10. Rail

The Canadian rail freight carriers reported increased traffic levels and improved profitability. In rail passenger services, the emphasis remained on cost reduction initiatives to face reduced subsidization.

Rail freight services in Canada are provided by two major Class I carriers, Canadian National Railways (CN) and Canadian Pacific Railway Company (CP). In addition to these, there are nominally some 54 smaller Class II and III railway companies. In practice, however, there are only about 46 railways, since some of these smaller ones are subsidiaries of CN, CP or other carriers and do not have separate and distinct operations. Class I railways are CN, CP and VIA Rail Canada Inc. (VIA). Class II railways include regional and shortline railways, while Class III railways include terminal railway operations.

Rail passenger services are offered by VIA, while more localized or tourist services are provided by several other carriers, including BC Rail, Rocky Mountaineer, Algoma Central, Ontario Northland, Amtrak, and the Quebec, North Shore & Labrador (QNSL) Railway.

Major Events in 1997

1997 was the strongest year in Canadian railway history. In aggregate, rail freight traffic levels increased by about seven per cent.

Severe weather conditions led to disruptions in rail transportation services to the West Coast in the early part of the year. These disruptions resulted in reduced traffic volumes of grain and coal (in particular during the first quarter) compared with previous years; however, volumes of these, and other commodities, rebounded quickly and by the year's end exceeded 1996 levels, in some cases significantly.

The disruptions to the grain handling system are currently under investigation by the Canadian Transportation Agency (CTA), and are not commented on here.

The year also saw a record number of lines transferred and new railways created, a response to the Canada Transportation Act of 1996, which provided a revised rail-line rationalization process, eased the entry of smaller, lower cost rail carriers into operation, and encouraged the growth of a Canadian shortline industry. For a detailed discussion of changes in the structure of the rail industry, see Chapter 5, "Infrastructure and Associated Services."

Rail Freight Traffic and Services

In broad terms, rail traffic levels exhibited strong growth during 1997, with aggregate tonnage levels for the rail sector in general at historical highs. Overall traffic volumes (in tonnes) were more than seven per cent higher than in 1996 and about four per cent higher than in 1995. Many market segments showed significant gains.

In terms of aggregate revenue tonne-kilometre output, Canadian railways enjoyed their strongest year ever, exceeding previous record output levels set in 1994 by almost five per cent. CN and CP experienced increases in 1997 of 11.4 per cent and 7.1 per cent, respectively (estimated on the basis of three quarters of Canadian data and four quarters of system data), while Class II railways experienced an estimated increase of about 3.7 per cent. The combined result is an estimated gain of about 8.7 per cent across all Canadian railways.

CN accounted for about 51.6 per cent and CP for about 39.0 per cent of all railway output in Canada, while Class II and other railways accounted for the remaining 9.4 per cent. The much lower output in revenue tonne-kilometre terms by Class II railways compared with traffic volumes is largely due to the greater distances that traffic moved on the Class I carriers.

Figure 10-1 shows rail output in revenue tonne-kilometres from 1990 to 1997.

In tonnage terms, Class II carriers accounted for about 29 per cent of total tonnage handled by Canadian railways. The slight increases in traffic levels over previous years - 77 million tonnes in 1996 and 79 million tonnes in 1997 - were driven largely by increased volumes of iron ore being transported.

Virtually all iron ore transported in Canada is moved by Class II railways, the most prominent being two large regional carriers. While these railways represent an extreme, in that they move essentially only a single commodity, they illustrate the dominance of resource products in the traffic base of Class II carriers.

Trade

In aggregate, rail traffic moving on the contiguous North American rail system (exclusive of the iron ore traffic in eastern Quebec) showed major changes over the previous year. From 1991 to 1995, north-south rail traffic increased at about seven per cent annually, with exports dominating imports by almost three to one. Data to confirm more recent trends is unavailable but, in light of the positive overall traffic growth evidenced in monthly traffic statistics, it is expected that the past trends of declining east-west traffic and increasing north-south traffic growth continued during 1997. Tables 10-1 and 10-2 illustrate the regional sources of north-south traffic.

East-west rail tonnages for 1995 were about 200 million tonnes (a figure that is unlikely to have changed more than marginally since), while north-south tonnages were about 70 million tonnes, divided roughly as 52.4 million tonnes of exports to and 15.3 million tonnes of imports from the US.

