By Jack Yoest, Catholic University
The recent train derailment in East Palestine, Ohio has brought into sharp focus the management issues facing some of America’s railroad companies. But even before this toxic disaster our railroad infrastructure was the subject of government regulators’ attention.
In addition, for the last several months economic observers have examined every available data point for insight into the direction of the economy. And while Federal Reserve meeting minutes and earnings reports can give some sense as to where the economy is headed, these indicators don’t tell the full story.
Threats to our economy can arrive in unexpected forms. That’s certainly the case with a proposed mega-merger within the rail sector currently under review by Federal regulators.
At issue is the is the proposed acquisition of Kansas City Southern railway by Canadian Pacific railway. If approved, the merger threatens to undermine competition, increase shipping costs, and impair key sectors of the U.S. economy. What’s more, all these potential damages would accrue to the benefit of Canadian Pacific, a foreign corporation.
To understand why the merger poses such a threat, it’s important to first understand the status of competition in the rail sector. In 1976, there were 73 Class I railroads serving all the United States. Today, there are only seven. Competition within this crucial supply chain linkage has eroded. Shippers throughout the American economy have found themselves at the mercy of a loose conglomerate of massive rail carriers. This closely resembles a monopoly where buyers have few options.
This dependence represents a serious, yet still manageable challenge to countless shippers around the country. But if railroads are allowed to continue to consolidate and exercise even greater control over the sector, shippers can face new harmful dynamics ranging from diminished service, restricted car supply, shrinking loading windows, new fees, and much more. And now ever-present safety concerns are coming into clearer focus.
Given the geographically specific nature of so many crucial goods within our supply chain – especially commodities and agricultural products – railroad dominance can have a massive impact on access to markets, business competitiveness and profitability. In agriculture-heavy, land-locked states like Montana and the Dakotas, shippers already must rely on one, single railroad to move their products to consumers. Moreover, beyond the service risks inherent to such consolidation, shippers in states that lack rail competition pay twice the rates of areas that have more robust competitive landscapes.
The Canadian Pacific-Kansas City Southern merger would further limit competition in an already strained sector. It should not be surprising that the U.S. Department of Justice has now formally voiced antitrust concerns related to this merger – twice.
The Department of Justice first voiced its concerns about the project back in April of 2021. Since that time, applicants have seemingly attempted to misconstrue or obscure the Department’s position on the merger. That effort did not sit well with the Department of Justice, which submitted another letter last month to correct what they believed to be “inaccurate statements” made by merger applicants.
The most recent letter states: “Applicants argued that the Board should infer that the Antitrust Division does not believe the transaction has the potential to cause harm. No such inference should be drawn.” (Italics mine.)
In other words, the Department of Justice views the proposed merger as an antitrust concern with the potential to cause economic and competitive harm to the United States. The Department staffers also, seemingly, don’t appreciate their words being twisted in a manner that attempts to obscure those concerns.
The United States Surface Transportation Board (STB) will ultimately make the decision as to whether or not the merger proceeds. But such strong words from the Department of Justice will surely influence the debate as the STB moves forward on this critical issue. Foreign ownership concerns are echoed in President Biden’s recent State of the Union pledge to “make sure the supply chain for America begins in America…” It is inconsistent that administrators at the Surface Transportation Board would even consider approval of this merger.
With the United States economy on shaky ground, it’s little wonder that observers and forecasters are working overtime for insight into reducing risk. But for all the attention paid to the Federal Reserve it’s important to remember that a railroad merger can be just as disruptive as an interest rate increase. We face real harm to market competition. Let us hope that the STB appreciates concerns about this proposed merger and makes the right decision to keep our supply chain logistics competitive.
Jack Yoest is an Assistant Professor of Practice in Leadership & Management at The Catholic University of America in The Busch School of Business and a former Assistant Secretary of Health and Human Resources for the Commonwealth of Virginia.