Since the Canada Transportation Act came into force in 1996, the country's rail industry has undergone a dramatic transformation, with modernisation and restructuring at the two big national operators matched by a mushrooming of small and medium-sized feeder railways

Bob Ballantyne is President of the Railway Association of Canada, and Roger Cameron is General Manager, Government & Public Relations

THIS YEAR, the Canadian government is to launch a review into the effectiveness of the Canada Transportation Act, which came into force during 1996. But it is already clear that the Act has succeeded in its aim of ushering in a new era for the country's railways. Over the last three years the industry has undergone a dramatic transformation, and more change is hurtling down the track.

Employment downsizing, investment in more productive equipment and advanced technology, and better asset utilisation have been the keys to the transformation. It is far too soon to say whether the government will make any significant changes to the law following the review, but even if change does come the railways will have a couple more years to reshape their networks.

The CTA has clearly assisted the railways in their efforts to become more productive. For starters Canadian National, once the archetype of government-owned enterprises, has become a darling of North American stock exchanges. CN shares now trade at about three times their original value when issued in 1995. The Montreal-based carrier, with a former civil servant in the president's suite, is poised to take over Illinois Central to create a Y-shaped network linking the Atlantic, Pacific and Gulf coasts. And an alliance with Kansas City Southern announced last year will extend that reach even further, right into Mexico.

Meanwhile Canadian Pacific Railway, operating from its new home in Calgary, has invested almost C$2bn in new locomotives and intermodal yards since the Act was passed. It has also seen a revival of traffic in eastern Canada, thanks to a determined effort by its subsidiary, Montreal-based St Lawrence & Hudson Railway, and aggressive short line partners in New Brunswick, Quebec, Ontario and the northeast USA.

Freedom to modernise

The railway revival has probably exceeded the wildest hopes of those who drafted the 1996 Act. One of their goals was to correct a perceived defect in the 1986 National Transportation Act to make sure that CN could be successfully privatised.

The old act, brought in by the former Conservative government, provided competitive protection for shippers and deregulated freight rates for most commodities. But it left the carriers with little room in terms of cutting costs to boost their profitability so they could invest in new equipment and technologies.

The result was poor earnings by both CN and CPR through the late 1980s and the early 1990s while their American competitors were solidly in the black and steadily reducing their operating ratios. CN and CPR even proposed a merger of their eastern operations in the early 1990s to try to stem their losses.

With the advent of the 1996 Act, the railways were able to speed up the long-overdue restructuring of their operations. In 1988 there was 82000route-km in Canada. By the end of 1997, that figure had been whittled down to 64000 km.

Faced with a decline in freight rates in real terms over the last few years, growing truck competition and increased productivity by American railroads, the Canadian freight railways are under continual pressure to lower their costs and become more efficient. Following the changes brought about by the 1996 Act, operating ratios quickly began to close in on the levels achieved by the American roads. Both big players have cut their ratios down to around 80%, but they still haven't caught up with the major American carriers - whose tax burden is 50% less than their Canadian counterparts.

In addition to the reduction in their network size, CN and CPR have also slashed their workforces. The number of railway jobs in Canada dropped from 75000 in 1988 to 46000 in 1997. Perhaps the most dramatic downsizing has been at CN, where the number of employees has halved from 34000 in 1993 to just 17000 today.

While the pressure to improve won't go away, the railways have already achieved some positive results. Assisted by a strong economy, they began to increase earnings. From 1988 to 1997 CN and CPR increased traffic by 63·7million tonnes. Over the same decade their wagon fleets fell by 13%, their loco stock by 11%, and their network length by 36%. In 1997 Canada's railway industry handled a record 304·2 billion revenue tonne-km giving a net income of more than C$1bn, the best results for a decade.

Building for the future

Increased earnings have also justified major investment which was long overdue. Both companies were operating some of the oldest locomotives in North America, because of an imbalance between Canadian and American depreciation rules. But they have added a lot of muscle in the last few years.

CN has acquired about 150 high-horsepower diesel locomotives to replace almost 500 older units. CN is sticking with DC traction motors, but CPR has opted for AC drives. With 262 new AC diesels coming mostly from General Electric, CPR has in effect renewed 40% of its loco fleet. CPR President & CEO Rob Ritchie says the move to AC locomotives is as significant as the switch to diesels from steam in the late 1950s. He feels the AC locos perform especially well under winter conditions; 'they pull more weight more efficiently.'

