In the Winter 2025 Steel Wheels I provided an overview and some forward-learning initiatives UP could take that would smooth the merger’s approval. Union Pacific has filed its merger application with the Surface Transportation Board (STB) and instead of making proactive proposals to smooth the merger, they instead chose a far more aggressive strategy.

Union Pacific’s strategy for fulfilling the competitive and public service requirements of the new merger rules is to note that the strong projected post-merger growth in rail traffic fulfills these requirements through enhanced competition. UP Forecasts a 12% growth projection with 75% of that growth shifting from the highway to rail. This shift would generate revenue growth of $4.2 Billion. UP also forecasts that the merger would also leverage the growth potential of the Midwest “Watershed Market” the area on either side of the Mississippi River separated by rail company interchanges.

However, UP compounds this “trust me” strategy by presenting very limited analytics around the forecasts of rail traffic growth and a shift of freight from highways to rail. Although UP offers to keep all current gateway interchange points open, except for ownership changes to two terminal railroads, UP offers no other concessions such line sales, trackage rights, etc. This is despite forecasting early in the merger process that it saw $750 million in concessions to stakeholders to facilitate the merger.

To address concerns about avoiding a “merger meltdown” UP highlights an Information Technology and technology system integration investment of $1.1 billion. UP also lists $1.1 billion in yard and mainline capacity investments. Much of the mainline investment is focused on the Golden State Route, the former Wabash Line from Kansas City to Detroit and the Norfolk Southern Line between New Orleans and Atlanta.

Union Pacific’s original merger application only generally referred to passenger service. While Union Pacific and Norfolk Southern settled their on-time performance cases with Amtrak, the merger application failed to leverage passenger service as an opportunity to provide significant public benefits. All the application said was that the “existing track infrastructure has sufficient capacity to support the projected increased freight schedules while maintaining current passenger operations.”  There was no discussion regarding the proposed daily Sunset Ltd. or Cardinal (Alexandria, VA to Orange, VA) and whether the proposed network could handle this priority expansion. There was also no mention of other proposed routes, such as the proposed leg of the Crescent Ltd. from Meridian, MS to Dallas, TX, or others outlined in FRA’s Amtrak Long-Distance Service Study. And there is no settlement with Chicago’s Metra.

One of Union Pacific’s major challenges is the lack of confidence in  ability to achieve a smooth merger transition and that UP, under Wall Street pressure, will quickly pivot to a yield/operating ratio focused strategy. Stakeholders are concerned about long-term service issues and UP seeking only high-yielding long-distance traffic and not growing the business across the board.

The merger application drew mixed reactions from organized labor and shippers. Organized labor was split with SMART-TD (conductors, brakemen, and switchmen), Brotherhoods of Railway Carmen, Boilermakers, Firemen and Oilers and Yardmasters all found the promise of no furloughs and guaranteed life-time employment very appealing and support the merger.  Other unions, the Brotherhoods of Locomotive Engineers and Trainmen and Maintenance of Way employees and American Train Dispatchers Association oppose the merger with concerns around a lack of seniority protections and the need to transfer to other locations in order to maintain the guarantee of life-time employment. There was also concern about UP’s efforts around leasing trackage and yards to short lines and what would happen to current workers at those facilities.

The International Association of Machinists and International Brotherhood of Electrical Workers are all still in talks with UP. All told about half of the combined UP/NS workforce support the merger while about half oppose it.

Shippers are also split. Some like the American Chemistry Council and Alliance for Chemical Distribution have come out against the merger. The intermodal companies, with the flexibility of a dray to anywhere, are generally supportive. Other shippers on-line UP to on-line NS support the merger. Most shippers are “wait and see,” open to supporting the merger if UP proposes additional initiatives that increase competitive choices.

Union Pacific’s one concession to shippers is Committed Gateway Pricing (CGP) that appears to address Bottleneck Rail Rates. UP says it will keep all existing interchanges open and offer competitive rates for those interchanges. If UP outlines a process that fully carries out CGP shipper support will increase. But shippers want a robust Reciprocal Switching proposal and need further convincing that UP has fully planned and invested to avoid a “Merger Meltdown.”

