SPECIAL REPORT: SHIFTING TRACKS

The End of the Line

Faced with new market pressures, Canada’s two national railways are reconfiguring the ‘national dream’

TOM FENNELL April 18 1994
SPECIAL REPORT: SHIFTING TRACKS

The End of the Line

Faced with new market pressures, Canada’s two national railways are reconfiguring the ‘national dream’

TOM FENNELL April 18 1994

When Lord Strathcona drove the final spike into the CP Rail line at Craigellachie, B.C., in the Eagle Pass near Kamloops on Nov. 7, 1885, Canada was finally welded together with a single ribbon of steel. After years of heated debate and bouts of near bankruptcy, the new nation, led by Sir John A. Macdonald, had finally overcome the obstacles of its own geography and political fragmentation to construct an east-west link binding it together economically and emotionally. But 108 years later, the “national dream” is being recast in the Montreal head offices of CN North America and CP Rail System.

Under a proposal that will be sent to Ottawa this summer, CN and CP plan to rationalize their operations between Winnipeg and Halifax and to sell off or abandon thousands of kilometres of rail line. Once the two railways merge in the east, analysts say that they will probably repeat the process in Western Canada. In the end, hundreds of communities will lose their vital links to the national railway network. “It means the eventual end of the railway,” said Theo Stol, national vice-president of the Canadian Brotherhood of Rail Transport and General Workers. “It will be a disaster.”

Strathcona pounding the last spike in the CPR line: knitting the country together with a single steel ribbon

The railways insist that such a major overhaul is imperative for their survival in the new North American economy, which is configured on a north-south axis. CN and CP have already made massive investments that will allow the railways to speed freight from Western Canada, Ontario and Quebec to Chicago—the continent’s primary rail hub. As they do, servicing the remote corners of Canada becomes less feasible for the railways. “In the old days, freight was kept in Canada as long as possible,” said John Heads, director of the Transport Institute at the University of Manitoba in Winnipeg. “Now, there are increasing competitive pressures to cross the border earlier.” But as the railways move quietly towards a newly configured future, Edward Abbot, executive secretary of the Ottawa-based Canadian Railway Labor Association, is calling upon Ottawa to hold a national inquiry into the future of rail transport. “If something has to be done,” said Abbott, “it should not be left to the whim of the railways.”

The tough measures that lie ahead are based upon much more than a whim. Executives from CP and CN insist that only by merging the two railways from Winnipeg to Halifax will they be able to reverse the staggering $2 billion in losses that they have incurred on their operations in Eastern Canada since 1988 (page 53). And without such drastic cuts, William Stinson, chairman and chief executive officer of CP Ltd., the parent company of CP Rail, says that Canada’s national railways would probably not survive at all. Furthermore, the railways’ plan has the full support of Transport Minister Doug Young, who told Maclean’s that the era of a rail line running through almost every town in Canada is over. Said Young: “The 21st century approach to Canadian identity has more to do with maintaining medicare than keeping a railroad running through everyone’s backyard.”

The push to merge, sell off or abandon track will not end in Winnipeg. Under the terms of the Uruguay Round of the General Agreement on Tariffs and Trade, subsidies that the federal government now pays to move grain and other agricultural commodities from the prairies will likely be phased out, Young said. As those subsidies— which will drop by $160 million to $560 million in 1994—disappear, Young said that the railways will also have to change the way they operate in Western Canada. And even if the subsidies remain, he added that Canadian taxpayers, who are already shouldering a $506-billion federal debt, are no longer willing to underwrite freight shipments, or for that matter, Via Rail Canada Inc.’s money-losing passenger service. Said Young: ‘The Canadian taxpayer is telling me loud and clear that they are sick and tired of picking up the tab.”

In fact, draft legislation that died with the previous Tory government would have allowed the railways to abandon thousands of kilometres of track in Western Canada in 1995. And Maclean’s has learned that a subsequent report prepared by the Grain Transportation Agency in Winnipeg, which also endorses rapid abandonment, is now on Young’s desk. Said Leroy Larsen, president of the Regina-based Saskatchewan Wheat Pool, the largest agricultural commodity exporter in Canada: “We could see one railway in the future.”

The prospect of losing their railways is a devastating thought for many small-town mayors and their constituents. For decades, the town of Capreol, just north of Sudbury, Ont., has been a critical railway junction where freight trains bound for southern Ontario and

Eastern Canada were assembled. Ten years ago, 1,400 people worked out of Capreol for CN, but that figure is down to 750 and dropping rapidly. Now, CN may abandon or sell its line through Capreol altogether. That troubles town Mayor Frank Mazzuca, who has seen the population of his community shrink from 4,600 people to 3,800 in the past five years. “We’ve spent billions of dollars building the railway, and now they want to dismantle it,” said Mazzuca. “But it’s not just Capreol, it’s Canada they are dismantling.”

