U.S. regulators approve merger of Canadian Pacific and Kansas City Southern

Canadian Pacific Railway (CP) got a conditional green light today from federal regulators to complete a $31 billion merger with the U.S. freight rail line Kansas City Southern (KCS), clearing the way for the two companies to create what they call the first single-line rail network linking the U.S., Mexico, and Canada.

The deal had been approved by both companies’ stockholders in December 2021, following a protracted fight over a rival bid for KCS from fellow freight carrier Canadian National that was turned aside by U.S. antitrust regulators.

Following those votes, the transaction had been on ice pending approval by the U.S. Surface Transportation Board (STB), which issued its decision today. As part of its approval, the STB will require what it calls an “unprecedented” seven-year oversight period and contains conditions designed to mitigate environmental impacts, preserve competition, protect railroad workers, and promote efficient passenger rail. If all those conditions are met, the STB said it anticipates that the merger will result in overall improvements in safety and the reduction of carbon emissions.

The two railroads cheered the STB decision, saying it authorizes CP to exercise control of KCS as early as April 14, beginning a three-year process to achieve full integration of CP and KCS and unlock the benefits of the combination, Canadian Pacific said. That combined company will operate approximately 20,000 miles of rail and employ close to 20,000 people.

"These benefits are unparalleled for our employees, rail customers, communities and the North American economy at a time when the supply chains of these three great nations have never needed it more," CP President and CEO Keith Creel said in a release. "A combined CPKC will connect North America through a unique rail network able to enhance competition, provide improved reliable rail service, take trucks off public roads and improve rail safety by expanding CP's industry-leading safety practices."

Feds say merger maintains competition

To reach its decision, the STB said it reviewed nearly 2,000 comments and other filings, held a seven-day public hearing, and assigned its Board’s Office of Environmental Analysis to hold seven public meetings and produce a Final Environmental Impact Statement (FEIS). 

As a result of that research process, the STB said it concluded that the merger would preserve competition within the industry, since the combined companies—to be known as Canadian Pacific Kansas City (CPKC)—will continue to be the smallest Class I railroad, with a network that is a few thousand route miles shorter than the next smallest Class I and half the size of the Western railroads.

Other Class I railroads had challenged the merger based on monopoly concerns, but the STB said those complaints were “simply seeking conditions and other remedies that appear aimed at protecting their own traffic from competition with CPKC and at limiting the ability of the combined CPKC to meet its potential.” 

According to the STB, that potential will include reduced travel time for traffic moving over the single-line service by eliminating the need for the two now-separate CP and KCS systems to interchange traffic moving from one system to the other. “This will enhance efficiency, which in turn will enable the new CPKC system to better compete for traffic with the other larger Class I carriers,” the STB said.

The STB also found that CPKC’s potential customers approve of the move, saying “There is substantial (though not unanimous) shipper support for this transaction—the Board has received more than 450 support letters.” 

To protect shippers’ interests, the STB said it had imposed numerous conditions to preserve existing rail service options at affected “gateways”—the interchange points between CPKC and other railroads—that allow shippers to require CPKC to justify any rate increases that are greater than inflation.

STB sees environmental improvement

Aside from the business implications, the STB also found that a combined CPKC would be able to attract 64,000 truckloads from the roads to rail each year, helping to reduce road congestion, create fewer emissions, and improve transportation safety.

The board also pointed to last month’s derailment and toxic spill by a Norfolk Southern train in East Palestine, Ohio, saying the merger would improve industry safety overall since “rail is by far the safest means of transporting any freight, including hazardous materials.”

The STB said it had also studied community concerns about train lengths, and found that the merged companies would actually run shorter trains in the future and would meet a rule that trains must avoid blocking public crossings longer than ten minutes. The STB cited the two companies’ estimate that their average train length would decrease from approximately 9,551 feet (1.8 miles) if there was no merger to 7,726 feet (1.4 miles) after the merger.