MONTREAL – As part of its proposed acquisition of Kansas City Southern, Canadian National envisions spending $250 million to create an upgraded route linking Kansas City, Mo., with Eastern Canada via Springfield, Ill.
The big prize in a CN-KCS merger is connecting Canada, the U.S., and Mexico. But the combined CN-KCS route to Kansas City would receive the largest single investment as the railroads tie their systems together, Doug MacDonald, CN’s senior vice president of special projects, said on an investor webcast on Thursday.
The improvements would cover CN’s roughly 112-mile former Illinois Central Gilman Subdivision from Gilman, Ill., to Springfield and KCS’s 288.6-mile former Gateway Western line from Springfield to Kansas City.
CN’s Gilman Sub is a 60-mph route with islands of centralized traffic control, while the former Gateway Western is 40-mph dark territory with short passing sidings. A CN spokesman did not return an email today seeking further details on the planned track improvements.
The rationale for the upgrade: Connecting Kansas City to Eastern Canada and its ports for intermodal traffic and linking carload origins on CN with destinations on KCS.
“By combining CN and KCS, and upgrading the rail line between Gilman, Illinois, and Kansas City, Kansas City would be directly connected to the port of Montreal, the port of Halifax, and potentially the port of Quebec City and be connected with the East Coast trade not only for imports but also for exports,” CEO JJ Ruest says.
Some of that business would involve converting traffic that now moves via U.S. East Coast ports, Ruest says. And he says having CN reach Kansas City could tie the area to the CN-served ports of Vancouver and Prince Rupert, British Columbia, as well as New Orleans and Mobile, Ala., on the Gulf Coast.
Combining CN and KCS would create a single-line route between Detroit and Kansas City to compete with Norfolk Southern’s shorter former Wabash main line. NS hauls auto parts and finished vehicles over the former Wabash, along with both domestic and international intermodal traffic linking Kansas City with East Coast destinations including the ports of New York and New Jersey and Virginia.
Intermodal analyst Larry Gross says it’s a stretch for Kansas City to be served by Canadian ports because U.S. ports on the East and West coasts are significantly closer and involve far fewer rail miles. But he says lower costs at Canadian Atlantic ports could tilt the balance in favor of a CN routing for imports originating in Southeast Asia that transit the Suez Canal.
CN says that finding so-called “matchback” loads for containers that otherwise would return to Asia or Europe empty boosts the economic competitiveness of its international intermodal business and its port partners. The Kansas City area would provide export loads of cereal grains, fertilizers, and other grain products, CN says.
Kansas City also offers new opportunities to connect CN carload shippers with destinations on KCS.
“Kansas City is a smaller Chicago, I call it. All the Class I railways get there … except for CSX. It’s a great hub for business, especially in the grain world out there. But it’s a great east-west connector as well as a north-south connector,” MacDonald says. “CN sees a lot of traffic going through there.”
For example, corn and soybean from CN-served origins in the U.S. Midwest and Canada could flow to destinations on KCS between Kansas City and Shreveport, La.
CN is committed to keeping KCS interchanges open at the Kansas City gateway, including for rival Canadian Pacific. In March, CP and KCS announced their friendly $29 billion deal to merge. A month later CN submitted an unsolicited $33.7 billion bid, which the KCS board is currently reviewing.
Ruest and MacDonald spoke with Bernstein analyst David Vernon.
This is a potential benefit of combining CN & KCS, though there are problems as well. However, if CP gets KCS, they might sell this line anyway because it really doesn’t fit in with CP. Perhaps a split of KCS could happen with CN getting this line.
It would make any future merger with NS more difficult, however.