In fact, the railways could dismantle the national railway link altogether. Both companies are already moving an increasing amount of eastbound freight south of Lake Superior through the northern United States to Chicago. Iain Angus, a former NDP MP who is now a transportation consultant based in Thunder Bay, Ont., said that moving Canadian freight through the United States is cheaper because

labor costs and taxes are far lower. And as the Canadian economy continues to shift to a north-south axis, the railways will no longer have an incentive to keep their lines from Winnipeg through northern Ontario operating at all (page 54). Said Stol: “We see all those lines in northern Ontario disappearing.” Via Rail employees are all too aware of the pain caused by massive cuts in service. The Tory government, citing lack of ridership, cut Via routes in half in 1990. And Young predicts that more cuts are now likely because the federal government is reducing Via’s annual subsidy to $250 million in fiscal 1996 from $350 million in its 1993 fiscal year. After that point, Young said that Via will have to operate without government handouts. “It’s clear that Via cannot maintain its existing level of service without subsidies,” says Young. “So it is going to get tougher for them.”

Last November, Via announced that it was already preparing for a leaner future by cutting 250 jobs by the end of this month. The cuts will save the railway $15 million over the next 12 months, and Terry Ivany, president and chief executive officer, believes that Via must make even deeper cuts if it is to survive. Said Ivany: “Our success in this area will be crucial to Via’s long-term health.”

panies operate on small portions of track that hook up with the national system. Because their labor and operating costs are lower, they can make a profit where CP and CN failed. Through that process, communities would also maintain their critical links to the railway. “Short liners are part of the answer,” said Stinson. “The United States has successfully built a short-line network.”

Mergers, short-line railways and massive rail abandonment certainly were not what Lord Strathcona envisioned when he drove in the last spike in the CPR. From that day until Jan. 30,1923, when CN, one of Canada’s first Crown corporations, was created, CP ruled Canada’s transcontinental route. For its part, CN, known as the “people’s railway,” was launched to take over a number of bankrupt railways, including the Grand Trunk Railway of Canada, which linked Montreal to Chicago and is still a main CN artery today.

Now, with the proposed merger, the railways are on the verge of another historic transition. At this point, it is still unclear how the ownership and profits of a merged railway would be shared. CN is by far the larger of the two companies in the east, with revenues of $1.9 billion in 1993 on its eastern operations, compared with CP’s $800 million. As well, CN has spent more than $500 million over the past five years upgrading its lines to accommodate cars carrying doublestacked containers, and is building a tunnel under the St. Clair River between Sarnia, Ont. and Port Huron, Mich. When it opens in 1995, the $200-million tunnel will allow CN to move the larger cars to Chicago without interruption. Said CN president and chief executive officer Paul Tellier: “The fact is that our business in the east is better and we are significantly bigger.”

While any agreement would have to reflect CN’s larger position, Stinson said that such a merger is essential if the two railways hope to escape the type of financial crisis currently plaguing the two national air carriers. For years, both Air Canada and Canadian Airlines International Ltd. have been locked in a combative struggle for survival and both have suffered financially as a result. But Stinson believes that the railways can avoid similar problems if they agree to merge in the east. Said Stinson: “We can make a viable national railroad without government funding.”

The pressure to merge the two railways has also been fuelled by growing competition from the trucking industry, U.S. railways, plummeting revenues, high taxes and labor costs. As a result, Stinson and Tellier have been forced to

As the major freight railways retreat, however, another form of railroading known as short-lining is emerging (page 55). The com-

transform their railways from Canadian institutions into aggressive North American firms. They have had little choice. William Waters, associate professor of transportation at the University of British Columbia in Vancouver, says that as the Canadian and U.S. economies integrate under the North American Free Trade Agreement (NAFTA), transportation flows are rapidly shifting to a north-south axis. “The railways are not leading this,” said Waters, “they’re being dragged along by economic forces.”

