January 21, 2016
Proposed railroad merger would have unknown but significant impacts on the region
In recent months, the Canadian Pacific Railway (CP) has expressed interest in purchasing the Norfolk Southern Railway (NS), which the NS has opposed. CP argues that the combined company would improve efficiency and reduce congestion, particularly for the Chicago region. However, these claims are difficult to assess without detailed information on the specifics of a merger. Further, a merger could raise other concerns related to the economic position of the Chicago region, the completion of the CREATE program, and safety.
The proposal has generated interest from a variety of stakeholders. The Surface Transportation Board (STB), the federal oversight agency with the power to approve railroad mergers, has compiled recent publicly-available correspondence on the proposed merger, including letters from the Illinois Congressional delegation. If successful, the merger would be the first combination of two Class I railroads in North America in over 15 years.
CP is a transcontinental railroad, spanning Canada from east to west, with a significant presence in the upper Mississippi River valley. NS is one of two railroads dominant in the eastern half of the U.S. Both CP and NS have a presence in the Chicago area: CP facilities extend north and west from the O'Hare area, while NS facilities extend to the southeast from the south side of Chicago. NS and CP facilities do not directly intersect in the region, although they are connected by the region's two belt railroads, the Indiana Harbor Belt (IHB) and the Belt Railway of Chicago (BRC), which are located in a northwest-southeast arc across the core of the Chicago Terminal area. Belt railroads tie together the various lines of the Class I railroads, allowing trains to switch from one railroad to another. The IHB and BRC are jointly owned by Class I railroads, including CP and NS, and as such both CP and NS currently have rights to traverse tracks through Chicago.
CP has stated that a merger would have numerous benefits, namely to increase capacity through more efficient routing decisions and use of equipment. In particular, CP asserts that the merger is an opportunity to reduce rail congestion in the Chicago area. NS, however, refutes those claims and argues a merger would increase rail traffic in Chicago. According to this white paper from CP, a merger would allow greater use of the region's two belt railroads, bypassing congested yards in the city; it would also allow the combined companies to build trains outside of the Chicago area and to reroute trains by using facilities in Canada and other U.S. cities like Kansas City, St. Louis, and Buffalo.
Potential impacts on the Chicago region
These potential benefits are difficult to analyze without access to detailed information on the proposed merger, for example the changes in freight flows and use of facilities. CP has not made detailed data available, and existing publicly-reported performance data on the Class I railroads are insufficient to analyze the proposed merger. CMAP has long called for improved access to data, including rail data, in order to support the planning activities of both CMAP and the region's transportation implementers.
Nevertheless, any proposal that would significantly reduce rail operations in the Chicago area is likely to have negative implications for the region. Today, Chicago is the premier railroad hub in North America, home to six of the seven Class I railroads and serving as the main interchange between eastern and western railroads, and is particularly dominant in the fast-growing intermodal sector. This unsurpassed level of connectivity and reach provides a significant economic advantage to the region, including many options for our region's firms to ship goods quickly and economically. Reducing this level of rail dominance would decrease the economic benefits of the dense rail network in the region, while also decreasing the competitive advantage provided by the region's confluence of freight and manufacturing activities.
These potential economic impacts do not consider the substantial direct employment by the freight industry in the Chicago area. According to CMAP staff analysis of Economic Modeling Specialists International (EMSI) data, the broader freight cluster -- of which the rail industry is a key component -- employed some 183,000 people in 2015. It is unclear how a merger might reduce freight employment in the region.
Further, it is concerning that the proposed merger may affect the completion of the CREATE program, a long-term partnership between freight railroads and federal, state, and local agencies. CMAP and GO TO 2040 strongly support the completion of the CREATE program, and the enactment of the Fixing America's Surface Transportation (FAST) Act in December 2015 provides an opportunity to capitalize on new federal funding sources to advance the completion of the program. Both NS and CP are members of the CREATE public-private partnership. NS is the lead entity for a number of projects, including high-profile efforts like the Englewood Flyover (nearly completed with Phase 3 construction) and grade separation at 130th Street and Torrence Avenue (completed in July 2015), both in Chicago; all of NS's projects have proceeded to some extent. In contrast, CP is the co-lead for three CREATE projects, none of which had proceeded as of December 2015. Additionally, CP is no longer actively participating in the Chicago Transportation Coordination Office (CTCO), a related effort to coordinate railroad operations in the region through more efficient use of existing infrastructure, having withdrawn its representative from CTCO last year. To be most effective, CTCO requires full participation from all railroads operating in the region.
Finally, a concern is how a potential merger might affect rail safety. While the merger of any two large railroads could potentially raise safety concerns, the history and culture of both railroads in question could warrant attention. According to recent articles, the Federal Railroad Administration, the rail safety regulator, intends to research the potential safety issues raised by the merger, including the challenges of reconciling two companies' operating systems and safety cultures.
GO TO 2040 called for CMAP and its partners to develop a regional voice on freight issues that is in line with our national role as the freight hub of the nation. GO TO 2040 also projects that the volume of freight moving through the area will rise 62 percent over 2007 levels by 2040, meaning both additional capacity and operational efficiencies will be needed to accommodate this growth. Any merger that would reduce the Chicago region's rail dominance or dilute attention to CREATE would be concerning to the long-term competitive position of the region. CMAP believes the region is best served by the industry strengthening their commitment to CREATE to grow infrastructure capacity, and by increasing industry cooperation through efforts like the CTCO and consolidated dispatching to better utilize existing infrastructure. While no formal proceeding related to the merger is currently before the STB, the region should be ready to explore the consequences of any formal merger. CMAP will monitor the proposed acquisition closely, given its potential impacts on the regional economy, CREATE, and safety.