A comparison of Canada-US trade for 1995 and 1985 reveals similar growth rates in both exports and imports. In 1995, rail exports to and imports from the US were about 22 and seven per cent of total rail tonnage; in 1985, exports to and imports from the US were 15 and five per cent.

Figure 10-2 highlights this pattern of growth in trade by rail with the US, particularly after 1990.

By volume, three commodity groupings - forest products, fertilizer materials and grain - comprise about 50 per cent of rail exports to the US. Intermodal traffic, automobiles and parts, petroleum products and construction materials account for another 15 per cent of exports. Imports are more diversified, with the largest source of rail traffic from the US, intermodal, at slightly less than 15 per cent by volume. Tables 10-3 and 10-4 show the relative volumes of exports to and imports from the US by commodity.

By value, rail exports to the US and Mexico in 1996 amounted to some $50 billion. Vehicles and parts accounted for about $25 billion (50 per cent) of this, while forest products generated about $12.5 billion (25 per cent). Figure 10-3 illustrates the commodities exported by rail to the US and Mexico. In light of the concentration of automobile and parts manufacturers in southern Ontario and Michigan, it is not surprising that the three major rail gateways in southern Ontario - Sarnia, Windsor and Fort Erie - accounted for almost 70 per cent of the value of all rail exports to the US. Intermodal traffic includes both containers and trailers transported on flat cars.

Traffic Segments

Railway traffic can be categorized based on a variety of criteria, from commodity characteristics to market segments. For the purposes of this report, rail traffic has been grouped into three broad categories that reflect differences in transportation requirements, particularly operations and equipment: bulk, merchandise (including automotive) and intermodal. Bulk traffic includes coal, grain and grain products, and fertilizer materials, including sulphur. Merchandise traffic (i.e., industrial) includes forest products, petroleum products, chemicals, ores and metals, construction materials, and automobiles and parts. As noted earlier, intermodal traffic includes both containers and trailers transported on flat cars (i.e., Container-on-Flat-Car (COFC) and Trailer-on-Flat-Car (TOFC) traffic).

Demand for rail transportation services increased strongly across virtually all services and sectors during 1997. System congestion, associated with adverse winter weather conditions during 1996 - 1997, produced severe equipment shortages that, along with motive power failures, resulted in problems in moving traffic to the west coast.

Figure 10-4 illustrates the aggregate monthly traffic level from 1995 to 1997, and Figure 10-5 summarizes the change in traffic demand (i.e., volume) in each major traffic segment sector in 1996 and 1997 as compared with the previous year. The following sections briefly discuss key traffic developments in the major segment sectors.

Coal

Some changes in demand patterns and loadings for coal occurred in 1997. At the beginning of the year, volumes were almost 30 per cent lower than those in 1996. Cumulative coal loadings in 1997 were more than four per cent ahead of the previous year's level. By the end of 1997, coal volume exceeded the previous year's volume of about 40.4 million tonnes by almost two million tonnes.

Aggregate coal tonnage moved by Canadian railways represented about 16 per cent of total railway volume for the year. Principal coal producers are located in Western Canada, with virtually all Canadian coal exports (33.4 million tonnes in 1996) moved by rail to export position through the ports of Vancouver and Prince Rupert. CN, CP and BC Rail are all involved in the transportation of coal. The balance of about 7.0 million tonnes (1996) was transported by rail, or in some cases a rail/laker combination, and used domestically for thermal generation of power in Ontario and Nova Scotia.

Fertilizer Materials and Sulphur

Fertilizers generally include potash, phosphate rock and blended fertilizer materials. Sulphur, produced largely as a by-product of sour gas and high-sulphur oil, is used principally in fertilizer production.

Potash in Canada is principally produced by a small number of high-volume mines in Saskatchewan, which accounted for 87 per cent of Canadian production in 1996. Much of this is transported by rail to export position, either directly to the US or to offshore markets via Vancouver. Smaller volumes produced in New Brunswick are moved to the Port of Saint John for export. Potash shipments through the Port of Saint John, which totaled 1.7 million tonnes in 1996, decreased to 1.2 million tonnes in 1997 as a result of a flooding problem at a major potash mine in the Sussex area.

Potash volumes tend to fluctuate annually, mainly because of its use in the agricultural sector and the varying demands of this sector for fertilizer materials. Demand for Canadian potash is influenced not only by end use but by the ability of other global suppliers to meet the demands of the agricultural sector. With a 40 per cent share of global markets, Canada is the largest potash exporter in the world. Volumes of potash transported by rail in 1997 are about 14.1 million tonnes.

