Articles

Are the Railways on the Ropes?

FRED BODSWORTH July 23 1955
Articles

Are the Railways on the Ropes?

FRED BODSWORTH July 23 1955

LAST YEAR about fifteen out of Canada’s thirty-one railway companies lost money. In the past quarter century, twenty-one Canadian railroads have gone broke.

Our biggest railway, the government-owned Canadian National system, ran up a deficit of twenty-nine million dollars in 1954; only twice in the past fifteen years has its deficit been bigger.

The privately owned Canadian Pacific system, as it usually does, wound up with a small 1954 surplus, but it did so mainly on the strength of extra income from mining and oil properties which augmented meagre railway earnings. Meanwhile agitation was growing among CPR shareholders to divorce its railway operations from the company’s more profitable investments, and demand that the government assume any railway deficits that might result, as it does for the CNR.

A striking corroboration of the railways’ worsening economic plight came unsolicited from an authoritative source last fall. Chief Justice Gordon Sloan of British Columbia, when arbitrating railway-union demands, agreed that railway employees were entitled to most of the benefits they were seeking but he granted few of their requests, stating that the railways couldn’t afford to give them more. He said: “In an era of growth and expansion in Canada in which the railways are playing a most vital and important role, their net rail revenues are showing a steady and serious decline.”

What’s wrong? Are the railways doomed to go the way of the stagecoach and canal barge?

It is a question that gets deeply into the story of Canada what Canada is today and how it came to be. For railways are of the very essence of this country. Without railways there would have been no Confederation and no Canada, for Confederation hinged on the promise of railway construction and railways more than anything else brought a dubious Maritimes and British Columbia into the union. Without railways there could be no Canada today. Because of our large area and small, widely dispersed population, Canada uses more railway transportation per capita than any other country of the world. Because our domestic market is limited, a large part of our production has to be hauled long distances to seaports for export, making cheap efficient transportation within Canada a necessity of existence.

At least half the population of the country lives within sound of a train whistle. Without its railways Canada would cease to exist as an organized civilized community. The obvious substitutes trucks, ships and airlines are specialized carriers. Only trains can perform the large-scale movement of basic commodities like grain, coal and ores which lie at the foundation of our economy.

But , in spite of their essential role, Canadian railroads are displaying all the ominous symptoms of a business going broke.

“The railway industry is a very sick one,” I was told by S. W. Fairweather, CNR vice-president of research and development. And Hon. W. F. A. Turgeon, the one-man royal commission who investigated rate-setting methods last year, said virtually the same thing in his report of last February, adding, "Prospects for the near future do not appear hopeful.”

According to the experts, both inside and outside the railway industry, there is no deep economic mystery as to what has gone wrong.

"We are trying to maintain a government-regulated system of paying for railway services that have become obsolete,” says J. L. McDougall, Queen’s University professor of commerce, an authority on transportation. "It is a system that was designed for the monopoly era of railroading when railways had no competition in the land-transport business. But now the railways have competition—trucks, oil pipelines and airlines--and the freight rate structure that worked fine during monopoly days has been knocked completely haywire by the appearance of competition.”

It isn’t that the railways are inherently incapable of meeting competition. Because of basic engineering principles, railways provide the cheapest method by far of moving large shipments of freight on land. But because of what they consider to be a strange and illogical structure of preferential freight rates, the railways claim that they are prevented from putting their great engineering advantage into full use. They say that a paradoxical situation has developed in which trucks, with operating costs five times as high, are finding it possible to cut seriously into railway freight business.

Railroads’ Joy: the Boxcar

Railway passenger business has always been a losing proposition in Canada where a tremendous track mileage is necessary to serve a small population. The railways make a profit on a few busy inter-city passenger runs like Toronto to Montreal and Montreal to Ottawa, but on the whole they get almost ten times as much revenue from freight. From a cold dollars-and-cents viewpoint, their pride and joy is not the luxurious streamliner, but the homely battered boxcar.

The railways win or lose on freight. And for more than a hundred years, railway freight rates in Canada have been under some form of government control and not under the control of the railways that provide the service.

