shippers that would embrace the prospect of another wave of consolidation within the rail industry.”

Canadian Pacific and Kansas City Southern executives argue that this merger could increase competition in rail by providing the first single-carrier line between Canada and Mexico. This new track would compete with Canadian National, which provides continuous service from Canada to the Gulf of Mexico. A group of Canadian wheat growers and the president of the U.S. Soybean Export Council both spoke positively of the merger. Steenhoek and Warner said shippers are also weighing the benefits of more continuous service, but there is still uncertainty.

“If you have a seamless process of transporting your goods … in theory that should make it easier for the shipper, but does that necessarily mean it is going to be reliable service at competitive rates? You just don’t know,” said Warner.

The focus on connectivity can also be a red herring. Back when there were still many railroads, shorter lines often cooperated to provide faster and better service than what consolidated railroads offer today. For nearly 50 years eight separate railroads worked together to offer the “Alphabet Route,” which moved perishables like fresh meat and vegetables from Boston or New York to Chicago or St. Louis. Today, most produce companies ship by truck as railroads deprioritize these time-sensitive, higher-cost trips.

Despite decades of deregulation, the Surface Transportation Board still has a lot of authority to regulate and improve competition in the rail industry, including the power to block this merger. The Surface Transportation Board also has underused authority to adjudicate disputes between shippers and railroads over unreasonable rates or unfair terms. In cases where shippers are served by a single railroad, the board can also compel that railroad to share its tracks with other lines, thereby preserving competition.

Going forward, if Congress picks up President Joe Biden’s recent plan to pour billions of tax dollars into private rail infrastructure, it should also demand that private rail companies become more accountable to the public. This could include reinstating common carriage requirements and bans on price discrimination. Before the era of rail deregulation and monopolization, these were important public policy tools that ensured everyone who depended on railroads, regardless of size or location, could compete for service on equal terms. If we hope to get more freight off of highways and on to more energy-efficient, environmentally friendly trains, it might be time to bring those principles back.

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Claire Kelloway

Claire Kelloway is a senior researcher-reporter for the Open Markets Institute and the lead writer for Food & Power.