The US Surface Transportation Board (STB) has approved the acquisition of Kansas City Southern Railway Company (KCS) by Canadian Pacific Railway Limited (CP), with conditions.  “The decision authorises CP to exercise control of KCS as early as April 14, 2023, at or after which point CP and KCS would combine to create the new CPKC. CP is reviewing the full 212-page decision in detail and in the coming days will announce its plans with respect to the creation of CPKC,” CP said in a statement.

CP President and Chief Executive Officer Keith Creel extended the company’s sincere gratitude to the STB board and staff for their hard work as part of the comprehensive review of the combination. “This decision clearly recognises the many benefits of this historic combination,” Creel said. “As the STB found, it will stimulate new competition, create jobs, lead to new investment in our rail network, and drive economic growth.

“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,” Creel added. “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.”

“This important milestone is the catalyst for realising the benefits of a North American railroad for all of our stakeholders,” said Patrick J. Ottensmeyer, KCS President and Chief Executive Officer. “The KCS Board of Directors and management team are very proud of the many contributions and achievements of the people who have made KCS what it is today and we are excited for the boundless possibilities as we move forward into the next chapter as CPKC.” 

Announcing its decision the STB noted that its approval “includes an unprecedented seven-year oversight period and contains many conditions designed to mitigate environmental impacts, preserve competition, protect railroad workers, and promote efficient passenger rail.”

The STB received many submissions raising the issue of a loss of competition due to the merger, including concerns from other railroads that currently interchange with CP and KCS separately. “To mitigate those risks, the Board is imposing numerous conditions to preserve existing rail service options at affected “gateways”—interchange points between CPKC and other railroads—on commercially reasonable terms, which should ensure competitive options are not reduced for shippers served by CP or KCS. This condition applies equally to existing and new service. In particular, if CPKC increases its rates to an affected gateway by more than inflation, the Board is providing shippers with an unprecedented right to require CPKC to provide the shipper with written justification for the increase so that shippers can evaluate whether the increased rates are challengeable. The shipper may bring challenges to the commercial reasonableness of CPKC rates or service at affected gateways directly to the Board in a streamlined process, or in arbitration,” the STB said.

Furthermore, CPKC is restricted from terminating reciprocal switching access for shipper facilities served by CP or KCS that have such access today.

Ultimately, however, concerns about competition were trumped by the benefits of the merger, particularly the environmental and safety benefits of moving more freight from road to rail. “The Board expects that this new single-line service will foster the growth of rail traffic, shifting approximately 64,000 truckloads annually from North America’s roads to rail, and will support investment in infrastructure, service quality, and safety,” the STB said in its decision.

The STB also highlighted improved safety as a major benefit of allowing the merger, noting that over the last 15 years, “CP has had the best safety record of any Class I railroad.” Rail safety is a major issue in the US at the moment after a major hazardous cargo incident in Ohio involving Norfolk Southern, which is its fifth derailment since 2021. The National Transportation Safety Board has this month opened a special probe into safety at Norfolk Southern as a result. This may be behind the STB’s comment that “approval of this transaction may even enhance safety for the nation as a whole…thus, any rail traffic diverted to CPKC from other railroads will likely mean traffic moving to a railroad with a better safety record.”

The merger is also expected to benefit cross border trade, which is a hot topic as the US tries to move away from China and Canada’s government talks of trade based on “friendshoring”. CPKC will be the first railroad with single-line service through Canada, the United States, and Mexico. “Shipping of grain, automotive parts and vehicles, and intermodal goods will improve with new single-line options, and shippers will have opportunities to expand their market reach. Imposed conditions will ensure shippers’ options are not reduced. The Board also requires CPKC to adhere to the terms of the CPKC Service Promise to address any post-transaction service disruptions, including developing and reporting customised “Service Action Plans” to address specific issues when certain thresholds are triggered,” the STB noted.