The government has been in the railway business since 1851 when it ruled that freight rates must be subject to the approval of the governor-in-council. In 1888 parliament established a railway committee to supervise rate setting. In 1904 parliament handed over direct control to a Board of Railway Commissioners. In 1938 the board was given authority over other forms of transportation and its name changed to the Board of Transport Commissioners.

The board’s main responsibility is the setting of maximum rates. It also controls other features of railway operation, including the location of new lines and the abandonment of old ones, construction standards and service. Railways or shippers can appeal rulings of the board to the Supreme Court of Canada or to the cabinet, and the cabinet has the authority to reject the board’s rulings at any time. So the board is an instrument of government policy, although in practice the government rarely interferes with it.

There were two reasons for this government regulation. First, the railways until about twenty-five years ago had a tight monopoly on land transportation. Second, freight rates are often the factor that decides whether a remote region or industry is worth developing, and the government adopted a policy early in Canada’s railway history of using freight rates as an instrument. for national development. The method was, and still is, to set below cost freight rates on most raw materials like grain, ore and pulpwood to assist the development of these basic industries, and to make up the loss with high freight rates on manufactured products.

The railways were in favor of the policy themselves; similar policies were in many other parts of the world at the turn of the century when railroads were being pushed toward the frontier. From the railways’ point of view, it was good business. As the nation prospered, the railways would prosper, and it was expected that freight business at first unprofitable could become or be made profitable after the developmental period passed.

Go Farther, Pay Less

In the case of pioneer Canadian railroads, there was another reason for approving of low freight rates on basic commodities. The Canadian government had needed railways to promote settlement and to stitch together the scattered provinces of the new Dominion. The only way it could get them was to offer grants of land and cash to railway builders, because to begin with the railways couldn’t pay for themselves. So several Canadian railways, notably the CPR, began life as owners of vast tracts of land. The CPR received twenty-five million acres. These railway land grants were virtually valueless until the regions around them became settled. So the railways willingly offered low freight rates on primary products as a means of making their own land holdings saleable.

Out of this policy of using freight rates as an instrument for nation building there has evolved a freight rate structure in which the rate charged has little relationship to the cost of the service provided. Thus the railways charge about $12.50 to haul a ton of wheat from Saskatchewan to Halifax, although it costs them $37.50 to do it. It costs them approximately the same $37.50 to haul a ton of silk from Halifax back to Saskatchewan, but for that job they would charge about $500. To meet competition with ships using the Panama Canal the railways are permitted to charge a comparatively lower rate on through freight moving from eastern Canada to the Pacific coast. As a result, certain shipments going from Montreal to Edmonton for a freight charge of, say, $200, would go eight hundred miles farther to Vancouver for about $50 less money. Distance and actual cost are often among the least important factors considered in determining a freight rate.

The average cost of rail transportation in Canada is one-and-a-half cents per ton-mile. One of the first preferential rates was established for western grain which moves for about half a cent per ton-mile, or at one third of cost. Gradually many other basic commodities (ores, coal, pulpwood, and lumber) were also given the benefit of preferential freight rates and today, as a group, these products move for an average rate of about nine tenths of a cent per ton-mile--less than two thirds of cost.

Railway economists claim that half of all freight is carried at below cost, a quarter at cost, and a quarter at a profit. Thus that top twenty-five percent, most manufactured goods, must subsidize everything else and also provide the railways with any profit they derive. In order to recover cost and profit, from this twenty-five-percent segment of their freight business, railways have been permitted to charge freight, rates as high as forty cents per ton-mile on some manufactured articles, in spite of the fact that average cost is one-and-a-half cents a ton-mile.

"It’s an illogical and completely artificial system of paying for railway services,” CNR vice-president Fairweather admits. "Yet it worked. But,” he adds, "it needed a monopoly situation to keep it functioning because that twenty-five percent of railway freight for which we have to charge very high rates, is, of course, extremely vulnerable to any competing carriers that come along. And now the competition has arrived.”