CN and CPR also know they have several years of labour peace ahead. New contracts with all the unions will be in force until the end of 2000, a major improvement over the nasty strikes that disrupted services in 1995. But over the next year and a half, the companies must start to make good on their frequent promises to improve their labour relations, and begin treating the unions as partners rather than opponents.

CN President & CEO Paul Tellier admits that labour relations have not improved as much as he would like. 'We have made a lot of progress on that front, but I wish we would have with our unions a genuine partnership and that the dialogue would be ongoing.'

Tellier also thinks the railways need to focus more on relations with their customers. He feels that the industry suffers from a lack of entrepreneurship, and could learn lessons from other business sectors such as telecommunications. 'We're still trying to catch up. The customer focus is not what it should be and therefore we are not increasing our market share the way we should as compared to other transport modes.'

Tellier has proposed the idea of a 'bill of rights' for shippers, that would set out clear obligations and expectations for both the carriers and the customers. Meanwhile CPR has instituted a customer satisfaction index, to gauge how well its service stacks up against customer expectations.

Short line revolution

However, for a growing number of shippers the main contact is with short lines that have taken over the line that runs into their plant. CPR's Ritchie says the growth of short lines is the 'most astounding partnership development of all. I must say how impressed I am to see some of the things they are doing. Such strong business development. One new railway is being created in Canada every month.'

This is another aspect of the CTA that has been highly successful, if little noticed by the government or the public. The act simplified the process of dealing with unprofitable lines, in order to encourage CN and CPR to transfer their marginal operations to new independent operators. After a timid start, both majors have been actively shedding tracks and plan to dispose of even more.

While critics feared a wholesale abandonment of lines across the country, most of the tracks have been snapped up by short line operators. Figures collected by the Railway Association of Canada show that for every kilometre of track that has actually been abandoned since the passage of the CTA, another 6 km has been taken over by a short line. That adds up to 7200route-km transferred to new operators during the last three years.

Locally managed enterprises have sprung up across the country. Short line and regional railway operators have taken over branch lines and secondary main lines from CN and CPR and increased traffic to levels unseen for many years - if ever.

The new breed includes home-brew RaiLink of Edmonton, which has grown from a tiny Alberta grain hauler to become the third largest Canadian railway in terms of mileage operated. It has done well enough in Canada to consider expanding south of the border, according to President & CEO Gordon Clanachan. Besides its own operations, RaiLink is part owner of another successful company, Quebec Railway Corp, which has lines in Quebec, Ontario and New Brunswick. Its newest operation, the Ottawa Central Railway, runs through the national capital.

The well-established American short line industry has also moved into Canada. Among those operating lines from Nova Scotia to British Columbia are RailTex, Iron Road, Wisconsin Central, OmniTrax and Rail America. Genesee Rail One of Montreal is half-owned by US-based Genesee & Wyoming.

Short line executives are optimistic about the potential for growth in the future. They contend that what has really changed in their relationships with CN and CPR is that they are no longer considered simply as a dumping ground for marginal lines but as viable operators of secondary main lines and busy branches.

RaiLink President Gordon Clanachan feels the relationship between the majors and the short lines has been very good. 'They are very aggressive in terms of the traffic they are trying to build up. And they have been very supportive of us.. The success of the short lines will see CN and CPR concentrating more and more on main line movements, leaving the pick-up and delivery of much of the freight to the short line partners.

Peter McCarron, President of RailTex Canada, says the short lines have won the confidence of the shippers. 'We have shown them that we can deliver and that gives them a basic sense of security. We have access to CN and CPR's Electronic Data Interchange systems so we can schedule our freight. CN and CPR can concentrate on long-haul traffic. While we bring them the traffic; we're also there to pick up the freight.'

In some cases, groups of short lines have been integrated to create larger regional networks that interchange with several Class I operators. The 1600 km Bangor & Aroostook system in eastern Canada and New England, owned by Iron Road Railways Inc, is a case in point. The network includes the Quebec Southern and the Canadian & American Railroad.