Of particular concern to both the Port of Vancouver and Canadian railways is the completion of Canpotex's new potash terminal at Portland, Oregon, with a projected annual capacity of five million tonnes. Canpotex would no doubt be expected to use the facility to the extent necessary to rationalize the investment or to apply competitive pressure on Canadian railways and the Port of Vancouver. Since total potash tonnage moved through Vancouver for export was approximately 3.6 million tonnes in 1996, the potential exists for the loss of significant quantities, if not all, of the potash moving through the port. The impact on rail traffic of such a diversion could be equally serious. The long haul business could go to US carriers and the short haul could conceivably be limited to the distance between Saskatchewan mine sites and the US border.

Sulphur production and shipments tend to be highly sensitive to world prices. Rail volumes totaled about 7.3 million tonnes in 1997, with significant export quantities produced in Western Canada, principally from sour gas processing and the refining of high-sulphur crude and heavy oils. With 22 per cent of world production, Canada was the second largest exporter of sulphur in the world in 1996, after the US.

Another fertilizer material moved by rail, phosphate rock, is imported via Vancouver. Volumes, however, are much lower than for potash, at about one million tonnes in 1997.

The total volume of fertilizer materials, including sulphur, shipped by rail was significantly ahead - about 11 per cent - of the previous year's total.

Grain

Aggregate rail volumes of grain for 1997 were 35.8 million tonnes, 13.5 per cent of total rail tonnage, compared with less than 12 per cent in 1996. Grain volumes were about four per cent below 1996 levels at the beginning of the year, but rebounded strongly by the end of the year to levels over 18 per cent higher than those in 1996.

While volumes in January 1996 were almost 20 per cent lower than in January 1995, the year ended with aggregate loadings only four per cent below 1995 levels. Loadings in 1997 exceeded loadings in both previous years by significant margins, even though they were considerably below previous levels at the beginning of the year. Total grain volumes at year-end are estimated to be 20 per cent ahead of 1996 year-end totals and ten per cent ahead of 1995 year-end totals. Figure 10-6 illustrates the volatility of monthly grain loading volumes from 1995 to 1997.

Ores and Mine Products

This segment is dominated by the shipment of iron ore, which represents about 65 per cent of all ores and mine products transported by rail in Canada and about 55 per cent of total Class II rail traffic.

Virtually all iron ore transported by rail in Canada (96 per cent in 1996) was transported by the Cartier and QNSL railways (in addition to several smaller railways associated with QSNL) from the Labrador Trough region of Quebec and Newfoundland. With the announcement by Algoma Steel that its Algoma Ore Division's Wawa operation will cease production, virtually all iron ore in the future will continue to be transported by these two railways and their affiliates.

The Cartier and QNSL railways moved approximately 36 million tonnes of iron ore in 1997; that is over 50 per cent of all Class II traffic in Canada, and about 14 per cent of total rail tonnage. Following a start to the year that saw traffic levels for ores and mine products essentially the same as the previous year, volumes gradually improved to the point where, by the end of 1997, aggregate shipments were approximately 7.5 per cent higher than in 1996. The volume of iron ore transported was about 6.2 per cent ahead of the previous year.

Forest Products

Forest products, a broad commodity grouping that includes such products as paper, lumber and pulpwood, can be categorized into two sub-sectors: processed (e.g., lumber and paper) and unprocessed (e.g., logs and pulpwood).

Processed forest products moved by rail were among the few sub-sectors to show traffic declines in 1997, with volumes approximately four per cent lower than in 1996. Unprocessed forest products, on the other hand, showed substantial year-over-year increases of almost seven per cent, principally due to rising demand in US markets. In aggregate, the forest products sector experienced traffic increases of about three per cent over 1996 levels.

Both sub-sectors accounted for relatively similar levels of activity. Unprocessed forest products, however, represented about nine per cent of all rail movements (approximately 23 million tonnes), while processed forest products represented some seven per cent (about 18 million tonnes). In aggregate, forest products moved by rail amounted to about 41 million tonnes, or about 16 per cent of total rail shipments.

Industrial and Automotive Products

This broad market segment, which includes manufactured goods, petroleum products, metals, chemicals, etc., accounted for over 30 million tonnes in traffic volume, representing a moderate increase of about five per cent over the previous year and 12 per cent of overall traffic volume.

Volumes of chemicals were essentially stable, increasing by less than two per cent in 1997, while traffic of petroleum products increased significantly, with gains of more than 11 per cent over 1996 levels.

