$85 billion rail merger could unify coast-to-coast service

Two major freight railroads are joining forces: On Tuesday, Union Pacific, which operates mostly in the Western U.S., announced that it would acquire Norfolk Southern, which operates in the East, for $85 billion.

The deal would create the largest freight rail network in the country, but it’s sure to get a close look from regulators.

If something needs to be shipped from LA to New York, there are a couple of options. An airline could be paid to fly it there. Or a trucking company could drive it. But one thing can’t be done: paying a rail company to bring it by train. There’s no single freight railroad with coast-to-coast service. Which is something of a shame.

“Railroads are more cost-efficient for most items and are also more fuel-efficient and more environmentally friendly,” said Ari Rosa, a logistics analyst at Citigroup.

The merger would create the first true transcontinental freight rail. That could incentivize shippers to send more stuff by rail by eliminating a major Midwest chokepoint in the system.

“Chicago is congested,” said railroad analyst Tony Hatch.

Hatch said Chicago is one place railroads do something called interlining.

“Interlining where you're connecting to the eastern carrier from a west or vice versa, requires often changing the locomotives, changing the crews,” Hatch said.

And while it’s a chance for train operators to grab a hot dog and deep dish pizza, Hatch said interlining between networks isn’t entirely efficient.

“So if you own the entire thing, you'll move the assets where they make the most sense,” Hatch said. “You'll save a lot of labor. You'll be much more reliable. You'll have more capacity.”

This consolidation, supporters argue, isn't just about efficiency and reliability — it also fulfills a long-held vision of streamlined national rail service.

“It would be a seamless, one-receipt transaction from coast-to-coast, which was envisioned, of course, when the transcontinental railroad was authorized under Abraham Lincoln,” said Stuart Chirls with FreightWaves.

But Chirls said there’s a reason it hasn’t happened yet.

“Shippers have to be assured that they're going to be getting benefits of this kind of a tie-up, which is going to create a monolith of a railroad,” said Chirls.

It’s a monolith that others might call a monopoly. In addition to antitrust concerns, Chirls said smaller mergers have led to costly traffic delays as railroads struggled to integrate their operations.

“Nobody was really clamoring for a coast-to-coast consolidation of the railroads, except perhaps some CEOs and their bankers,” Chirls said.

Regulators have held up a high bar for railroad mergers in recent decades. This deal is a test of whether that’s changed.

“If the White House weighs in on this, I think it will be an indication of the extent to which the White House is comfortable creating these mega companies,” said Citigroup’s Ari Rosa.

Rosa said it could take regulators more than a year to review any deal.