The Impact of Political Power on Railroad Regulation and Merger Dynamics

The Trump administration’s reshaping of the Surface Transportation Board (STB) has ignited a seismic shift in railroad regulation, equity valuations, and merger dynamics. By strategically altering the STB’s ideological balance—most notably through the August 2025 removal of Democratic member Robert Primus—the administration has tilted the regulatory landscape toward deregulation, favoring railroad profitability over shipper protections. This maneuver has not only accelerated the approval of high-profile mergers like the $85 billion Union Pacific-Norfolk Southern deal but also reshaped investor sentiment and market confidence in the sector [1].

Deregulation and the STB’s Ideological Shift

The STB’s transformation began in 2018, when Trump filled two new seats on the board, expanding it to five members and ensuring partisan balance [4]. However, the removal of Primus—a vocal critic of railroad rate hikes and mergers—marked a pivotal moment. By replacing him with Republican Patrick Fuchs, Trump effectively shifted the board’s composition to a 3-2 Republican majority, aligning it with his “America First” agenda [1]. This move has emboldened railroads to push for deregulation, including streamlined merger approvals and relaxed revenue adequacy rules, which determine how much railroads can charge shippers [3].

The STB’s cost-of-capital determinations—a key metric for railroad stock valuations—have already fluctuated wildly, from 7.89% in 2020 to 10.68% in 2024, reflecting regulatory uncertainty [1]. With the board now favoring pro-industry policies, investors are betting on improved operating ratios and reduced regulatory friction. For example, Union Pacific’s operating ratio dropped to 56.3% in Q1 2025, driven by efficiency gains under Precision Scheduled Railroading (PSR) [6]. Analysts like Bernstein have raised price targets for major rail operators, citing stronger carload volumes and improved service metrics [5].

Merger Dynamics and Market Reactions

The pending Union Pacific-Norfolk Southern merger epitomizes the STB’s new regulatory ethos. Proponents argue the merger will eliminate interchange delays, save $1.5 billion annually, and create a 50,000-mile transcontinental network [6]. However, critics warn of reduced competition, higher shipping costs, and service disruptions, citing historical precedents like the 1990s Union Pacific-Southern Pacific merger [2]. Despite these concerns, the STB’s pro-business stance has already paved the way for similar consolidations, such as the 2023 Canadian Pacific-Kansas City Southern merger [3].

Market confidence in railroad equities has been mixed. While shares of Union Pacific and Norfolk Southern rose slightly after Primus’s removal, broader sector volatility persists. For instance, Norfolk Southern’s stock traded at a 18.4% premium to its discounted cash flow (DCF) intrinsic value as of August 2025, suggesting overvaluation [1]. Conversely, Union Pacific was deemed undervalued by 16.9% based on DCF analysis [3]. These divergences highlight the sector’s sensitivity to regulatory shifts and merger outcomes.

Risks and Long-Term Implications

The politicization of the STB raises red flags for institutional credibility. Primus’s dismissal, which he argued violated the 1993 Interstate Commerce Commission Termination Act, has drawn criticism from labor unions and Democratic lawmakers, who accuse the administration of undermining regulatory independence [4]. If the STB continues to prioritize railroad interests over shippers, it risks eroding long-term trust in the freight rail sector and deterring infrastructure investment [1].

Moreover, the Trump-era deregulatory momentum could face headwinds under a future administration. The Biden administration’s two-person crew rule and safety-focused policies, for example, might be reinstated, creating regulatory whiplash for investors [2]. This uncertainty underscores the need for hedging strategies, such as overweighting rail operators with strong balance sheets while maintaining smaller positions in antitrust-focused firms [2].

Conclusion

The Trump administration’s STB reforms have catalyzed a deregulatory environment that favors railroad consolidation and profitability. While this has boosted short-term equity valuations and merger approvals, it also introduces risks tied to reduced competition and regulatory instability. Investors must navigate this complex landscape by balancing optimism over efficiency gains with caution regarding long-term policy reversals and antitrust concerns.

Source:
[1] Trump's Firing of Robert Primus and Its Implications for U.S. Infrastructure and Transportation Policy [https://www.ainvest.com/news/trump-firing-robert-primus-implications-transportation-policy-infrastructure-stocks-2508/]
[2] Regulatory Winds Shift: How Deregulatory Momentum Reshape Transportation Equity Markets [https://www.ainvest.com/news/regulatory-winds-shift-deregulatory-momentum-reshape-transportation-equity-markets-2508/]
[3] Political Crossings: How Regulatory Risk Shapes Railroad M&A in the 21st Century [https://www.ainvest.com/news/political-crossings-regulatory-risk-shapes-railroad-21st-century-2508/]
[4] Trump fires Surface Transportation Board member Primus [https://www.trains.com/pro/regulatory/trump-fires-surface-transportation-board-member-primus/]
[5] Bernstein Raises Rail Operators' Price Target Expecting Stronger Carload Outlook [https://www.tradingview.com/news/reuters.com,2025:newsml_L4N3RU1FD:0-bernstein-raises-rail-operators-pt-expecting-stronger-carload-outlook/]
[6] North American Class I Freight Rail Performance: Q1 2025 [https://www.oliverwyman.com/our-expertise/insights/north-american-freight-rail-performance/2025-q1.html]