Railroads are seeing a significant upturn in second-quarter earnings, with most Class 1 carriers raising guidance. The bigger development, however, is the set of strategic agreements between Union Pacific and Canadian National Railway, which are tied in part to the proposed Norfolk Southern-Union Pacific merger and are reshaping cross-border rail competition.

Canadian National Railway will not oppose the proposed Norfolk Southern-Union Pacific merger after reaching two separate agreements with Union Pacific, rail analyst Bill Stevens told FreightWaves. One agreement is directly tied to the merger, while the other stands on its own and gives CN a faster route to Mexico and a first-ever foothold in Kansas City.

The proposed NS-UP combination would mark one of the most significant Class 1 railroad consolidations in decades. The Surface Transportation Board, which has authority over rail mergers, last approved a major Class 1 combination in 2023 when Canadian Pacific acquired Kansas City Southern to form CPKC — the first such deal since the consolidation wave of the 1990s that produced today's six largest North American freight railroads. Securing a non-opposition from a peer carrier like CN removes a potential obstacle in what is expected to be a lengthy regulatory review.

The standalone agreement grants CN haulage rights over Union Pacific's tracks between Memphis and the Mexican border crossing at Eagle Pass, Texas, for traffic moving between Canadian origins or destinations and Mexico. The arrangement gives CN a faster, more direct route to compete with CPKC, which already offers single-line service across Canada, the U.S. and Mexico following its 2023 formation. At present, CN hands traffic to Union Pacific in Chicago, which shortens CN's length of haul.

In exchange, Union Pacific gains rights to use CN's Chicago bypass, the EJ&E corridor acquired in 2009, to avoid Chicago's notoriously congested rail network.

"CEO Jim Vena said at times when he was at CN, they could get a train faster from British Columbia to Chicago than it took to get from one side of town to the other," Stevens said.

The merger-contingent agreement gives CN trackage rights over Union Pacific through Missouri, with two parallel routes across the state. Under the arrangement, CN gains access to the Kansas City market for the first time with its own trains and gets use of Union Pacific's underutilized Neff Yard in Kansas City. The package is designed to address competitive concerns for roughly five shippers whose railroad options would drop from two to one under a Norfolk Southern-Union Pacific combination, along with about two dozen shippers, mostly in the St. Louis area, whose options would fall from three to two.

"CN said, hey, this solves our competitive concerns about the merger. We get growth opportunities out of it, and as a result, we will not oppose the merger," Stevens said.

The merger developments come as four of the six Class 1 railroads reported earnings this week showing broad-based volume improvement. CSX volumes rose 6%, Norfolk Southern increased 4%, Canadian National rose 5% on a revenue-ton-mile basis, and Union Pacific gained 2%. CN's carload volume was essentially flat at 0.35% growth. Three of the four railroads raised their financial or volume outlooks for the year.

Intermodal led much of the growth. CSX intermodal volumes climbed 9%, Union Pacific domestic intermodal posted a fourth straight quarterly volume record with double-digit growth, and Norfolk Southern intermodal rose 5%, helped in part by truck-to-rail conversions tied to high fuel prices.

Coal performance varied sharply by railroad. Norfolk Southern coal volume increased significantly on exports of metallurgical coal, while Union Pacific coal declined because of high stockpiles at utility plants and low natural gas prices. CN Chief Commercial Officer Janet Drysdale said on the railroad's earnings call that truck capacity in Canada is not as tight as it is in the U.S., which helps explain why CN's domestic intermodal performance lagged its American peers.

CN also flagged tariff uncertainty, forest products weakness tied to slow U.S. housing starts, and strength in petroleum, chemicals and grain as the main variables shaping its outlook.

On the industrial side, Norfolk Southern said new plant openings and expansions across its network are running at double last year's pace, while CSX pointed to data center construction as a driver of construction-related traffic. Union Pacific also cited manufacturing gains that it expects will outpace overall industrial production, implying market share gains from truck.

The Surface Transportation Board is set to receive a supplemental merger filing from Norfolk Southern and Union Pacific on Monday, ahead of FreightWaves' Future of Rail Symposium in Chattanooga on Tuesday, where both railroads' CEOs are scheduled to appear.

CPKC reports earnings on Wednesday, and BNSF will report alongside parent Berkshire Hathaway next month.