Although pipelines and airlines are carrying commodities that recently went entirely by rail, the only serious freight-hauling competition facing railways as yet is from trucks. Truck costs are about five cents a ton-mile against the railways’ cent and a half. But railways have had to charge well over five cents a ton-mile for that top twenty-five percent of freight which pays the shot for everything else. Shippers in this class can therefore switch to trucks, actually a more expensive method of transportation, and get a cheaper freight rate.

Railway economists argue that actual trucking costs should be more than seven cents a ton-mile, instead of five. The railways claim that truck gasoline tax and license fees fall far short of paying the truckers’ true share of highway costs. They also point out that truckers select their freight business carefully and concentrate on heavy traffic routes between main cities. In contrast, the railways claim that they must provide their own right-of-way and, as "common carriers” by law, they are required to handle any traffic that wants to use railway services. The truckers, of course, don't accept these arguments. They say they more than pay for the value they derive from public highways. Whatever the facts, annual figures of the Dominion Bureau of Statistics show that railways pay twenty-one cents out of every expense dollar on building and maintaining track, while truckers contribute seven to eleven cents out of every expense dollar to highway maintenance.

Trucks began competing with railways for the cream of Canadian freight traffic in the 1930s. During World War II there was plenty of freight for everyone. Then shortly after the war the railways were hit by a double-barreled blow—wage increases and a big expansion of trucking competition. Several freight rate increases were granted but the railways, after making money during the war years, began going into the red again.

The CNR’s losses climbed to forty-two million dollars in 1949. In a desperate attempt to make the CNR show some kind of profit, at least on paper, the huge government-held portion of its debt was converted to preferred stock to ease the interest burden. This left the CNR still owing about twenty-five millions a year in interest charges on debts held by the public that were not affected by the government’s generosity, but this was about half what its previous annual interest bill amounted to. In 1952, the first year this recapitalization went into effect, CNR paid all its bills and interest charges and closed the year with a modest surplus of one hundred and forty-two thousand dollars. It managed it again in 1953, with a surplus this time of two hundred and forty-four thousand. They were small profits compared with its seven-hundred-million-a-year income, but at least CNR was breaking even. Then freight traffic took another slump in 1954 and the CNR’s deficit of twenty nine millions looked like old times again.

The Commissioners Said No

CPR’s earnings meanwhile were also going down. It ended the war with earnings that represented a five-percent return on its one-billion-two-hundred-million-dollar investment in railway property. By 1954 this annual return on investment was down to 2.15 percent. The CPR pointed out before the Board of Transport Commissioners that it had to pay 6.5 percent in bond interest etc. for money with which to earn that 2.15 percent. It asked for another rate increase based on a system that would yield it five percent a year on its capital investment. The board refused, arguing that the economic impact of freight rates was so great they couldn’t be tied to a set formula. The trouble the trucks are causing the railways is far out of proportion to the amount of business they’re taking away. "Actually, trucks are carrying less than ten percent of combined road-rail freight traffic,” says W. G. Scott, economist for the Railway Association of Canada. "But it’s the best-paying freight, and for that ten percent of the work they are pocketing twenty-five percent of the nation’s land freight revenues.”

Since railways have to be kept running to haul the nation’s basic commodities, what they lose in revenue to trucks has to be made up by the railways somewhere else. This means that, although the individual shipper may get lower freight rate by switching to trucks, shippers as a class are paying more, railway spokesmen insist. Before a recent commission on transportation, CNR vice-president Fairweather estimated the total cost to the Canadian economy at one hundred and fifty million dollars a year.

The truckers are ready with replies to these arguments too. They say that the railroads are not as hard up as they try to show with their statistics. And second, they say any economic setbacks the railways have suffered in recent years have been due to factors other than truck competition.

"The railways aren’t going broke,” argues John Magee, secretary of the Canadian Trucking Associations. "The CNR makes a profit every year on its actual railway operations. But they usually report a deficit because the profit isn’t sufficient to pay the interest charges on their debt. The point is, though, that the debt shouldn’t be there. It is composed mostly of debts that failing railways brought with them into the CNR when CNR was formed in 1923. In any normal business those debts would have been written down through bankruptcy proceedings, but the government at the time wouldn’t permit bankruptcy, so the debts are still on the books.”

