Canadian National Railway Co. president Ron Lawless perches—when he is in Toronto—in an office near the CN Tower, the city’s best-known landmark. Wearing a conductor-blue suit and a train tiepin, he is physically only a few blocks away from the station where he began his career more than four decades ago as a railway express clerk. But now, his office overlooks a tangle of tracks that have been torn up as part of Canada’s largest redevelopment, which involves both CN and its railway rival, Canadian Pacific Ltd. The $2-billion scheme, which includes office and residential buildings plus a new domed stadium, underscores the fact that railways are as much in the real estate business as they are in the business of moving freight. And the future of CN—one of Canada’s largest Crown corporations—is very much of interest to you and me, its indirect shareholders.
Few Canadians realize that CN is very nearly the world’s biggest railway, with $7 billion worth of assets—equivalent to $268 for every man, woman and child in the country. Perhaps the Soviets—with an even more massive piece of real estate to service—have a larger rail system. But it is doubtful. CN is one-third larger than CP in terms of track mileage and besides owning prime real estate, it has mineral rights to more than 3,100 square miles of property across Canada, an area larger than Prince Edward Island’s 2,264 square miles. CN also owns 32,000 km of main-line track—enough to circle the globe more than twice.
But railways are more than just a collection of assets. They are the single-most important type of infrastructure needed to develop a country. This is why they are so much a part of history and lore. A railway system is the skeleton around which new development forms, or old development clings. Towns and villages exist only because of the railway’s existence, which is why the closing of a line is a highly emotional issue fraught with political peril. But despite public opposition to closures of many of its routes and stations, CN, like
Despite excess baggage, CN chugs along, one of the few winners among Ottawa’s crown jewels
railways everywhere, continues to shrink.
It is surprising then, how this monolith still ranks as one of Canada’s most profitable Crown corporations, especially since it was rescued from near-bankruptcy in the midst of the Depression. Since the first cash infusion in 1938, the federal government has cancelled more than $1 billion of its debt. No longer an orphan after two more cash infusions by Ottawa— once in 1952 and another in 1978—it is now one of the world’s most profitable railways. Said Lawless: “We earn between eight per cent and nine per cent return, while the average in the United States is less than five per cent.”
Since the last infusion of $800 million in 1978, CN has had to pay Ottawa 20 per cent of its profits annually. Last year, CN earned a profit of $120.6 million, and this year, Lawless says, the after-tax profit figure is $282.7 million. Added Lawless: “As for dividends, we have paid our shareholders about $235 million since 1978. We are not a drag on the feds.”
CN’s robust earnings are surprising, considering the fact that Canada’s railways were deregulated one year ago, and both CN and CP are burdened by featherbedding. But a landmark decision on March 24 by the Federal
Appeal Court may change the labor situation. The court ruled that the railways could drop cabooses, which allowed them to replace the end units and use computers to monitor brake pressure and other functions. The decision will allow CN and CP to run computerized freight trains with two crew members instead of four.
Railways shoulder political burdens too, but this is also changing. Last year, Ottawa finally allowed CN to withdraw rail service from Newfoundland and agreed to build $800 million in new highways. CN lost $45 million during the final nine months of operation last year in Newfoundland and $300 million over the past decade. Another drag on earnings has been government-supported grain shipments. Ottawa pays $700 million a year to the railways in grain transport subsidies, but Lawless has been pushing to have them replaced with subsidies paid directly to farmers. He argues that this would allow the railways to cut back on the number of points where they have to pick up grain. Faced with higher rail transport charges, the farmers would have an incentive to transport grain longer distances by truck to bigger grain elevators.
Lawless says that the present web of subsidies paid directly to the railways has resulted in a huge overcapacity. About 90 per cent of CN’s shipments travel on one-third of its trackage, nine per cent on another third and one per cent on the rest. In other words, the railway could shut down two-thirds of its operations and affect only 10 per cent of its business. And while governments subsidize Canada’s railways, they also support their competition— truckers and airlines—by building and maintaining roads and airport facilities. The result is that, since the mid-1950s, the percentage of freight moved by rail has dropped to 30 per cent from 70 per cent of total shipments. Of course, the pie has grown considerably larger, and railways are handling 2VÍ times more volume than they did 30 years ago.
As for the Free Trade Agreement, Lawless said that if the deal works as planned there will be more business flowing north and south, in addition to east and west. CN is poised to profit because it owns three sizable U.S. railways serving the Midwest and New England and has exchange arrangements with others. But despite its enviable position, Lawless says that privatization of CN’s rail operations is not in the cards at the moment. Said Lawless: “All nonrail assets are candidates for privatization. But there are only a couple. We are in the real estate business and are moving our rail services out of downtown Toronto and Edmonton. We also have our oil and gas exploration company—it made $3 million last year. But it will sit right there until the time is right and oil prices rise.”
Clearly, CN’s future is a paradox. It must shrink to grow. It must shed operations in the East and grow in the West. Already 70 per cent of its revenue comes from journeys that start or end in Western Canada, yet, like CP, its head office remains in Montreal—perhaps another form of featherbedding. But despite such excess baggage, CN keeps chugging along, one of the few winners among Ottawa’s crown jewels.
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