UP-NS merger intermodal costs: $2.69B gap flagged

As reported by Trains, a filing argues UP-NS merger intermodal costs are not reflected in the application, with intermodal marketing companies likely facing major spending if 2 million truckloads are shifted from highways to rail.

This is reported by the railway transport news portal Railway Supply.

Drew Robertson, president of Atlantic Systems Inc. and a consultant who has worked on prior mergers, submitted the analysis as part of the Surface Transportation Board merger review rules process. He estimates $2.69 billion equipment and terminal investments would be required to support the shift of 2 million truckloads diverted to rail.

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Robertson said the plan explains how a combined railroad would run, but it does not indicate whether prospective partners can meet intermodal marketing companies (IMCs) capital requirements — or whether they have the operational capacity and willingness to expand.

Robertson wrote that the application “does not indicate whether the IMCs as a group have the capital, operational capability, or the willingness to expand.” He added that it contains no accounting or economic study of the impact on intermodal marketers, and includes no comments from them. In his view, prospective partners should offer detailed testimony from financially solvent IMCs showing both the ability and willingness to invest billions in additional equipment and operations.

Diversion claims and STB review

UP and NS have made traffic diversion central to their argument that the merger would enhance competition, as required under the STB’s merger review rules. Their 6,692-page application, filed Dec. 19, projects that within three years an expanded UP would move 1.4 million additional intermodal loads and 425,000 additional carloads.

Union Pacific has also committed to Union Pacific $2.1 billion improvements plan, including $1 billion for capital spending on track, yard and intermodal terminal upgrades, plus $1.1 billion for technology integration and other investments. Intermodal analyst Larry Gross said the analysis underpinning the growth projections looks solid, calling the methodology “very thorough” and “very sound.” Still, Gross said it is difficult to believe the merged railroad could increase its domestic intermodal volume by 31% over three years, given that their combined intermodal volume has been relatively flat since 2014.

Robertson pointed to the years after NS and CSX divided Conrail, when both carriers eventually increased intermodal volumes once merger-related service problems were smoothed out. Even so, he warned against assuming demand will follow automatically, saying “‘Build it and they will come’ works in Hollywood movies but not for multi-billion-dollar business investments.”

What IMCs would need to buy?

Robertson’s analysis names Hub Group, J.B. Hunt and STG Logistics as IMCs that would have to step in to provide additional containers, tractors, chassis and terminal services to support a coast-to-coast, single-line UP. Earlier this month, STG Logistics made a bankruptcy filing and announced a restructuring agreement.

Robertson’s filing was submitted three days before the STB rejected the UP-NS application as incomplete, as previously covered by Railway Supply. The railroads have said they will provide regulators with the additional information requested in the board’s Jan. 16 decision, as outlined by the Surface Transportation Board.

His $2.69 billion equipment and terminal investments estimate includes $1.14 billion to purchase 120,000 containers and $900 million to acquire 5,000 electric or clean-diesel tractors. Another 100,000 chassis would add $500 million, while terminal and information technology costs would account for the remaining $100 million.

Operating and environmental questions

Robertson also said the merger application does not address the environmental impact of shifting a million-plus loads to intermodal. Concentrating added volume in urban areas with a limited number of terminals, he argued, would affect air quality and noise.

The UP-NS application also projects diversion of intermodal moves from competitors because the merged company’s single-line service would be faster and more efficient than intermodal moves involving multiple railroads. Gross observed that “no one will notice” a 2 million-load diversion in the broader freight market because roughly 190 million truckloads are moved more than 300 miles annually.

Gross also questioned a feature of the intermodal plan that would link origins and destinations with as few as 12 daily containers — only two or three well cars’ worth of volume. He said that approach conflicts with Precision Scheduled Railroading and low-volume lanes, which focus on moving large volumes long distances. Such small volumes would complicate operations and could require en route switching, block swapping or container sorting, slowing service and adding cost, Gross explained.

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