Merge Of Union Pacific & Norfolk Southern Signals Better Days For Rail

Union Pacific cargo train approaching a level railroad crossing near Jamestown, California, December 17, 2017. (Photo by Smith Collection/Gado/Getty Images)

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Money is ruthless. The genius of compound returns vivifies the previous truth. The costs associated with a lack of returns are enormous.

This is something to think about as railroad giants Union Pacific and Norfolk Southern work to complete their $85 billion combination. $85 billion would comfortably place the merger among the largest in U.S. history, which is a prominent market signal.

The simple, crucial truth is that the financing for such a large deal wouldn’t be available unless the marketplace viewed rail’s future potential as vast. Translated, an $85 billion combination of Union Pacific and Norfolk Southern is a signal that the combined corporation is seen as capable of becoming something much greater than the headline number presently associated with the deal.

Which is just a comment that the proposed merger’s future result will amount to a great deal more than achievement of a coast-to-coast rail network, greater long-haul efficiency, reduced supply-chain “chokepoints,” and other bullet points associated with the merger. The greater truth imbued in the merger’s headline is that railroad corporations in their present form in no way resemble what they could be. And what they could be is much greater than a “coast-to-coast rail network” free of various supply-chain “chokepoints.”

Put another way, the media description of the proposed merger amounts to the rail networks combining to expand on the knowns of seamless nationwide shipping, all as though Union Pacific et al have already reached the frontier of the sector. That’s a limited view, and one that is once again belied by the size of the merger.

So rather than concentrate on the knowns, let’s imagine what railroad companies could be in the age of driverless transportation, AI meant to wholly modernize the size, scope and range of freight loads, not to mention what combined rail entities see for themselves beyond the traditional shipment of market goods from point A to point B. Asking a basic question that’s perhaps not asked enough, is cross-country shipment the limit to what existing and future railroad corporations can be?

Crucial about the questions asked is that only by doing in concert with failing, succeeding and in between can rail companies discover a still opaque future. Which brings us to an unknown: the politics of it all.

While President Trump speaks glowingly about a modern business future, there’s no certainty as you read this that the Trump White House will even allow the proposed merger to go through. The Trump administration has a tangled history with M&A that potentially imperils the deal.

What about unions? Precisely because modernization of any industry will include the automation of work formerly done by humans, will union power assert itself in a way that renders moot efforts by the rail companies to do as all other soaring industry sectors are doing: produce exponentially more with less, all while hiring more people exactly because they’re producing much more with less.

From there, there’s the regulatory burdens long in the way of rail companies. As opposed to an enabler of advance, the Federal Railroad Administration (FRA) has long operated more as a gatekeeper than an entity doing all it can to enable innovation. The FRA is part of the Department of Transportation. Will the Trump DOT encourage the FRA to do what’s necessary for the railroad industry to be great again?

What’s important is that it could be great. The previous truth can once again be found in the size of the proposed merger between Union Pacific and Norfolk Southern. The markets say the future of rail exceeds its present. Here’s hoping markets are allowed to work to prove market wisdom.