The railways’ continental aspirations are already reflected in new names and corporate strategiés. In 1990, CP Rail became CP Rail System and, more recently, it incorporated the U.S. flag into its promotional logo. A year later, CN formally changed its name to CN North America. To compete in the U.S. market, CP acquired the Soo Line in the American midwest in 1989, giving it access to a market of 66 million people within a 650-km radius of Chicago. In 1991, CP paid $30 million for the bankrupt Delaware & Hudson railway, linking its Canadian operations to major ports and markets in New York City, Philadelphia and Washington. Over the same period, CN, which already had an extensive U.S. rail network, entered into a number of agreements with U.S. rail and trucking firms to give it rapid access to virtually every major American city and to Mexico. ‘We are North American companies,” said Tellier. “If we had a level playing field, we could compete successfully with U.S. railroads.”

TRACKING THE RAILWAYS
CN CP
Revenues (1992) $3.5 billion $3.2 billion
Losses (1992) $893.7 million $287.2 million
Employees 29,000 24,000
Track (route kms.) 32,000 kms 31,000 kms

To level that playing field, Stinson and Tellier both told Maclean’s that they want the federal government to scrap the complicated mix of boards and tribunals that currently regulate Canadian railways. In their place, they propose that Canada should adopt the more streamlined U.S. regulatory system, which allows American railways to enter and abandon markets with greater ease. In Canada, railways are forced to maintain moneylosing routes, pending government approval for cuts—and that can often take years. Young supports that call for a simplified system: We’re trying to beat our way out of the 19th century. I want the transportation system in Canada to work.”

FORGING A NATION

How the new Liberal government contends with the transformation of Canada’s railways will also reveal the extent of its commitment to the integration of Canada into the North American economy under NAFTA and the 1989 Free Trade Agreement. So far, the railways have been given a green light to proceed with their plans. Tellier, who must have the approval of the federal cabinet before he can merge CN’s eastern operations with CP, said that he has had a number of meetings with Young and was told to continue his negotiations. Said Tellier: “Young has told us to do what we think is in the commercial interest of the corporation in order to balance the balance sheet”

In the railways’ push to balance their books, Young said that CN and CP may have no choice but to drastically cut both track and people. He said that if the railways are going to compete against their U.S. counterparts they will have to build a more streamlined national rail service—even if that means only one railway emerges. Nostalgia for the romantic era of railroading, which Young calls the “Pierre Berton” vision, simply will not be part of any future equation. “There is no alternative to an efficient railway system from coast to coast,” said Young. “But it’s going to require some pretty dramatic changes to get there.” The pressure to make such changes to Canada’s railway network has been building since 1980 when Washington enacted the Staggers Act. The act, which deregulated U.S. railways, drastically reduced the cost of operating railways in the United States by allowing them to abandon markets and negotiate their own freight rates. Since then, it has become cheaper to move goods bound for Canada on American railways. Harry Gow, a University of Ottawa instructor and vice-president of the Ottawa-based consumer group Transport 2000, said that most of the freight being shipped to Central Canada from Asia now enters North America at Seattle. From there, it is moved by rail to Chicago and then north to Canada. In the process, both of Canada’s railways have been robbed of critical revenues that they need to maintain their vast networks. ‘Traffic is being siphoned off into the United States,” said Gow. “As a result, many lines in Canada are now simply shadows of their former selves.” Canada’s railways have also been hurt by property and fuel taxes that are higher than those paid by their U.S. competitors. In theory, the provinces use the revenue from fuel taxes to build and maintain their highway systems. But the railways argue that because they maintain their own roadbeds they shouldbe exempt from paying them. In some cases, Gow said that a single railway bridge in a community can carry a property tax bill of more than $100,000. And in 1992, CN and CP jointly paid $225 million more in property and fuel taxes in Canada than they would have paid if they were operating in the United States. “The railways are helping to pay for the deficit, highways and airports,” said Gow. “But they are getting damn little help themselves.”

The railways are also trying to bring their labor costs into line with their U.S. counterparts. CN and CP have reduced their workforces by more than 8,000 people over the past 18 months, and thousands more workers will go when the railways merge in the east. Furthermore, Tellier said that he wants a different kind of employee to emerge from the latest round of labor talks now under way in Montreal. Canadian railway workers are currently represented by more than a dozen unions that prevent workers from working outside narrow job classifications. Under existing contracts, a diesel mechanic, for example, is not allowed to change a locomotive’s headlight. By contrast, Tellier noted, under deregulation in the United States, American railway workers, who are also largely unionized, have become much more flexible. “I’m asking for the elimination of trade barriers in the shop,” said Tellier. “We think that about 80 per cent of the work could be done by a highly skilled composite employee.”