By building two new intermodal terminals, in Montreal and Bangor, Maine, BAR has pushed up its intermodal traffic from 3000 revenue units in 1997 to an astonishing 20000 in 1998. At the same time, the railway is gaining business from an expanded lumber mill and a new wood chip shipping enterprise in Lac Megantic, Quebec. The mill alone could generate up to 2000 carloads a year while the chipping plant chews out 100000 tonnes of chips a year, most of which will be shipped to US destinations.

The marketing manager for QS and CDAC Gabriel Tessier says growth of business on the Bangor & Aroostook has meant a healthy injection of traffic for CPR, which used to own the lines. In the last two years, business has tripled and Tessier thinks there is more to come; 'no customer is too small ... that is key to our marketing strategy.'

In the future, the short line groups are likely to run terminal railway operations at the major ports and take over switching work at major industries. OmniTrax has already won a five-year contract to handle shunting at Vancouver's Deltaport container terminal (RG 2.98 p100).

Further opportunities are possible as CN and CPR continue to rationalise. The two majors may sell off their competing lines between Calgary and Edmonton to a single operator. Other potential sales have been identified in eastern Canada, including Saint John - Moncton in New Brunswick and a number of routes in southern Ontario. However, RaiLink's Gordon Clanachan says the main focus must be getting more traffic on the existing lines: 'we want to grow the business.'

The perils of passengers

In marked contrast to the unheralded success of the short lines is the uncertainty hanging over Via Rail, the state-owned operator of inter-city passenger services. Via has driven up revenue from its 3·8 million passengers to C$200m and cut its dependence on government subsidy to C$170m a year. But that isn't enough to allow the company to renew its ageing fleet of locomotives and coaches. Nor does the federal government have the funds available, so it is looking to the private sector for help.

The government has enlisted Hambros Bank to work with Via and the Transport Department on developing a new long term business plan, which is due to be presented to Parliament in September. The plan is supposed to spell out Via's route network, levels of service, funding requirements, proposals for equipment renewal and the scope for private sector involvement.

This could include franchising out the various passenger train operations as was done in Britain. One option proposed in a report by the House of Commons transport committee in the autumn of 1998 was to split Via's network into three franchises. These would cover the corridor trains between Quebec City and Windsor via Toronto, Ottawa and Montreal, the transcontinental route from Toronto to Winnipeg, Edmonton and Vancouver, and the Maritimes services from Montreal to Halifax, Nova Scotia. The three franchises would share the few 'remote service' trains which Via runs to meet government requirements.

A government spokesman said: 'we're exploring any kind of alternative financing arrangement. That could include franchising, partial franchising, public-private arrangements or selling shares to the public.' Meanwhile Transport Minister David Collenette has called for proposals from private operators interested in taking over any of the passenger routes.

But while Via attracts a lot of public interest, its fate will have little impact on the rest of the Canadian railway industry. Probably more significant in the longer term will be the recent wave of megamergers in the USA. This poses threats and offers potential opportunities for the Canadian freight railways, and CN and CPR will be closely tracking developments south of the border.

La déréglementation change la donne des chemins de fer canadiens

Depuis l'entrée en vigueur, en 1996, de la loi sur les transports, l'activité ferroviaire du Canada a subi de profondes transformations, avec la modernisation et la restructuration des deux grands opérateurs nationaux, face à un développement de petits et moyens réseaux affluents qui naissent comme des champignons. De nouveaux partenariats avec les clients et les salariés ont contribué à l'accroissement du trafic et de la productivité, inversant la courbe tracée par des décennies de déclin. L'opérateur voyageurs Via Rail est toujours confronté à un avenir incertain, le secteur privé étant susceptible de s'investir

Deregulierung verändert das Gesicht der kanadischen Bahnen

Seit das 'Canada Transportation Act'-Gesetz 1996 in Kraft getreten ist, hat die Eisenbahnindustrie dieses Landes einen dramatischen Wandel durchgemacht, mit Modernisierung und Restrukturierung bei den beiden grossen nationalen Gesellschaften und den aus dem Boden schiessenden kleinen und mittleren Zubringerbahnen. Neue Partnerschaften mit Kunden und Personal haben zu einer Steigerung von Verkehrsaufkommen und Produktivität geführt und Jahrzehnte des Zerfalls angehalten. Die Zukunft der Personenverkehrsgesellschaft Via Rail ist immer noch ungewiss, es ist jedoch mit einem Einbezug privater Mittel zu rechnen