With CPKCS and BNSF leading the pack, the freight railroads have come out against the merger. They have pointed out shortcomings in the forecasts for post-merger traffic predictions, the lack of concessions, no estimates for market share and the lack of clarity of downstream impacts of the merger. Drew Robertson of Atlantic Systems noted that the merger application does not include the costs ($2.69 billion) intermodal partners will have to invest to accommodate the intermodal traffic growth. The investment required to shift from truck to the rail carload mode is probably an issue for other truck focused shippers as well.  Slower mode shift due to this “investment friction” is another key risk that UP did not address in its projections.

Partnerships are the alternative highlighted as an option to a merger by the other railroads and some have been inaugurated even before the merger. However, it is ironic that these same partnerships did not develop in two decades of the current rail governance and only began when the merger was announced. So now, because of the merger announcement, there is more rail competition which somewhat counters the other rail companies’ argument that the merger will reduce competition.

Amtrak has yet to weigh in publicly regarding the merger. As was noted above, Amtrak has settled two on-time performance cases, one at the STB with UP and one in Federal court with NS. But no details on those settlements has been released so it is hard to judge the impact of the merger.

In the end STB rejected UP’s initial merger application as in-complete. UP tried to “bluster” its way through the merger process and the STB called them on it. UP is now working on an updated version to be filed April 30^th. The STB found the following shortcomings:

1. UP’s “application does not contain future market share projections showing the combined effects of merger-related growth, diversions and other merger influenced market changes”. The UP must provide market share projections beyond the merger date.
2. Failure to provide the entire merger agreement between the two railroads.
3. The application treated the restructuring the of ownership of the Terminal Railroad Association of St. Louis as a minor transaction whereas the Board finds it is a major transaction requiring a more detailed application.
4. Definition of the “materially burdensome regulatory condition” that would cause the merger to be terminated.

It should be noted that this ruling was not an indication of the Board’s views of the merger but only the completeness of its application.

In addition, perhaps providing a hint at what is minimally required to meet the new merger rules, the STB issued a proposed rulemaking for Reciprocal Switching that would simplify and streamline the current process and bring it in line with the intent of the Staggers Act of 1980. The proposed rule would eliminate the requirement that captive one railroad shippers show “anticompetitive conduct” in order to get directed access to another railroad.

Under the streamlined rules the shipper served by one railroad asks the STB to require that railroad to interchange the shipper’s cars to a second railroad at the closest interchange point. The STB can require railroads to establish through routes and to establish multi-carrier rates for these through routes.

This should broaden access to Reciprocal Switching. Under the old rules no shipper access had ever been achieved. UP has said it would support the proposed rule change. Still outstanding is how complex and time consuming the process will be. One question, was the timing of this rulemaking a coincidence or is the STB sending a “expand competition” message to the freight railroads and specifically the UP?

So, what are the major changes to look for in the revised merger proposal. Will UP propose any competition initiatives envisioned with its pre-application forecast of $750 million in concessions?

Passenger:
Will there be any information reconciling the disconnect where prior requests for additional passenger service required substantial capital investment, but the merger analysis indicates sufficient capacity over the same lines to handle several additional priority freight trains? Will the proposed Daily Sunset Ltd. and Daily Cardinal be addressed?

Competition:
Will the UP take the next step and eliminate Paper Barriers for short lines?
Based on past merger requests and STB cases we have some idea of the priority trackage rights requests by other railroads. They are:

1. CPKCS from Springfield, Il to Northern Indiana and Michigan.
2. CPKCS access from former CP lines to the Port of Houston (former KCS points were given that access as an outgrowth of the UP/SP merger).
3. CN from St. Louis or Springfield to Kansas City, KS.
4. CN from Baton Rouge to Houston and Gulf Coast petrochemical shippers.

Infrastructure:
Union Pacific plans additional train frequencies on key segments of its network. While there are capacity projects outlined, it would seem, as a confidence builder, that additional capacity projects would be well received by stakeholders – especially on the single-track segments east and west of Yuma, on the Norfolk Southern Line between Meridian and Atlanta and addressing the single bridge over the Neches River at Beaumont, TX.  Finally, UP and CPKCS have a dispute before the STB regarding the mismatch of train and siding lengths on the Meridian Speedway between Shreveport, LA and Meridian, MS. This route is identified as a major growth corridor for the merged company. A UP investment in siding extensions to settle this dispute would seem to be a wise strategy.

Given the impact of this merger on the rail industry, it is a major event. As a result, there will be additional updates in future issues of Steel Wheels.