Magee also charges that the CPR uses a misleading system when it expresses its earnings as a two or three percent return on its investment in railway property. He said much of what CPR calls its "railway investment” consists of old properties "a legacy of past glories and past mistakes” - that are no longer profitable and shouldn’t be considered in determining railway profits. "The fair thing is to express earnings as the percentage of gross receipts left after operating expenses are paid,” he says. "When you do this, the railways make a profit of seven or eight percent on their gross income, which isn’t too bad. It’s better than the trucking industry can do. Our net is under five percent of gross income.”

And Magee insists the railways are blaming trucks for declining freight revenues that have other causes. He produces the railways’ own statistics to show that, currently, the railways are suffering from a slowdown in the movement of iron and steel products (sheet, bars, pipes etc.), a class of freight notorious for its fluctuations. "The drop in manufactured products now being carried by the railways is largely in steel,” Magee says. "And this is a product trucks rarely carry, so they can’t blame us for that.”

Magee also argues that the railways’ complaint that they are shackled by government regulations and not free to compete on equal terms with trucks is a myth. "They are free to slash rates wherever competition demands, and they are doing it all over Canada,” he says. "Trucks are competing not on the basis of rates, anyway, but with better service. Over seventy percent of our shippers say they use trucks because of quicker, better, door-to-door service, and not to get lower freight rates.”

As evidence that railways are free to compete unshackled with trucks, Magee points to the big slash in freight rates that railways made last fall for goods moving on the Montreal-Toronto run. The rate cuts, only for commodities that were being hauled by truck, ranged from eleven to fifty-five percent. But in spite of this, railway spokesmen point out they are not free to put in lower rates everywhere that local competitive situations warrant it. The reason is that rate cuts in one area can always he challenged by shippers in other parts of the country and if the Board of Transport Commissioners decides that it amounts to "unfair discrimination,” the board can order that all shippers so affected get the benefit of the same rate. For example, truck competition might demand a cut in rail freight rates on sugar beets moving to southern Ontario refineries and the cut might allow Ontario sugar to reach Manitoba and sell more cheaply there than sugar from Alberta refineries. The Alberta refineries, if they could prove "unfair discrimination,” would be entitled to the same cut rate, although there might be no truck competition there at all. Because of situations like this the railways sometimes find that a rate cut on one route has to be made general across the country.

But even their competitors agree on one or two things: the railways aren’t as well off as they used to be and their well-being is closely tied to rates. Chief Justice Gordon Sloan of British Columbia, when arbitrating union demands last winter, put the blame for the railways’ economic plight on low grain rates. A month or two after Sloan’s report, Hon. W. F. A. Turgeon, who recently investigated the trucking and railway dispute,said: "Our railways are in a very adverse financial condition . . . The most striking development during the last few years (in the transportation industry) is the growth in size, efficiency and prosperity of the trucking industry, on the one hand, and, on the other hand, the great deterioration to be seen in the financial position of the railways.”

Where are the solutions—granted that the national interest calls for a solution?

The railways are already fighting back strongly with improved services and operating economies wherever they can implement them.

Two years ago Canadian railroads were about one quarter dieselized; today dieselization of locomotives is more than half completed, and in another few years the romantic old "iron horse” with its picturesque clouds of steam will be a museum piece. Operating costs for diesels are about half those of steam locomotives. Diesels require only two hours of servicing out of each twenty-four; steam locomotives need eight hours. Freight diesels can haul about fifteen more cars per train than steam engines and they have speeded freight schedules between eastern Canada and the Pacific coast by about twenty-four hours.

One serious drawback to the use of diesels in Canada was that originally they couldn’t produce the heating required for passenger trains in Canadian winter weather. Electrical heating units on diesel locomotives have overcome this problem and now Canadian railroads are also dieselizing their main passenger runs.