Automotive markets continued the growth trend experienced over the past several years, with exceptional growth, particularly in finished automobiles and parts, which saw a surge in traffic to levels almost 16 per cent higher than in 1996. Growth in automotive-related shipments has been one of the key factors behind the strong growth in Canada-US trade by rail over the past five years. Although relatively minor in terms of volume compared with the magnitude of the bulk category, automotive-related shipments dominate Canada-US trade by rail in terms of value.

Intermodal

In the aggregate, the intermodal segment of the rail sector continued its pattern of strong growth in 1997, with volumes increasing approximately eight per cent over the previous year. The continued slide of the Trailer-on-Flat-Car segment, with volumes dropping off by an estimated 11 per cent, was offset by the strong growth of the Container-on-Flat-Car segment, with an estimated increase of about 13 per cent. (Estimates for 1996 and 1997 were made on the basis of Statistics Canada's monthly traffic data in conjunction with Transport Canada's commodity flow data from previous years.) Figure 10-7 shows the changes in intermodal rail traffic from 1991 to 1997.

Although trailer traffic has been in gradual decline for more than a decade, container traffic has been reported as increasing consistently since the economic recession of the early 1990s. It was not until 1993, however, that container traffic recovered to the levels of the pre-recessionary peaks of 1988 and 1989.

The estimated aggregate increase in rail intermodal traffic since 1991 is slightly less than 55 per cent. This is the sum of an estimated 107 per cent increase in container traffic levels and an estimated 45 per cent decrease in trailer traffic levels. One of the factors influencing this overall growth has been the performance of ports such as Halifax and Montreal, which have succeeded in capturing increasing amounts of traffic destined for US Midwest markets. CN's Gateway Intermodal Terminal, which opened in December 1996, contributed to the strong growth in rail intermodal traffic handled through the Port of Halifax. Container traffic at the Port of Halifax increased by 19.9 per cent in 1997, from 3.2 in 1996 to 3.8 million tonnes in 1997.

Prices

Rail freight prices declined significantly in the late 1980s and early 1990s, with a major drop (5.4 per cent) in 1994. Market conditions enabled railways to increase domestic freight rates in 1995 by 2.2 per cent, but the industry returned to a pattern of rate decline in 1996 (1.2 per cent) and 1997 (1.1 per cent). (Table 10-6). In real terms, rail prices have fallen by 14 per cent between 1993 and 1996.

Average revenues generated per tonne-kilometre of freight traffic carried is often used as a proxy for rail freight rates. This unit of measurement, called "yield", was compared for US and Canadian railways for the period 1990 to 1995. The comparison revealed that the differences observed in 1990 had disappeared almost totally by 1995. Table 10-5 compares Canadian and US railways' yields from 1990 to 1995.

Competition

Competition between the trucking and rail industries is significant for certain commodities and within certain regions. In aggregate terms, however, for-hire trucking and rail accounted for approximately 45 per cent and 55 per cent, respectively, of surface freight transportation tonnage in 1996.

Relative market shares have been undergoing gradual change for some years, with for-hire trucking increasing its share of the surface market at the expense of the rail industry. Figure 10-8 illustrates both traffic volumes and (for-hire) truck-rail modal share from 1990 to 1996. It shows the relatively strong growth in for-hire trucking and rail volumes as well as rail's declining share of the surface market.

There was relatively little truck-rail competition in either bulk commodity markets traditionally dominated by rail or time-sensitive, high-value or low-volume commodities traditionally dominated by trucking. There was, however, competition in selected manufactured, industrial and automotive commodities.

Competition in transborder markets is illustrative of trucking's dominance over rail, with exports to the US by truck accounting for about 70 per cent of shipments by value and about 55 per cent by volume.

Rail Passenger Traffic and Services

Although a number of rail carriers provide intercity passenger services in Canada, VIA dominates the market, carrying about 88 per cent of all intercity rail passengers. Its services are categorized by route: corridor, from Quebec City to Windsor; transcontinental, servicing the areas east and west beyond the Quebec-Windsor Corridor; and remote, including intercity lines in Quebec, Ontario, Manitoba and British Columbia. Corridor passenger volumes are significantly higher than those in either the transcontinental or remote services, accounting for about 83 per cent of VIA's traffic in 1996. Transcontinental services accounted for a further 13 per cent, while remote services accounted for the remaining four per cent.

Other carriers providing passenger services include BC Rail, the Algoma Central Railway, the Ontario Northland Railway, the QNSL Railway, Amtrak and the Rocky Mountaineer.