    MOVING TO NORTH-SOUTH
  • CN and CP have a total of 7,800 employees in the United States: CP has 5,000 and CN has 2,800.
  • CP owns 10,400 kilometres of track in the United States and CN owns 2,358.
  • The Sarnia Tunnel, linking Detroit and Sarnia, is slated to open in July, 1995, to provide more efficient access to the U.S. market for CN.
  • The tunnel, 1,868 metres long, will cost $200 million to construct.

Predictably, the railway unions are fighting Tellier’s proposals and they want the federal government to act as the referee. Canadian Brotherhood vice-president Stol said that if CN and CP are allowed to unravel union contracts and merge in the east it will devastate the industry. “We’re talking about thousands of jobs disappearing,” said Stol. “It means the eventual end of CN railway.”

Individuals are also rallying to try to stop the merger. John Colasimone, a CN purchaser, who heads the Capreol Save Our Rail Committee, said that in an attempt to keep the trains running through the town, his group is lobbying the provincial government to lower diesel and property taxes. If the government does not do something, he said, Capreol is doomed. “We already know that the CN line through Capreol will probably go under the merger,” said Colasimone. “Ifs pretty scary.”

As CN and CP continue their negotiations, the push to cut or short-line track in Eastern Canada is already well under way. In 1993, the railways carried 90 per cent of their freight traffic on only 40 per cent of their lines. The cost of maintaining surplus track has been debilitating. In fact, in 1992, CN and CP were among the largest railways in North America, but in terms of revenue generated on a per mile-of-track basis, they ranked among the worst on the continent. Norman Bonsor, a transportation economist at Lakehead University in Thunder Bay who recently completed a major analysis of both railways, said that CN and CP have no choice but to cut track. “Canadian railroads are in an enormous mess,” said Bonsor. “In order to survive, they have to rapidly abandon a lot of track.”

In 1992, in one of the largest cutbacks to date, the National Transportation Agency gave CP permission to abandon 650 km of line running from Sherbrooke, Que., to Saint John, N.B. And last November, the agency gave the railways permission to consolidate their operations on 400 km of track between North Bay, Ont., and Ottawa. Under the proposal, CP will abandon most of its line and both railways will run on what is now CN track. And they will consolidate their maintenance crews, operating staffs and switching yards.

Taking the politically risky step of abandoning their main lines through northern Ontario could also save the railways millions of dollars. Certainly, economic forces are pulling the railways in that direction. In 1992, CN and the Burlington Northern Railway of Chicago signed an agreement linking Western Canada to Chicago on Burlington’s line running south from Winnipeg. Since the deal was signed, new freight traffic moving on the line, including potash, lumber and coal has more than doubled.

Indeed, as the volume of traffic from Western Canada to Chicago increases, the economic viability of the CN and CP main lines in northern Ontario decreases. Consultant Angus, who has been hired by the Ontario government to assess public opinion about the merger along the northern routes, says that the future is bleak in the region. And he added that within five years of the eastern consolidation, so much traffic will be flowing east and west through the Sarnia tunnel and Chicago that the railways will abandon their northern lines altogether. And to add insult to injury, Angus says that the head office of the merged company will likely be in Chicago. “CN has already started to lay people off in the north,” said Angus. “And most people think it is because of the merger.”

In March, in an attempt to stop the rush to abandon lines across Canada, Transport 2000 called for a moratorium on further rail cuts until CP and CN have presented the government with a detailed plan outlining how they intend to merge their operations. While the government hopes that short-line and regional railways will eventually replace CN and CP operations in some parts of the country, that prospect does little to mollify the mayors of such Canadian cities as Saint John and Thunder Bay. The deputy mayor of Saint John, Shirley McAlary, said that the loss of railway service would starve that city’s harbor of potential shipments. Said McAlary: “We have to have a railway or we’re in serious trouble.” For his part, Richard Charbonneau, general manager of the municipally run Thunder Bay Economic Development Corp., noted that unless the questions of taxes and labor costs are addressed, the railways will be hardpressed to maintain their services in his city. And that would undermine Thunder Bay’s position as a major transportation centre. Added Charbonneau: “There is no question that both lines are at a competitive disadvantage.”

Rail cutbacks would also hurt primary re source industries in remote parts of Eastern Canada. Angus, who represents a number of corporate clients in the Thunder Bay area, said that lumber and pulp and paper companies need the railway to haul logs and wood chips hundreds of kilometres to their mills in Thunder Bay. He predicted that many mills will close if the railways disappear. Said Angus: “If the communities go out of business, the federal government is going to have to deal with ghost towns.” And with the spectre of Sir John A. Macdonald’s dream as well.