By using diesels, CNR and CPR clipped up to fifteen hours off the three-to-four-day Montreal-Vancouver run when they put their sleek new long planned and much ballyhooed passenger streamliners into transcontinental service last April. Besides faster service, the new transcontinental trains introduce many swank and luxurious innovations as CN and CP go all out in a battle to recover some of the transcontinental passenger business that has been shifting to airlines. The new trains boast cocktail bars, wall murals, music at the flick of a switch, family-size bedrooms and snack bars for cheaper meal service. CPR’s gleaming silver and red "Canadian” has double-deck lounge cars with the top deck a sight-seeing dome of glare-proof glass. All told, the two railways have forked out close to one hundred million dollars to put the streamliners into service, and it looks like the gamble is going to pay off, for within a few weeks of the maiden runs the new passenger trains were booked up heavily with reservations into late summer, in the biggest upsurge in transcontinental passenger business since the war. Railway officials have no delusions about the streamliners being a cure-all for their economic ills. They expect to keep right on losing money on passenger service. But they are forced to provide passenger trains anyway, so the more passengers they can attract the less they will lose on the deal.

“Find My Steel Pipe”

In several of the country’s main freight yards there is now two-way short-wave radio communication between the yardmaster and his switching locomotives, which speeds up yard switching and the assembling of freight trains. On many busy freight routes teletype circuits, tape recorders and automatically sorted punch cards provide a car tracing system that will locate a particular car or shipment in a few minutes. Until a few years ago freight cars would sometimes be "lost” for days at a time, much to the annoyance of shippers who might be waiting for what the car carried. Recently an irate dealer in Windsor called the CP freight office there. "Get tracing my carload of steel pipe,” he said. "I need it and I want to know by tomorrow where it is.” He was asked to hold the line;, and in three minutes he was told, "Your pipe just left the St. Luc yards in Montreal forty minutes ago.” Up-to-the-minute reports like this and tight scheduling permit manufacturers to keep supplies flowing in and eliminates the cost of warehouse stockpiling.

In western Canada CPR provides a co-ordinated truck and rail service, using trucks on short hauls where they are cheaper and faster, or as a feeder service to rail shipping points.

But these developments, though helping out, do not get to (lie root of the railways’ financial troubles the freight rate structure in which cost is virtually ignored in rate setting.

One suggested solution has been that the CNR and CPR be forced to amalgamate so that present duplication of railway service is eliminated. They have been forced for many years to combine certain operations for the sake* of economy—the pooling of passenger trains, for example but Canadian governments have always opposed complete amalgamation. The government has always felt that a competing privately owned railway is essential to maintain efficiency in the government-owned CNR and to serve as a free enterprise "yardstick” for determination of rates and regulations.

Another suggestion is that the CNR at least should not be expected to pay its way. It started in 1923 as a hodgepodge of railways that had become bankrupt, in fact if not in law, but since these railways were essential to the regions and industries they served, the government couldn’t let them stop operating. Every once in a while to this day the CNR gets another nonpaying rail line tossed into its lap. In 1949 it inherited seven hundred miles of run-down, narrow-gauge railroad in Newfoundland which had had a long history of losses and indebtedness. In 1950 it was forced by act of parliament to take over the one-hundred-and-thirteen - mile Temiscouata Railway which runs from Riviere du Loup, Que., to Edmundston, N.B. The Temiscouata had not been profitable for sixty years but it serves an important agricultural and lumbering region and the government decided that it was in the national interest to keep it operating. Permission from the Board of Transport Commissioners to abandon branch lines is often difficult to obtain, even when heavy losses are proved, for abandonment usually puts a hardship on communities served. The CNR this year was permitted to abandon a forty-mile line between Falding and Scotia in north-central Ontario, but only after proving that it had been losing fifty thousand to one hundred thousand dollars a year for many years.

