May 5, 2021

Breakingviews: Customers can win, too, in big U.S. mergers

by Breakingviews.

Who said big deals have to be bad for consumers? Recently proposed U.S. railroad mergers have put the pros and cons of consolidation into the regulatory spotlight after a two-decade pause. One worry is that reduced competition can cause prices to skyrocket. In reality, that hasn’t happened.

The last mergers of so-called Class 1 railroads were in the 1990s, like the one between Burlington Northern Railroad and Santa Fe Pacific. After watchdogs cracked down, they stopped – until March this year, when Kansas City Southern became the target of a bidding war between two Canadian operators. The timing coincides with a renewed focus on antitrust in Washington, notably in relation to big technology companies. That raises the stakes.

Hundreds of stakeholders have expressed support for a deal, and past railroad mergers suggest a reason why. As the industry rolled in the 1990s, the price to move one ton of freight one mile fell by a quarter, adjusted for inflation, according to the Bureau of Transportation Statistics. Prices have ticked up over the last 20 years. But it still costs less in real terms to ship cargo via rail than it did 30 years ago. Meanwhile shipping costs by air and truck have both increased by more than a third.

Contrasting with cargo, the average passenger airfare has fallen 41% on an inflation-adjusted basis since 1995, the BTS says. In cellphone service, another industry that has consolidated significantly, prices have about halved since 1997, according to the Bureau of Labor Statistics. These examples suggest that regulators have been justified in allowing mergers, and that conditions attached have worked.

Merging companies have also benefited. An investment in Union Pacific, which acquired several competitors in the 1980s and 1990s and is the largest publicly traded U.S. railway, has returned over 3,000% including dividends since mid-2000, 10 times more than the S&P 500 Index.

Union Pacific’s EBITDA margins nearly doubled to 53% in the 20 years through 2020. And across all Class 1 railroads, the workforce in March this year was almost a third smaller than in January 2000, according to the Surface Transportation Board. Those are possible warning flags for regulators. Still, the pricing picture is in their favor. Whatever the business under scrutiny, that kind of give-and-take is the best watchdogs can hope for.

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BREAKINGVIEWS

Reuters Breakingviews is the world’s leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

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