‘Huge opportunity’: Kansas City Southern, Canadian National CEOs tout merger

The top executives for railroad companies Canadian National Railway and Kansas City Southern spoke together Thursday at the annual Strategic Decisions Conference hosted by investment firm AllianceBerstein. The virtual conference featured speakers from major corporations around the world.

JJ Ruest, Canadian National’s chief executive, and Patrick Ottensmeyer, Kansas City Southern’s president and CEO, discussed the proposed merger the two companies jointly filed on May 26 and their vision for the future of transportation. Canadian National, which is based in Montreal, bid an estimated $33 billion to combine with Kansas City Southern, which is based in Kansas City. The deal awaits regulatory approval.

Ruest and Ottensmeyer’s fireside chat addressed competition concerns that some investors fear may prevent the companies’ union, depicting the deal as pro-competition and good for consumers. They also discussed how the deal would push long-haul truckers to enhance their sustainability efforts, create opportunities for investment in Mexico and reallocate overseas operations to North America.

Competition concerns

Trade associations like the American Chemistry Council, which represents chemical manufacturers, have raised concerns that the union will harm competition between railroads. Further railway consolidation would increase the cost of shipping, the council says.

“Unless the (Surface Transportation Board) takes the necessary steps to put appropriate safeguards in place and to shore up competition between railroads any merger could have a negative impact on manufacturing in the U.S. – and the broader economy,” Chris Jahn, president and CEO of the American Chemistry Council, said in a May blog post.

Canadian National officials say the two railroads have received 1,400 letters in support of the merger agreement. They define the market not only as the freight rail industry, but as the entire transportation sector.

Healthy competition

There are multiple transportation options for the north-south trip across the Midwest, including rails, highways and river barges. Ottensmeyer said one of the reasons for the companies’ union is to boost customer choice and foster healthy competition that will push each industry to improve.

“That market between Mexico and the upper Midwest and into the East and into eastern Canada is a huge truck market,” Ottensmeyer said. “The (Interstate 35) corridor has a very low-level intermodal market penetration. There is a huge opportunity for us there.”

To increase the number of options for customers, the combined company would add railways to fill an existing gap between New Orleans and Baton Rouge, Louisiana. The added track would “provide new, single-line service to go after that I-35 corridor freight traffic,” Ottensmeyer said.

Sustainable alternative

Canadian National estimates that every double-stack intermodal train that transports cargo from San Luis Potosi, Mexico, to Detroit would take 300-plus long-haul trucks off the road, resulting in 260,000 fewer tons of greenhouse gas emissions emissions each year.

According to Canadian National, it uses 15% less fuel than the industry average to ship cargo, earning a place on the Dow Jones Sustainability World Index for nine consecutive years. Canadian National says its combined routes with Kansas City Southern would be faster and more direct, resulting in “enhanced efficiency and less road traffic.”

Mexico: A land of opportunity

“Mexico provides unparalleled growth opportunities,” Ottensmeyer said.

The COVID-19 pandemic has led to an increased focus on near-sourcing, or placing a company’s operations close to where its end products are sold. The CEOs see their deal as fueling near-sourcing in North America.

They believe the merger would entice companies that have manufacturing centers in other countries with low labor costs to establish new projects and investment in Mexico, closer to their U.S. operations.

Reshaping the landscape

Ottensmeyer referenced recent coverage of supply chain congestion surrounding ports, highlighting the high proportion of containers arriving in the U.S. that come from China.

Both CEOs touched on long-term benefits of the proposed deal — not just for their companies but also for U.S., Mexican and Canadian businesses. They see railways as the backbone for improved supply chains and access to markets in the years ahead.

“Long term, rather than manufacturing in a market halfway around the world and transiting it to congested ports on the West Coast (of the U.S.), why not just manufacture those products in North America?” Ottensmeyer said.

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