BUSINESS/ECONOMY

CN’s steely decisions

MICHAEL SALTER September 15 1986
BUSINESS/ECONOMY

CN’s steely decisions

MICHAEL SALTER September 15 1986

CN’s steely decisions

BUSINESS/ECONOMY

Their plastic yellow hard hats have become a symbol of their anger—and desperation. Two weeks ago in Fredericton, employees from Canadian National’s Moncton, N.B., repair shops tossed dozens of hard hats onto the hood and under the wheels of Prime Minister Brian Mulroney’s limousine as he began a tour of the area. The workers were protesting the potential loss by next year of 437 highpaying jobs when CN transfers ownership of part of the facility to Canadian General Electric Co. Ltd. Last week about 1,000 demonstrators continued the protest outside the Hotel Beausejour in downtown Moncton, where seven federal cabinet ministers were holding Atlantic Focus, a two-day conference on regional economic development.

But federal Transport Minister John Crosbie— who accepted a hard hat from the peaceful but noisy crowd —offered the protesters little hope. The minister said that he would review CN’s decision to sell the shops. But, he added, CN “was not created to overcome the problems of regional disparity.”

Over the next several years, dozens of communities across Canada will experience the same kind of dislocation. With nine divisions, CN’s activities include railways, hotels, real estate, communications and energy exploration. But it is the Canadian Rail operations that provide the bulk of revenue—$3.7 billion of total revenues of $5 billion in 1985—and that are central to management’s concerns. Indeed, the transportation conglomerate is facing a serious financial crisis. CN is carrying a $3.5-billion debt—most of it borrowed to finance Canadian Rail’s

capital expenditures and cover its operating losses. And the all-important rail division is experiencing a decline in freight volume—primarily in bulky commodities such as wheat and coal— which is its mainstay. It is also losing

more and more loads to truckers and revitalized U.S. rail carriers.

To compete, the company plans to eliminate 14,000 jobs over several years—10,500 of them from Canadian Rail. And the company wants to shut down at least one-third of its 52,000 km of track. Declared Maurice LeClair, CN’s chairman and chief executive officer: “The crisis is not five years from now. It is next year.”

In corporate terms, CN has embarked on a major program to reduce its size.

But in its attempt to shed employees and little-used branch lines—one-third of CN’s lines carry only one per cent of its business—CN faces problems that are both political and economic. Many Canadians still view nostalgically the

railroad’s historical role as a nation builder. “The railway is, for many Canadians, a precious link to a proud past,” said LeClair.

CN’s attempt to alter shape, from a sprawling giant into a smaller, more efficient railroad, will severely test the federal Conservative policy of permitting Crown corporations to act as profit-making businesses. The government is allowing the Crowns to move away from their traditional role as instruments of economic and social develop-

ment. Last week Crosbie said that although the government could instruct CN to keep the Moncton shops open, that would limit the company’s ability to compete. “The government does not manage CN,” Crosbie declared.

But in Moncton and many other parts of Canada, taxpayer-owned CN is regarded as a job-providing, job-saving arm of the state. The Moncton Save Our Shops (SOS) committee, formed a year ago and made up of municipal, business and union representatives, presented a brief to the Atlantic Focus conference pointing out that with 1,022 employees, CN’s Main Shops facility was the area’s largest single industrial employer. Among its recommendations, the brief, presented by SOS chairman Paul Daigle, general manager of the Moncton regional development commission, urged the government and CN to provide funds to encourage new industry to the area to replace the jobs.

A submission to the conference by the 800member Conseil économique du NouveauBrunswick, which represents francophone businesses, said that cutting 400 jobs in Moncton was equivalent to eliminating 10,000 jobs in Montreal or Toronto.

For its part, CN has pointed out that with 70 per cent of its traffic— and its repair workwest of the Lakehead, there is less and less work for the Moncton shops. Last week Ronald Lawless, CN’s president and chief operating officer, said in an interview z that the company had ï; worked hard to arrange § a deal with Canadian 3 General Electric, which intends to build diesel locomotives at the shop and may employ about 300 of the workers. Said Lawless: “We will still employ 3,000 people [at other CN facilities] in Moncton. But people think that if their father worked there, their sons should work there. It becomes an emotional issue.”

Since its creation, CN has had a mandate to provide services in areas of the country where it is not economic to do so—an activity its executives call an “imposed public duty.” In some cases, CN obtains federal subsidies that partially compensate it for maintaining

money-losing operations. The company receives 80 per cent of the cost of running branch rail lines that it wants to close but which its federal regulator, the Canadian Transport Commission (CTC), demands that it keep open. Branch line subsidies are currently running at $80 million a year—$20 million a year less than the cost of operation.

CN is not compensated for maintaining many other losing operations. TerraTransport, CN’s rail subsidiary in Newfoundland, is currently losing $40 million per year. The company would like to close the 1,002-km railway and serve the island with trucks and ships, but to date it has been refused permission to do so.

Partly as a result of the shortfall of federal subsidies, CN has built up high

debt loads throughout its history. Three times, in 1937, 1952 and 1978, the government recapitalized CN by converting its debt to equity. The government, which had loaned all the money to CN, forgave the loans. But in 1978, when $808 million in debt was absorbed, Ottawa ordered CN in future to borrow its funds on the open market.

Since 1978 CN has built up another $3.5 billion in debt. According to LeClair, $1.5 billion of that amount results from providing uneconomical public services. In 1986 interest on CN’s debt will probably absorb all of the company’s operating profit. Said LeClair: “We can continue to be a medi-

um of public policy—but only if we are compensated for doing so.”

Despite the costs involved in running a railway in Canada, industry experts note that CN—along with Montreal-based Canadian Pacific Ltd., which faces many of the same regulatory provisions—ran two of the most efficient railways in North America. But that began to change in 1980 when the U.S. Congress deregulated the country’s railways. The Staggers Rail Act permitted U.S. railroad companies to compete for business by making private contracts with customers instead of having to post their rates. Although revenue fell because of competition, costs fell even more. By 1983 the newly competitive U.S. railroads—joined by deregulated U.S. truckers—began to take at least $100 million a year in business away from CN, which directs 30 per cent of its traffic into the United States.

Two years ago CN launched an exhaustive series of internal studies to analyse its business and to determine how to improve its service. Completed in 1985, the studies indicated that unless it moved quickly to reduce its manpower, debt and improve its efficiency through the increased use of computerized methods, the company would be in trouble. Said LeClair in a speech last year: “The changes we are suggesting do not reflect foresight and they are not timely. They are late.”

Last year the federal Conservatives responded to the wave of deregulation in the U.S. transportation industry by proposing similar legislation for the Canadian train, trucking and air transport businesses. The new national transportation act, which was tabled in the Commons by then-transport minister Donald Mazankowski, is expected to be revived when the new session of Parliament begins in October. The bill will copy aspects of the Staggers Act. Like their U.S. counterparts, the railroads will be able to make confidential contracts with their customers. At the same time, the CTC will be replaced by a new regulatory agency that may permit the railroads to close inefficient branch lines more easily. But as CN struggles to regain its reputation as one of the continent’s great railroads, its employees in Canada’s small towns and communities are bound to suffer the most.

MICHAEL SALTER

SUE CALHOUN

KEN MacQUEEN