• UP–NS Merger Supply Risks
• ACD Warns Of Rail Consolidation
• Rising Rail Costs For Shippers
• STB Scrutiny On Mega-Mergers
• BSNF–CSX Cooperation Example
• Rail Dominance Threatens Chemicals

For nearly six months, Union Pacific (UP) and Norfolk Southern (NS) have been touting the benefits of their $85 billion merger, which was announced last July. The creation of a transcontinental railroad has been considered the pinnacle of success for the rail industry, with hopes of achieving lower transit times, reduced congestion and shipping longer distances on a single network. While these factors sound appealing to shippers across the nation, the facts paint a much different picture.

Today, four Class 1 railroads control 90% of U.S. freight rail traffic. As a result of this highly concentrated industry, shippers are typically serviced by only a single rail carrier, subjecting these businesses to capacity constraints, high rates and ongoing service issues.

This is particularly concerning for the paint and coatings supply chain and the chemical distribution professionals who help ship, handle, store and manufacture essential chemical products used in decorative paints, protective coatings and functional finishes.

The efficiency and safety of the paint and coatings industry is deeply intertwined with the robust capabilities of the rail network. The complex and global paint and coatings supply chain relies on rail for the transportation of large-volume, often heavy or hazardous raw materials. By having the ability to move massive volumes of liquids and solvents in a single train, paint and coatings businesses can greatly reduce their overhead logistical costs. Additionally, other pigments and fillers are often sourced far from industrial hubs and rail provides a predictable long-haul transportation option. The capacity rail can move and its safety profile make it a reliable—and preferred—choice among shippers in the United States.

The proposed UP-NS merger, however, has given shippers flashbacks of previous rail merger failures and has left businesses that rely on freight rail wary of worsening service and increased costs. Alliance for Chemical Distribution (ACD), whose members are a critical link to the supply of paint and coatings products and countless other industries, are concerned that the proposed merger would exacerbate existing challenges while driving up costs on businesses and consumers alike.

Failed Promises

One thing is certain: We cannot let history repeat itself. Previous rail mergers, including the UP and Southern Pacific (SP) merger in 1996 and the Canadian Pacific and Kansas City Southern in 2021, have not delivered on their intended promise of lower transit times, reduced congestion and greater efficiencies. Today’s proposal is no different.

If we look to the last merger UP was involved in, the results were far from acceptable. The then newly formed railroad failed on multiple accounts to fulfill the service commitments and track maintenance obligations it made as part of the merger, forcing the Surface Transportation Board (STB) to issue orders to address the unacceptable congestion and service experienced by shippers. More recently, the Canadian Pacific and Kansas City Southern merger failed across the board on its promises of improved efficiencies and service. Shippers experienced higher dwell times, missed switches, issues integrating information technology systems and more.

As a result of the UP-SP merger failures, the STB instituted an even higher bar of standards proposed mergers must meet. A proposal today must demonstrate a merger is in the public’s interest and enhances competition.

The burden of proof will be on UP and NS to demonstrate how the proposed merger will be in the public’s interest through enhanced efficiencies and how reducing the number of rail lines will enhance — not just preserve — competition for shippers. Shippers remain skeptical, and we are convinced the UP-NS mega-merger would, in fact, do the opposite.

Derailing Growth

Apart from allowing history to repeat itself, railroads are rarely held accountable today. By further consolidating the industry, lines would have no incentive to provide enhanced service nor work with businesses on rates, particularly for small shippers who are currently captive. ACD members and the supply chain partners they serve are wary that approval of this merger will lead to higher rates, greater congestion and failed promises—all to the detriment of freight rail customers and their downstream customers as well.

According to a rail survey conducted by John Dunham & Associates among ACD members, more than three quarters of respondents reported they have at least one facility that is captive to a single rail carrier and members expressed frustration with the lack of competitive rail service across the nation. A merger of this size would give one railroad control of nearly half of the rail traffic in the United States, threatening our supply chain resiliency and increasing the likelihood of even more bottlenecks.

Communication from rail companies also continues to be a problem. According to the survey results, nearly 70% of members are not always notified when a railroad is unable to meet its own delivery date. And service continues to worsen, with more than a quarter of respondents saying service has deteriorated over the last year. Congestion and equipment availability are also contributing to compromised service for ACD members. No matter the sector, ongoing service delays can place strain on the logistics and the fulfillment of the orders for our supply chain partners and their customers.

Cost is another significant consequence of shippers being held captive to one railroad. The rates to ship by rail have already risen 20% compared to pre-pandemic levels. These increases are happening at a time when railroads are already operating unilaterally. Late last year, ACD members were notified of an increase in demurrage surcharges of $3,000 per car per day for certain freight shipments. This is just one example of the types of charges imposed on shippers even when they have little, if any, control over offloading their product when it arrives. Time and time again, shippers have indicated they are willing and ready to unload these products once they arrive, but the monopolistic nature of the rail industry restricts businesses’ negotiating power. The escalation in rates compounded with increased—and unnecessary—demurrage charges imposed on ACD members has impacted demand and overall operating expenses.

We must be wary of market dominance. Competition of the industry is vital to efficiency in transportation, lowering prices and increasing productivity. If one railroad is allowed to control 50% of the market share in chemicals, businesses have less negotiating power to lower prices and consumers can expect even higher costs on everyday products needed for their health, safety and convenience.

Even more telling, an intermodal service agreement between BSNF and CSX announced last summer demonstrates how cooperation between freight rail companies can improve the movement of rail traffic without the need for a mega-merger. Through this agreement, BSNF, which services much of the west and midwest United States, and CSX, which services the East Coast, are working to enhance efficiencies to better serve customers. As the administration looks to incentivize and enhance domestic manufacturing, it should consider the impacts further consolidation of the rail industry would have on this opportunity for growth. If there are delays in the supply of key ingredients, such as paint and coatings products, and an increase in consumer costs, this will lead to an erosion of United States competitiveness as businesses look elsewhere for fulfillment and for better prices.

Freight rail will continue to be the lifeline of trade across the nation. That’s why it’s so important to hold rail accountable. This proposed merger is not in the interest of business nor American consumers.

We cannot — and should not — expand monopolistic control at the expense of America’s critical chemical supply chain. Our nation needs a robust, reliable and competitive freight rail system.

For more on how supply chain dynamics shape coating production, visit our coverage of Distribution.