By Bill Alpert

Asked last month whether his western railroad might merge with an eastern network to haul freight straight across the U.S., Union Pacific CEO Jim Vena didn't waffle.

"I think it's a win for our customers and a win for competition, and it's a win for how the country should move ahead," he told the rail industry publication Trains.

Vena's remark set off a month of debate among rail CEOs, as investors and analysts hit them with questions about merging in today's competitive and regulatory environment. The other rail leaders were more wary, saying it will be hard to win federal approval for a megamerger by one of the big western networks -- Union Pacific or Berkshire Hathaway's BNSF -- with one of those in the east -- CSX or Norfolk Southern. Merger rules have tightened since 2021, when the last big rail merger formed the Canadian Pacific Kansas City combo.

The reason that mergers are on the table is that rail growth has been stagnant for the past few years. Tariffs have further choked traffic since April; but even before that hit, North American rail volume in 2024 was 4.4% below the level of 2019. After climbing steeply in the decade before Covid, rail stocks have flatlined.

Apart from financial moves like a share buyback, railroads grow earnings with higher volumes, higher prices, or more efficient operations.

The industry reduced operating costs by an average of 20 percentage points in the last 15 years, through an efficiency regime known as " precision scheduled railroading" that sped car movement and slashed head counts. Railroads also raised prices, while still remaining below the higher cost of long-haul trucking. There's probably not as much pull remaining in those two levers.

Volume growth hasn't come. The rail freight industry's great mission in this century has been to win back market share it lost to truckers. Despite being more expensive, trucks expanded their share of North American freight hauling from 60% in 2000, to around 75% today, noted TD Cowen analyst Jason Seidl in a June 11 report.

There are three ways that rail volume grows, said Canadian National Railway CFO Ghislain Houle at a Wells Fargo conference last week. Your existing customers grow; you add a customer, perhaps by convincing them to build a plant along your rail line; or you extend your network's reach.

CN has pursued partnering to extend its network, with a service it calls Falcon Premium to speed intermodal containers between Mexico and Detroit by working with Union Pacific and Ferromex.

But a transcontinental merger would also grow the resulting company's volumes. It could trim costs by consolidating headquarters. Customers would benefit and rails would become more competitive with trucks, said Union Pacific CEO Vena, by eliminating the two to three days it still takes to hand off cars in Chicago between the east and west networks.

The high hurdle to a merger are the rules adopted in 2001 by the U.S. Surface Transportation Board, after service meltdowns during Union Pacific's acquisition of the Southern Pacific Railroad and the difficult split of Conrail into CSX and Norfolk Southern.

Surface Transportation Board rules now require that a merger enhance competition, and not just preserve it, USB analyst Thomas Wadewitz writes, in a June 16 note. The promise of greater competition, improved service and efficiency must outweigh any risks of disruption and reduced customer choice. The less network overlap between merger candidates, the more likely a rail merger would clear the high regulatory bar.

There was no overlap between Canadian Pacific and Kansas City Southern, the merged company's CEO Keith Creel told a Wolfe Research conference in May. "Those facts simply don't exist with any other proposed merger that might be out there," he said.

Analyzing potential combinations between the western rails of Union Pacific and BNSF -- on the one hand -- and the eastern CSX and Norfolk Southern, USB's Wadewitz found the least overlap between Union Pacific and CSX. Norfolk overlaps more with both western networks, but a bit less with BNSF.

While the Surface Transportation Board is now steered by Republicans, most rail CEOs agreed that clearing the merger hurdle remains a steep challenge.

"I'll be far retired before that happens," said CN's Houle.

Write to Bill Alpert at william.alpert@barrons.com

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June 18, 2025 14:47 ET (18:47 GMT)

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