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June 23, 2022 10:23 PM, EDT

STB Urged to Reject CP-KCS Merger

Kansas City Southern train (left) and Canadian Pacific train)The proposed $31 billion merger between Kansas City Southern (left) and Canadian Pacific awaits approval by the Surface Transportation Board. (Kansas City Southern Railway, Canadian Pacific Railway)

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Three of the five members of the Federal Maritime Commission are urging the Surface Transportation Board to reject Canadian Pacific Railway’s plan to merge with the smaller, but strategically significant Kansas City Southern Railroad.

Commissioners Carl Bentzel, Louis Sola and Max Vekich presented formal written comments to the STB in which they expressed concerns the merger could divert intermodal traffic from U.S. ports to Canadian ports.

Bentzel and Sola are Republicans who were nominated to the FMC by former President Donald Trump, and Vekich is a Democrat who was nominated by President Joe Biden.

“In our view, the proposed consolidation does not ensure that the anticompetitive effects of the transaction outweigh the public interest in meeting significant needs,” the commissioners wrote in the filing, which was obtained by Transport Topics. “Specifically, the proposed merger will adversely impact U.S. ports and the primarily U.S.-based intermodal railway systems that serve our ports, and would disproportionately benefit Canadian ports and the primarily Canadian-based intermodal railway systems that service Canadian ports for transportation of U.S.-bound cargo.”

The three commissioners stated that the views they are expressing are their own and not an official position of the FMC, a federal government agency that oversees the shipping industry.

FMC Commissioners

Left to right: Bentzel, Sola and Vekich.

If approved by STB, the $31 billion CP-KCS merger would create the only railroad linking Canada, Mexico and the United States. It also would be the first major railroad merger in more than 25 years.

The commissioners said that the U.S. supply chain could be damaged if it lost intermodal market share to Canada. They also wrote the merger could harm rail labor, port trucking companies and the thousands of U.S. longshore workers, as well as U.S.-based intermodal railroads, distribution centers and warehouses.

“Such economic losses will be far greater than any economic gain that might ensue as a result of a consolidation of the railroad systems of CP and KCS,” the commissioners said. “Since 2005, the Canadian government has worked closely with and helped finance two Pacific gateway ports and more recently with two Atlantic coast gateway ports to attract U.S.-bound cargo to benefit the Canadian ports and the Canadian railroads. U.S. ports receive less proportionate support than their Canadian counterparts and the evidence suggests that the greater levels of Canadian support seem to be paying off with greater market share of U.S.-bound cargo.”

Comments on Proposed CP-KCS... by Transport Topics

For the past several months the Surface Transportation Board has been receiving comments on the proposed merger from various stakeholders before making a final decision on the deal. Canadian Pacific leaders have said they hope a final decision will come sometime in early 2023.

“We contend that while there might be economic benefits to certain shipper organizations and locations in the United States, that overall, there will be greater negative impacts relating to employment and long-term investment affecting intermodal shipments through U.S. ports,” the commissioners wrote.

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Several Canadian ports, particularly in Vancouver and Prince Rupert in British Columbia, are gaining market share for containerized traffic that is ultimately planned to be delivered to the U.S. ports. Both Canadian National and Canadian Pacific have made their intentions clear they seek to divert some U.S. port traffic to facilities in Canada, including Saint John, New Brunswick; and Halifax, Nova Scotia.

In their document the commissioners said in 2008 ports in the Pacific Northwest had a whopping 62% to 38% advantage in U.S.-bound traffic compared to British Columbia ports. However, 13 years later the figures had more than flipped, with Canadian ports now moving 69% of the Midwest-bound containers. Leaders at the major California ports also have complained of lost market share to British Columbia, but the increase in Canada-bound traffic has not been as severe.

“The Canadian Pacific-Kansas City Southern proposed merger expansion is explicitly aimed at continuing to build on policies to use Canadian ports and Canadian railroads to carry U.S.-destined cargo,” the commissioners wrote.

In a follow-up news release on June 23, Commissioner Sola said: “The consolidation of any limited asset integral to the supply chain merits close examination and the acquisition of such an asset by an enterprise supported, subsidized or controlled by a foreign power deserves scrutiny.”