Union Pacific/Southern Pacific Merger: Impact on Shippers

Article excerpt

INTRODUCTION

Since merging with Southern Pacific, Union Pacific Railroad has been in the news. Headlines, such as "Union Pacific Says its Network Jammed" and "Local Businesses Steamed over Union Pacific Backlog," tell a tale of congested rail yards, late shipments, missing rail cars, neglected customers and overall poor service. As "Union Pacific's Problems Continue," other headlines, like "Union Pacific Faces Undoing Part of Merger" and "Union Pacific Reports to Feds on Service Meltdown," suggest shipper and federal responses to post-merger service problems. These responses have included diversion of traffic to motor carriers and requiring submission of weekly service reports to the U. S. government, as well as talk of dismantling the merger, opening up access to UP tracks, and even railroad re-regulation. Some shippers are also laying their own tracks (Machalaba 1998a).

The purpose of this paper is to report results of a recent survey of shippers on the UP/SP railroad merger. The second and third sections briefly describe the merger and market area surveyed-Reno/Sparks, Nevada. Then, the fourth and fifth sections outline research methods and present statistical results, respectively. Finally, the paper closes with a discussion on implications of the results for transportation management.

The Merger

Union Pacific (UP) has sought control of Southern Pacific (SP) since the dawn of this century. In 1901, UP gained financial control of the Southern Pacific holding company which, in turn, had control of both SP and the Central Pacific (CP) railroads. (On May 10, 1869, UP and CP linked together near Ogden, Utah to form the first transcontinental railroad in North America.) But, in 1912, the U.S. Supreme Court instructed UP to relinquish its 46 percent stake in SP. SP and CP merged in 1959 (Wilner 1997).

On July 3, 1996, the Surface Transportation Board (STB) approved the UP/SP railroad merger. This made UP the largest railroad in the USA, with over 31,000 miles of track in 25 states. UP and Burlington Northern/Santa Fe (BNSF) now control 90 percent of all rail freight in the West. STB approval of the merger came with conditions. One potentially important condition for shippers involves the trackage rights granted to BNSF on all "two-to-one" lanes, i.e. lanes formerly served by both UP and SP (Burke 1996).

Despite STB conditions, the merger was opposed by several groups, including the National Industrial Transportation League (NITL). The NITL is the nation's largest shipper group.. According to Bradley (1995): "Shippers worry that the (UP/SP) merger will lead to reduced service-partly as a result of possible line abandon-ments--and higher rates." The merger was also opposed by the Coalition for Competitive Rail Transportation and the United States Justice Department.

Before the merger, UP and SP operated a large number of parallel lines. The consolidation of parallel lines under one railroad affords an opportunity to route faster intermodal trains over one line and slower (e.g. coal) trains over the other (Bradley 1997). Indeed, the UP/SP merger application promised shippers faster TOFC/COFC movement between Chicago and both Northern and Southern California (Wilner 1997). Faster movement of freight is a form of improved service to shippers.

Consolidation of parallel lines, creating-two-to-one lanes, can also eliminate competition and reduce incentives the remaining railroad has to improve its service to shippers. In the UP/SP merger, there were more than 130 two-to-one points (Wilner 1998). This concern-that a parallel or side-by-side merger will eliminate competition and result in worse service-has been confirmed in a prior shipper survey (Anon. 1978).

Reno/Sparks

The railroad created Reno, Nevada. CP entered Northern Nevada from the West in early 1868. Since the transcontinental railroad was to be routed along the Truckee River, towns such as Reno and Verdi emerged in the Spring of 1868 (Miluck 1994). …