Once approved by the Surface Transportation Board, the combination of the Canadian Pacific and Kansas City Southern (the two smallest Class One Railroads by revenues1) can be expected to drive a modal shift from truck to rail. The combined “Canadian Pacific Kansas City”, or CPKC, will remain the smallest Class One. After the combination, a single rail transportation network will stretch across the North American continent and deep into Mexico.
The KCS connects the Gulf Coast Mexican ports of Veracruz and Tampico and the Pacific port of Lazaro Cardenas to Laredo, Texas. KCS has lines running north from Texas through Kansas City to Illinois and southeast to the U.S. Gulf Coast ports of Brownsville, Corpus Christi, Port Arthur, New Orleans, Gulfport, and Mobile. On a revenue growth basis, the CP and Kansas City Southern have been the two best performing Class One railroads for the past three years. After the new U.S.-Mexico-Canada (“USMCA”) trade agreement came into force last year (July 1, 2020), KCS, with its operations in Mexico, (the “Kansas City Southern de Mexico”) became a natural acquisition target. That July, the Blackstone Group Inc. and Global Infrastructure Partners considered a takeover bid for the KCS, which when made, was rejected. It was a strong indication of the upside growth any subsequent consolidation would offer.
The current combination has no route overlap and will create direct competition with the trucking industry (and other Class Ones) in the U.S. Midwest (the Dallas to Chicago corridor) and into the South. “The combination will provide a transportation solution for manufacturers seeking to bring factories back to North America after the pandemic exposed the risks of relying on overseas supply chains.” Mexico is a crucial supplier of vehicles, auto parts, electronics and food, and a major customer of grain, fuel, and consumer goods. Trade across the three nations is expected to grow, and the CPKC is targeting $800 Million in revenue gains by 2025 from the following sources: intermodal, automotive, and dry bulk (cement and grain carload traffic). The combination does not reduce choice for rail shippers, rather it expands their market reach and opens alternative shipping lanes. The benefits of single-line service will shift trucks off U.S. highways, reducing truck congestion and carbon emissions in the Chicago to Dallas corridor. “Rail is four times more fuel-efficient than trucking. One train can keep more than 300 trucks off public roads and produce 75% less greenhouse gas”.
The question for rail equipment investors: “Will the combination results in reduced or increased rail equipment demand?”
Pro: The combination will create rail traffic growth by expanding rail shipper market reach, taking truck traffic off highways, and improving rail transportation alternatives for grain, autos, and auto parts, energy, and intermodal shipments. It will eliminate the need for interchange between two systems, allow a bypass of Chicago congestion via the CP route through Iowa and reduce carbon emissions in the City of Chicago. It may also reduce the need for public investment in highways and bridge repair.
Con: Securing approval from the Surface Transportation Board (industry concerns remain over a loss of competition from previous rail mergers). The CPKC is positioning for post-pandemic rail growth. How to identify the impact on rail equipment demand from this combination?
1Kansas City revenues in 2020 were $2.6 Billion, CP revenues in 2020 $5.756 Billion.
Glenn P. Davis, 312-635-3161
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