Executives from Union Pacific and Norfolk Southern said their historic merger would help stem the loss of rail market share which declined nearly 10% over the past decade, as single-line service levels the playing field with trucks.
In a call with analysts Friday, the railroads said that rail’s market share is two to three times higher for single-line moves than for freight moving in interline service.
“This transaction is intended to stop and reverse that share loss by offering more single-line options to shippers so rail can compete more effectively with the highway alternatives,” Norfolk Southern Chief Executive Mark George said.
Roughly 75% of the projected merger-related traffic growth will come from converting truckload business to rail, he said, with the balance diverted from competing railroads.
A transcontinental UP (NYSE: UNP) system will create 10,000 new single-line service lanes, which will eliminate the costly and time-consuming interchange of 2,400 carloads and containers per day at gateways from Chicago to New Orleans. UP also points out that interline merchandise traffic moving between 1,000 and 1,500 miles costs an average of 35% more than a comparable move involving just one railroad.
UP sees significant growth in the so-called watershed markets – the vast swath of the American heartland that lies within a few hundred miles of the Mississippi River and the de facto dividing line between the Eastern and Western railroads.
Eliminating interchange friction, short hauls, and revenue division challenges will enable 105,000 carloads of merchandise traffic to shift from road to rail in the watershed, UP said, citing estimates from the consulting firm Oliver Wyman.
“We see meaningful opportunity in the watershed, which we define as the manufacturing and agricultural heart of the country that lies roughly 250 miles from our major gateways along the Mississippi River,” NS Chief Commercial Officer Ed Elkins said on the call. “Today, rail massively underperforms in these watershed markets, capturing less than 10% of the volume.”
Operational changes
UP’s operating plan adds merchandise and intermodal trains that avoid stops at current gateways, including Chicago.
Union Pacific and Norfolk Southern (NYSE: NSC) anticipate adding several routes, including two new daily intermodal train pairs connecting the east and the west with more direct service – reducing estimated transit times from Southern California to the Ohio Valley and Northeast by up to 20 hours and from Southern California to the Southeast by more than two days.
To meet expected intermodal growth, the combined company plans to introduce a total of six premium intermodal lanes operating seven days a week.
A new intermodal train connecting Southern California to the Ohio Valley and the Northeast will use UP’s Sunset and Golden State routes to Kansas City, where it will get on Norfolk Southern’s former Wabash main line to Butler, Ind., the connection with the NS Premier Corridor main line to the East Coast. Eliminating the interchange in Chicago will shorten the trip by up to 252 miles and reduce estimated transit times by up to 20 hours.
In another example, UP and NS will shave approximately 70 hours of transit time on intermodal traffic moving from Southern and Northern California to the Southeast, including Georgia, Florida, and North Carolina, and approximately 95 hours on westbound traffic by routing it via the Shreveport, La.-Meridian, Miss., Meridian Speedway rather than Memphis.
The combined railroad also will introduce six new manifest trains to bridge the east-west divide more efficiently, reducing over 600 daily car handlings.
“We’ve estimated that 40% of the combined company’s manifest routes will benefit from fewer handlings. Driving these results is a simpler, streamlined, and more efficient rail network,” John Orr, NS chief operating officer, told analysts. “This equates to almost 900,000 fewer handlings, about 1.7 million fewer train miles and a reduction of nearly 22,000 car miles.”
Main line and terminal capacity expansion projects will enable a transcontinental UP to handle projected traffic growth, executives said.
“Major projects identified include Union Pacific Sunset and Golden State routes as well as Norfolk Southern’s Kansas City to Butler, Ind., and New Orleans to Atlanta corridors,” Eric Gehringer, UP executive vice president of operations, said on the call.
The investments will add sections of double track, extend sidings, and add other improvements that will improve transit times and service, he said.
UP will expand seven intermodal terminals, two hump yards, and two auto ramps with projects set for Texas, Southern California, Tennessee, Ohio, and Florida. “Key locations for investment include Houston, Port of Laredo, L.A.’s Inland Empire, Chattanooga, Toledo, and Jacksonville,” Gehringer said.
Impact on competition
UP and NS said their combination would enhance railroad competition. Only three customer locations – out of more than 20,000 – are served by UP and NS but no other railroad. UP says it will provide the three locations with competitive options.
In September, UP and NS said they expected that potential concessions necessary to gain regulatory approval might reduce merger-related synergies by $750 million. But now, after preparing the merger application, they say that’s no longer the case.
“We now do not believe significant concessions are needed given the strong value offered by the merger in combination with the enhancements that we are offering,” UP Chief Financial Officer Jennifer Hamann told analysts.
The railroads said they will keep all current gateways open.
“Committed Gateway Pricing,” the railroads said, will streamline pricing for interline moves that otherwise may not directly benefit from the merger.
“Without CGP, a fully served UP industrial chemical customer in Texas shipping to a fully served CSX customer in South Carolina would not see any benefits from our transaction,” Kenny Rocker, UP’s executive vice president of marketing and sales, said on the call. “With CGP, however, the CSX will be able to market directly to that customer using a formulaic competitive rate based on shipments moving in that market and extending the benefits from our merger. Committed gateway pricing is purely additive, providing an extra rate and service option without removing any existing choices.”
UP will not divest any principal routes after the merger. But it will divest shares of the Terminal Railroad Association of St. Louis and the Peoria & Pekin Union Railway – carriers that shuttle cars between railroads – to prevent what otherwise would become majority ownership post-merger. In addition, UP says it will eliminate potential competitive concerns involving railroad-owned freight car pool TTX by reducing its stake to not greater than 50%.
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