CEOs of UP, NS, say latest additions to rail merger application further enhance competitive aspects

CHATTANOOGA – If questions of competition are at the heart of the regulatory future of the Union Pacific-Norfolk Southern merger, the CEOs of the two railroads are firmly convinced they have checked all the boxes to make a compelling argument for the deal’s approval.

And for UP (NYSE: UNP) CEO Jim Vena, it’s the matter of competition that should make approval by the Surface Transportation Board so clear-cut, as he explained during an appearance with his NS (NYSE: NSC) counterpart, Mark George, during the FreightWaves TrainsPro Future of Rail Symposium.

“If the STB is concerned about the customer,” Vena said Tuesday, “if you limit faster service end to end, if you think that it’s not good to have an end-to-end move across the country that is normally less expensive … and you rule that other railroads should be kept whole, you’re actually increasing the price to consumers.

“That’s why this is going to go through. … Let [the other railroads] go compete. They can drop their price. They can provide a higher level of service to compete against us,” he said. Noted George, “There’s no denying competition has already been enhanced just by the announcement of it. That won’t be enough to satisfy the STB, I’m sure.

But the other features that we’ve added in the application clearly pass a threshold of enhancement.” The latest features in that application came in a 412-page supplemental filing on Monday. The filing was the second of two this month addressing questions the STB had raised when it accepted the railroads’ revised merger application in May.

One significant addition in the latest filing is an expansion of the Committed Gateway Pricing concept included in the original merger application. The revised version doubles the number of eligible shippers and includes bulk unit train moves, which were not part of the original concept. Vena said the change reflected discussions with customers.

“They truly thought it was going to be helpful in their negotiations with the other railroads, to be able to get their products moving in a manner that was better than what we had offered up with just the products that were included,” Vena said. “And we looked at it and we said, ‘Listen, we’re okay with competing.’”

George said the change “really is a significant increase to the enhanced competition arguments of this deal. “We’ve gone beyond what any Class I merger in the past has done in terms of offering up new competition.

I think when you couple that with what we did with CN (NYSE: CNI) and having that agreement with CN, we’re really in uncharted waters here in terms of changing the competitive landscape for the better.” That deal, announced last week, includes CN access to Kansas City, Mo.

, and the UP gateway to Mexico at Eagle Pass, Texas, while UP will be able to move some trains around Chicago via CN’s former Elgin, Joliet & Eastern route. Some aspects are not contingent on approval of the UP-NS merger; others are contingent on the merger and will require STB approval.

“It resolves Kansas City for us,” George said, referring to the fact the merger will give UP parallel routes across Missouri. “It also gives CN access to Kansas City, so now you’ve created more competition in that market. … I think the enhanced competition features dealing with St. Louis and Kansas City are a big plus.”

While BNSF (NYSE: BRK-B) argued this week that the UP-CN deal shows that a merger is not necessary to offer improved service, Vena, without mentioning UP’s western rival by name, said it would not have come about if not for the merger.

To that point, Trains Editor Bill Stephens and moderator asked what the reaction would have been absent a merger if he had gone to CN headquarters and asked about a deal to use the EJ&E. “I think I wouldn’t have gotten through the turnstiles at the front,” Vena said. “They would have kicked me out of the building.

They would have said hi first because a lot of people remember me there. [Vena was at CN from 1977 until 2016, when he retired as chief operating officer. ] But yes, that would have been a nonstarter.”

Vena also addressed another aspect of Monday’s filing, which would create a mechanism for customers to ask the STB for relief in the form of reciprocal switching if UP service deteriorates during the integration of the two railroads. “I think we can handle it two ways,” Vena said. “One is we’ll make deals with customers.

Let’s say during the integration, if you feel some pain, we’ll open up a spot for you. We have no problem doing that. So it’s not just putting it in for the STB to handle. I would rather handle it with customers directly.” Said George, “It’s really an augmentation to what the STB’s remedies are. We’re providing another avenue.”

George also offered additional thoughts on why the merger will aid customers. “We’re creating 88,000 single-line lanes as opposed to interline today,” he said. “And we know when single line is offered, shippers are two to three times more likely to select rail vers