In view of the lines it keeps in operation at a loss and the freight hauled, also at a loss, it has been argued that the CNR is doing a national job and the nation might as well pay through taxes as through freight rates. This argument that the CNR shouldn’t have to pay its way is strongly opposed by CNR President Donald Gordon, whose all-absorbing ambition since taking over the CN reins in 1950 has been to make it a paying concern. "There is no substitute for the profit and loss account as the test for business fairness and efficiency,” Mr. Gordon told me recently. "If we could run the CNR without reference to cost we would put all other transportation companies out of business in no time. The competitive element would disappear. There would be nothing left to keep us on our toes.”

As for further freight rate increases on manufactured products that are already paying far more than their actual transportation cost, the Board of Transport Commissioners in a recent report had this to say: "We are now more strongly than ever of the opinion that the long succession of freight rate increases . . . has brought about a loss of traffic by the railways to competing modes of transport . . . We are convinced therefore that means other than rate increases will have to be found in the future if the railways of Canada are to be maintained in a healthy operating position.”

If the high-paying classes of freight cannot pay more, can rates be raised on the vast volume traveling at less than cost? The railways feel that basic commodities like grain, gravel, coal, ores, pulpwood and lumber should be paying higher freight rates, but there is general agreement that these products can never be charged their true freight cost if Canada is to retain its present large export business. Grain now moves from Saskatchewan to Halifax for thirty-nine cents a bushel. It might be able to pay a higher freight rate and still compete on world grain markets, but it could never pay its full freight cost of a dollar ten a bushel and keep Canada in the world grain business.

What about denying the use of public highways to the commercial truckers? The railways oppose this suggestion as strongly as the truckers do. "There are certain types of freight that can be moved on short hauls more economically than railways can do it,” says Donald Gordon. "Trucks have a place in our transportation scheme, and the public should be entitled to choose the type of transportation that best fits each individual’s needs.”

Should trucks be restricted to short-haul work? Or, if not this, should trucks be brought under regulations of the Board of Transport Commissioners and their rates forcibly adjusted so that trucks and railways could compete on an equal basis? "Over-regulation will not cure a situation that is the outcome of too much regulation already,” Donald Gordon says. And his CPR counterpart, President N. R. Crump, expressed the same idea: "We are not asking for more regulation of trucks. What we would like to see is a lightening of regulations on railways that would allow us to compete with trucks on the basis of true costs.”

In other words, what the railways want is more freedom.

A main complaint of railways is that in many cases they cannot now change rates or schedules to meet truck competition without first applying to the board and waiting months for approval. Often, by then, the trucks have cornered the business.

Under a rate-setting method which they call "agreed charges,” the railways may soon get a large measure of the freedom they seek. The question of agreed charges was debated at great length before the one-man Turgeon royal commission last fall.

An agreed charge is a contract between a railway and a firm, in which the railway agrees to haul the firm’s product at a lower freight rate in return for a commitment from the firm that it will ship a specified and usually fairly high portion of its product by rail. Canadian railroads have been permitted to enact agreed charges since 1938 but they argue that their effectiveness is largely destroyed by the requirement that they be approved first by the Board of Transport Commissioners. Often tedious hearings result and it may be six months later before board approval is granted and the agreed charge put into effect. The railways say it’s difficult to get shippers to enter into agreed charge contracts under these conditions. Truckers, in contrast, can change a freight rate by picking up a telephone.

In his report last winter, Hon. W. F. A. Turgeon recommended that an agreed charge go into effect after a waiting period of twenty days and not be delayed by lengthy hearings of the board.

"This is what we want;’’ says Donald Gordon, "freedom to put a new rate into effect and do all the arguing about it afterward. It is just one of the competitive weapons we need, but an important one.”

Truck owners, meanwhile, are fighting strenuously for retention of the old red-tape-cluttered system of agreed charge rate-making. They argue that wide-open agreed charges are "a reversion to the law of the jungle in transportation.” "It could destroy Canada’s motor transport industry,” declares G. M. Parke, former president of the Canadian Trucking Associations.

The railways see it differently. "Canada must recognize,” says Donald Gordon, "that the railways are now in a competitive business. We are no longer a monopoly. We want the competition; there is a place for it in Canadian transportation. But we must be permitted to meet the competition on fair and equal terms, not on terms designed for monopoly conditions.” ★