(CNN) — Two of the largest U.S. railroads, Union Pacific and Norfolk Southern, announced on Tuesday a plan to combine in a $72 billion deal that would create America’s first transcontinental freight railroad.
The stock and cash deal would be the largest ever in a sector that has already massively consolidated in recent decades. The deal still needs regulatory approval and will serve as a major test for the Trump administration’s antitrust regulators, who have appeared more willing than the Biden administration to approve mergers in certain industries, even if they reduce significant market competitors.
US freight railroads are crucial to America’s economy, carrying about 30% of the nation’s freight in terms of weight, according to the Bureau of Transportation Statistics. Trains transport autos, retail goods, food and energy products, as well as raw materials and parts needed to run America’s factories.
“Railroads have been an integral part of building America since the Industrial Revolution, and this transaction is the next step in advancing the industry,” said Union Pacific CEO Jim Vena in a statement Tuesday.
The companies confirmed they were in advanced talks last week.
Union Pacific (UNP) serves the western United States, while Norfolk Southern (NS) serves the eastern parts of the country. The coast-to-coast combination could force the other two major freight railroads, Burlington Northen Sante Fe, a unit of Berkshire Hathaway, and CSX Corp., to also merge to stay competitive, leaving the nation with two major freight railroads moving goods east-to-west.
“We believe BNSF and CSX will have to come together or else they’ll be handcuffed in terms of competition,” Jason Seidl, managing director at TD Cowen, told CNN Tuesday after the UP-Norfolk deal was announced.
“We are confident that the power of Norfolk Southern’s franchise, diversified solutions, high-quality customers and partners, as well as skilled employees, will contribute meaningfully to America’s first transcontinental railroad, and to igniting rail’s ability to deliver for the whole American economy today and into the future,” said Mark George, CEO of Norfolk Southern, in a statement.
Rail customers, many of whom have been complaining about the quality of rail service for years, are concerned that any merger could result in service problems and supply chain disruptions.
“The experience in the rail industry has been that mergers have resulted in no improvement in, or worse, service, and higher rates,” said Ann Warner, a logistics consultant to numerous rail customers and trade associations of rail shippers, many of whom have only one railroad serving their property. “Shippers won’t know until an (merger) application is filed what this all means.”
Service has suffered following every rail merger, said Peter Swan, emeritus professor of logistics and operations management at Penn State Harrisburg.
But the railroads promised Tuesday that the deal would benefit their customers.
“Imagine seamlessly hauling steel from Pittsburgh, Pennsylvania to Colton, California and moving tomato paste from Heron, California to Fremont, Ohio. Lumber from the Pacific Northwest, plastics from the Gulf Coast, copper from Arizona and Utah, and soda ash from Wyoming,” said Vena’s statement.
Still, it could take months, if not years, for the deal to close, according to experts. The deal will need the approval not just of antitrust regulators but also such bodies as the Surface Transportation Board.
But Seidl said he’s confident the deal will eventually be approved, as would any subsequent deal to combine BNSF and CSX.
“We think the board will look at this not as approving one deal, but instead approving two,” he said.
In 2023, the Surface Transportation Board approved the first major railroad merger in more than two decades when Canadian Pacific purchased Kansas City Southern, creating a direct freight line from Canada through the United States to Mexico. The deal was approved, in part, because the combined company had little to no overlapping routes, which is the case with Union Pacific and Norfolk Southern.
A transcontinental railroad
Transcontinental rail service has been available since 1869, just four years after the end of the Civil War, when the famous “Golden Spike” linked Union Pacific with the Central Pacific railroads in Promontory Summit, Utah. But moving goods cross-country has always required they be handed off from one railroad to another. While Amtrak trains provide coast-to-coast passenger service, they depend primarily on tracks owned and maintained by the nation’s freight railroads.
Most freight rail mergers combine railways that share a similar service area to build density and market share rather than seek an end-to-end merger like this one, Swan said.
But doing that once again is likely to be a regulatory non-starter. With only two eastern freight railroads, CSX and Norfolk, and two western freight railroads, BNSF and Union Pacific, remaining after years of mergers, an end-to-end merger is the only combination still available.
Swan said the while there could be some increased efficiency moving traffic cross-country, such as from the Port of Los Angeles to customers on the East Coast, trains will still need to stop and remove the cargo for different destinations.
“There’s not that many containers that move all the way from one coast to the other,” he said.
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