Union Pacific blasts rival railroads’ trackage

Union Pacific CEO Jim Vena is critical of rival railroads’ plans to request trackage rights over a combined UP-Norfolk Southern system.

“The idea to give up tracks of your railroad for no reason at all just goes against the fundamental principle of how … business should work,” Vena told an investor conference.

Last week BNSF Railway (NYSE: BRK-B), CPKC (NYSE: CP), and CSX (NASDAQ: CSX)—along with 11 short lines— in filings with the Surface Transportation Board said that they planned to seek widespread trackage rights and access to customers on UP-NS (NYSE: NSC), should the proposed merger gain regulatory approval.

BNSF put forward two major proposals. First, the railway said it would seek 824 miles of trackage rights over Norfolk Southern between Chicago and intermodal terminals in Harrisburg and Bethlehem, Pa. Second, it called for the creation of a neutral switching carrier that would serve BNSF- and UP-served customer facilities on the Gulf Coast, the largest chemical-producing region in the U.S.

Without mentioning BNSF by name, Vena said the long-distance trackage rights request doesn’t make sense. “If we allowed X railroad to run on our railroad for 800 miles, we would charge them a per car-mile charge that actually would make it more expensive for them to get to that destination,” he said.

“I thought about just agreeing because guess what: We would just reset the price higher for us,” Vena said, adding: “That doesn’t make a particle of sense in business.”

BNSF told regulators the trackage rights would be necessary to preserve service and competition to eastern Pennsylvania, which is a major distribution hub for consumer goods.

The UP-NS merger agreement allows UP (NYSE: UNP) to walk away from the $85 billion deal if the STB approves the combination but adds onerous concessions as a condition. UP would be on the hook for a $2.5 billion breakup fee to NS.

The UP CEO says he’s not opposed to reaching deals like the haulage and trackage rights agreements reached with Canadian National (NYSE: CNI) in July.

In separate deals, UP granted CN haulage rights between Memphis and the Eagle Pass, Texas, gateway to reach Ferromex. In exchange, CN granted UP the right to use its former Elgin, Joliet & Eastern bypass around Chicago. And in a deal contingent on approval of the UP-NS merger, CN would operate over and serve customers on UP’s line between the St. Louis area and Kansas City, including use of UP’s Neff Yard in Kansas City.

“Would I make a deal with another railroad? Absolutely. But it would have to be a win-win for Union Pacific and for them,” Vena said.

“We gave Canadian National access from Canada to Mexico through Memphis. Man, I can hardly wait,” Vena said. “We win by them growing Canadian business to Mexico. Gotta love the competition we just added to Canada against the Canadian Pacific. Love it.”

Vena says he’s pleased that the STB accepted the merger application and last month started the procedural clock ticking. The board had initially postponed the proceeding while reviewing the revised application that the railroads submitted in May.

But he disputed BNSF’s contention that a combined UP-NS would handle half of the rail traffic in the U.S. if the merger is approved.

“Some railroads are out there saying that we end up with 50% of the business. That’s just a lie. It just is a lie. Burlington Northern Santa Fe, owned by Berkshire, big company, they have more gross ton-miles than us. So we’re No. 2 on gross ton-miles,” Vena said.

BNSF, CPKC, and CSX — who have urged the STB to reject the merger application — say a transcontinental UP would be a railroad of unprecedented size and market power, which is reason alone for regulators to reject the merger.

Vena says the ability to offer coast-to-coast single-line service is a plus, and is necessary with autonomous trucks on the horizon.

“We want to move ahead because our competitors are moving ahead,” he says, noting that he has ridden in an autonomous rig and the technology is ready.

“The competition’s going to get better,” Vena said. “And we need to be able to get better and have a chance to win.”

Eliminating interchange and providing faster, seamless service will help railroads compete against autonomous trucks, Vena contends. He also said that single-line service tends to be cheaper than interline moves.

“It truly is a great deal for America,” Vena said.

Record high diesel fuel prices, along with tighter trucking capacity, has prompted shippers to send more freight to the railroad. UP’s traffic is up 5% for the quarter to date, domestic intermodal is on pace for a fifth straight quarter of record volume, and for the first time since 2018, UP has deployed all of its domestic intermodal containers, Chief Financial Officer Jennifer Hamann said.

The worry now, however, is that sustained high fuel prices will hurt consumer spending and freight demand. “Fundamentally a higher fuel price is never good for the economy in the long run,” Vena said.

But the railroad has yet to see a broad freight downturn.

Vena and Hamann spoke at the Morgan Stanley 14th Annual Laguna Conference.

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