A $28 billion merger between two of the largest railroads in North America is set to go forward after a board controlled by appointees of President Joe Biden ignored the administration’s push against corporate concentration.
The Surface Transportation Board approved the merger of Canadian Pacific and Kansas City Southern, the sixth- and seventh-biggest railroads on the continent. The merger will create a new railroad stretching from Vancouver to Nova Scotia, all the way down to Veracruz, a port on the Gulf of Mexico. It will be the first merger of two Class I railroads ― industry-speak for the largest rail companies ― in two decades.
The decision will bitterly disappoint both progressives and environmentalists, who fear it will increase demand for Canadian oil and lead to the same type of cost-cutting favored by Wall Street that some have linked to the toxic derailment in East Palestine, Ohio.
The Surface Transportation Board has five members, three of them appointed by Biden. But it’s an independent agency, free from the influence of either the White House or the Department of Transportation, limiting the sway of the aspiring trust-busters on Biden’s economic team.
So while the Justice Department and Department of Transportation were able to file a lawsuit aiming to block the $3.8 billion merger of JetBlue and Spirit Airlines, they were powerless to directly intervene in this merger, which is seven times larger.
In the first press conference held by the board in recent memory, Chairman Martin Oberman defended the decision, noting the two railroads do not share territory and said the merger “will benefit the American economy and will be an improvement for all citizens in terms of safety and the environment.”
A key factor in the board’s decision was how consolidated the railway industry already is. The deregulation of the industry in the 1970s spurred a wave of mergers, bringing the number of major North American railroads from 40 to just seven today. The other five railroads are already bigger than Canadian Pacific and Kansas City Southern; the new combined railroad, the Surface Transportation Board argued, will be able to better compete for business with the existing giants.
“There’s certainly been an ongoing debate about whether there’s been too much consolidation [in the rail industry], and I personally might have such a view,” Oberman said. “But that consolidation presented the landscape on which we are acting today.”
Oberman noted many of the existing Class I railroads testified against allowing the merger, while hundreds of companies reliant on rail to ship their goods supported it.
The Justice Department’s Antitrust Division warned against the merger, and progressives in Congress ― including Rep. Katie Porter (D-Calif.) and Sen. Elizabeth Warren (D-Mass.) ― spoke out against it. Canadian Pacific and Kansas City Southern spent nearly $2 million lobbying in support of the merger, including by hiring former Sen. Byron Dorgan (D-N.D.).
Antitrust groups attacked the decision. “This is a disgraceful decision from the Surface Transportation Board,” said Erik Peinert, the research manager at the American Economic Liberties Project. “This $28 billion mega-merger will put even more critical transportation infrastructure in the hands of a single, powerful corporation more interested in extracting profits than operating a reliable, safe railroad system. Nothing in the history of rail consolidation suggests it is a good idea.”
The combined tracks will establish a “NAFTA super railway” ― the first railroad to connect North America’s three largest economies at a moment of dramatic change to the continent’s energy systems. Electric vehicles assembled in Mexico will travel north to U.S. drivers. Meanwhile, some of the world’s most carbon-intensive oil will ship from Canada.
The new route will connect Alberta’s tar sands fields with refiners on the U.S. Gulf Coast. Since President Joe Biden nixed the Keystone XL, a pipeline meant to increase the flow of oil from Canada to the U.S., rail could become an attractive alternative route. Shipping oil by rail is almost always more expensive than a pipeline, but connecting the full route under one company could eliminate the cost of paying two different railways for access to separate lines.
The recent derailment in East Palestine of a train carrying chemicals offers a grim reminder of the risk these so-called “bomb trains” pose to communities crisscrossed by rail lines. A train carrying oil along a regional freight line in Quebec went off the rails in 2013 and exploded, killing nearly 50 people in the deadliest train accident in Canada since 1894. Nearly two dozen more derailments have occurred in the U.S. and Canada since.
But explosive accidents remain relatively rare. A more mundane and widespread environmental impact of the merger could be increased air pollution from automobile traffic. Freight rails aiming to increase profits have added more and more cars to each train, sometimes stretching miles long and causing lengthy delays at road intersections.
On much of the railway’s route, the impact could be small. The Surface Transportation Board estimated that the average wait time per vehicle at most grade crossings would increase by just 0.7 seconds. The impact could be heavier on other jurisdictions, particularly a transit hub in the Detroit area that is widely considered the nation’s most polluted zip code.
In a letter to the federal regulatory agency, the Michigan Environmental Council warned that air quality in that part of the state already “got worse without additional merger-related train traffic going through these towns.”
“Running unwanted trains through Detroit just adds to the environmental injustice for the city, and we cannot let it continue with the merger of CP and KCS,” the letter read.
Citing Canadian Pacific’s own data submitted to the Surface Transportation Board, the nonprofit said the merger “would result in an estimated 87 more trucks per day moving in and out” of a local facility.
“Unless serious efforts are undertaken to mitigate the increased traffic and resulting pollution residents of our state would see, we would urge you to reject this merger,” the Michigan Environmental Council said.
Oberman addressed environmental concerns by noting both the strong safety records of Kansas City Southern and Canadian Pacific ― they are the top two among Class I railroads, he said ― and argued it was safer to transport oil and chemicals by freight rail than by truck.
Oberman noted the board was also putting in place an unprecedented seven-year oversight period to make sure the newly merged railroad followed the conditions of their approval, but antitrust advocates noted this approach has failed in the past, including when the Justice Department tried to limit Ticketmaster’s power following their merger with Live Nation.
The vote to approve the merger was 4-1, with board member Robert Primus, a Democrat originally appointed by former President Donald Trump and reappointed by Biden, echoing many of the progressive complaints about the merger and the Wall Street-driven cuts to railroad workforces and staff.
“The unhindered cost-cutting permitted by concentration of market power can have safety consequences for surrounding communities and railroad employees,” Primus wrote in his dissent. “These effects are undeniably contrary to the public interest.”