Fuel and petrochemical manufacturers in the United States are expressing their concerns regarding the merger between two of the largest rail freight operators in the country: Union Pacific (UP) and Norfolk Southern (NS). Continuing to reduce the number of the so-called Class I railroads is turning shippers into “captives” with little to no choice, the American Fuel and Petrochemical Manufacturers (AFPM) association stressed.
According to AFPM, the heavy reduction in number of Class I railroads over the past few decades is creating an environment where shippers are captives to these companies. “Because of rail consolidation, 78% of customers who ship products and feedstocks by rail are only served by a single railroad”, the association pointed out. Moreover, 90% of the total rail freight traffic in the US is operated by only four companies, which some might consider as an oligarchy rather than an open market.
Higher revenues but lower quality
This quasi-monopoly has been very favourable for the few Class I companies remaining, but not so much for shippers and customers. The revenues of these companies coming from captive shippers currently make up half of the total, with a 27% surge between 2004 and 2019, AFPM said. However, more money coming in did translate into better services or cheaper rates, quite the contrary.
Rates for rail freight services have skyrocketed 42% since 2004, while operating costs have only increased by 8%. “Rates for the largest US railroads have jumped more than twice as fast as inflation and rates for long-haul trucking”, the association underlined. Moreover, the AFPM claims that these companies implemented significant service cuts and imposed higher rates without prior negotiations. And they can do this because they are the only option available after competition was slowly eliminated throughout the second half of last century.
Union Pacific to buy Norfolk Southern
The merger between UP and NS would create the first US railway operator with a network stretching from the west to the east coast. UP is already the largest player in the country, and the acquisition of NS would turn it into a gargantuan entity. Despite the two companies agreeing on a deal, the process might take a while given its size and scope. Bloomberg estimated the value of the deal at around 72 billion dollars (62 billion euros). However, the US Safety Transportation Board would still need to review and approve the agreement, which could take up to two years.
Class I railroads
In the 1960s, there were more than 100 operators classified as Class I railroads in the United States. Many of these companies competed with each other, providing services along the same routes. On the flipside, they were much smaller entities and they were not very profitable. This started to change in the 1980s, when the rail sector was highly deregulated with the Staggers Rail Act.
Since then, the number of Class I railroads plummeted, also because the definition was changed. Initially, companies with a yearly revenue higher than one million dollars were considered Class I. Now, the threshold is at over one billion dollars. Another factor in the lower number of big operators was an increase in mergers, especially in the 1980s and 90s.
Despite creating larger networks which facilitate cross-state traffic and making the sector more profitable, all these policies led to a massive reduction in competition, leaving about a handful of Class I companies free to manipulate the market. “Unfortunately, freight rail consolidation has coincided with higher rail shipping rates, longer shipping times and more infrequent service”, the AFPM highlighted.
