CP CEO: KCS merger opens Lazaro Port as Pacific alternative

NEW YORK — As the merger of Canadian Pacific and Kansas City Southern awaits final U.S. government approval in 2023, the CEOs of both companies presented their arguments on the merits of the deal before an audience of rail executives on Tuesday.

Presentations at Progressive Railroading’s RailTrends conference by Canadian Pacific (NYSE: CP) CEO Keith Creel and KCS CEO Patrick Ottensmeyer both highlighted on one screen the map representing the $31 billion merger pushed ahead, which was completed about a year ago.

This map shows the roughly Y-shaped network that will be the core of the combined companies, extending to both coasts of Canada and as far north as Mexico. In his remarks, Creel often referred to “nation” in the singular, later stating that it was a reference to the more unified nation of North America—the United States, Canada, and Mexico—which he believed benefited significantly from the merger.

The merger was completed about a year ago and KCS is part of CP but still requires Surface Transportation Board (STB) approval for its operations.

However, just building the network is not enough, Creel said. The opportunities offered by the merger can only be used “if we become truck-like and create options for our shippers”.

“This is not a horizontal merger,” Creel said, echoing a phrase he has used in the past. “It’s not about rationalization. It opens up the possibility of developing two underutilized routes.”

Creel also said he “underestimated the enthusiasm” for the merger.

“We’ve been embraced by customers and employees,” he said. “[Workers at CP are being presented with] an opportunity to be something bigger than yourself, and that touches an emotional connection with them.”

One of the key offerings that CP has spoken about is the ability to transform the Port of Lazaro Cardenas in Mexico into an alternative to the ports of Los Angeles and Long Beach. Lazaro is on the west side of the Panama Canal, so it doesn’t have the disadvantage of traversing the waterway that US ports on the east coast have to contend with. According to the port’s website, Lazaro handled 1,318,632 20-foot units in 2019.

Creel stressed that Lazaro will not replace either Los Angeles or Long Beach and spoke about his strengths.

“You can unload a container in Lazaro, put it on a rail car and take it all the way to Chicago in seven days,” he said. “This is phenomenal.”

By being able to offer this Lazaro-Chicago non-interchange service, the CP-KCS combination will “complement” west-east rail service from Southern California ports, Creel said.

Another west-to-east route created by the merger would be additional service from the ports of Vancouver and other Canadian ports in British Columbia, according to Creel. Single-line moves from those ports to remote locations in other parts of North America “just aren’t possible today,” Creel said.

At the RailTrends conference, the mood was more that STB will eventually approve the CP-KCS merger. CP expects a decision sometime in the first quarter of next year. The board held public hearings on the merger in September and October.

Creel said he knew that shippers who are customers or potential customers of the two separate railroads had had “many concerns about gateway foreclosure and forcing companies onto that network.” But he resisted.

“This team of railroad workers will keep the flow going,” he said. “We will act entrepreneurially and earn the business. We will not force a deal. We will compete and we will be partners.”

For Ottensmeyer, his speech at the conference was reminiscent of the day after Donald Trump was elected president in 2016. At the time, Kansas City Southern had assumed that an end to the North American Free Trade Agreement, or NAFTA, was in the hands of a Trump running while if he was staunchly opposed to the deal, it would be disastrous for a company that had billed itself as the “NAFTA railroad.”

NAFTA was replaced by the United States-Mexico-Canada Agreement (USMCA). Ottensmeyer avoided explaining whether USMCA was better or worse than NAFTA.

But given that the company was staring into a world with no trade deal between the three nations — and had built about 50% of its business around Mexico — he said the fact that USMCA exists and was passed by an overwhelming majority is a important factor remains.

“We should have trade security for several years,” said Ottensmeyer. “Mexico has this installed manufacturing base and it’s not going away. It is a critical part of the North American supply chain.”

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