Intercity rail passenger volumes increased somewhat over 1996. This was due almost entirely to growth in VIA's traffic levels, which increased by slightly less than two per cent in 1996 and by almost six per cent in the first half of 1997. Aggregate volumes, however, saw relatively little change from 1990 to 1995.

In addition to intercity rail passenger services, commuter rail services are offered in a number of metropolitan areas, including Vancouver, Toronto and Montreal. The number of passengers using such services are about eight times greater than intercity rail passenger traffic.

Figure 10-9 illustrates the trend in intercity rail passenger volumes over the past seven years.

Prices paid by users of VIA's services have increased at a faster pace than inflation. Based on preliminary 1997 data, VIA's prices went up by 6.1 per cent, compared to a 3.1 per cent increase in 1996.

Financial Performance

Freight Carriers

Highlights

The rail industry showed significantly higher profits during 1997. While this achievement can be explained in part by the improved performance of the Canadian economy, it can not be dissociated from the restructuring initiatives implemented by the two large Canadian rail carriers in recent years.

In 1997, the combined system operating income of the two major Canadian freight railways rose to $1,479 million from $1,141 million (excluding special charges) a year earlier, a 30 per cent increase. The average in operating profit margin was in the order of 18 per cent, an improvement of three percentage points from 1996. The main reasons for this improvement were higher export volumes, especially in grain shipments, which led to an eight per cent increase in freight revenues, and only three per cent increases in operating costs, due to strict cost control and productivity gains.

Revenues/Expenses

In 1996, total operating revenues of rail transportation in Canada were about $7.2 billion. If the US operations of CN and CP are added, the total jumps to $8.8 billion. The Canadian operations of CN and CP generated combined total operating revenues of $6.2 billion, representing a 90 per cent share of rail freight revenues in Canada. Regional railways generated the remaining ten per cent.

In addition, CN's and CP's US operations generated about $1.7 billion, which accounted for 21 per cent of their combined system revenues of $7.9 billion. In 1996, about 14 per cent of CN's revenues were earned from its USoperations, compared to 29 per cent for CP.

Figure 10-10 charts operating revenues in the Canadian rail transportation industry in 1996.

The operating expenses of railways consist mainly of labour, fuel, depreciation, equipment rentals, and other materials and services.

Reductions in labour costs have been the largest contributing factor to higher operating profit margins in recent years. In 1996, the share of labour costs in total operating revenuesNote 1 was 35 per cent, down from 47 per cent in 1993. In comparison, the US Class I railways still have relatively lower labour costs, with the labour cost share of total operating revenues at 28 per cent in 1996.

While CN, CP and VIA all experienced estimated labour reductions of six to seven per cent during 1997, labour reductions over the past five years have varied by carrier. During the 1992 - 1997 period, CN experienced a reduction of about 32 per cent, CP a reduction of some 24 per cent, and VIA a reduction of about 38 per cent. Figure 10-11 illustrates the trend in Canadian railway employment since 1990.

While long-established Class II carriers have tended to reduce the labour content of their operations, employment in Class II railways overall has not come down as significantly, a situation partly due to the transfer, in recent years, of lines and some employees from Class I to Class II railways.

Rail operations used to be more labour intensive than the overall transportation sector. In 1992, labour costs represented 50 per cent of CN and CP combined operating revenues, but only 41 per cent of transportation in general. In 1997, labour costs for rail were down to 35 per cent, almost equivalent to that of the total transportation sector.

Rail labour productivity increased by 47 per cent over the 1992 - 1995 period - much more than the 28 per cent improvement in the entire transportation sector - and by nine per cent in 1996. Based on preliminary data, 1997 also showed further gains.

The strong productivity gains must be tied to higher average annual labour costs in the rail transportation industry, $61,000 in 1996 compared with $45,000 for all transportation. While phenomenal productivity improvements were achieved, average labour costs per employee also increased. Unit labour costs at CN and CP have declined by 25 per cent since 1992, allowing CN and CP to shave $720 million from their total labour costs. Comparatively, unit labour costs in the overall business sector increased by 0.4 per cent over the same period.

Rail fuel costs represented 9.5 per cent of operating revenues for CN and CP in 1996, compared with 12 per cent for the transportation sector as a whole. Since 1992, fuel efficiency in CN's and CP's operations has improved significantly.

Operating expenses other than fuel and labour accounted for 47 per cent of CN and CP operating revenues in 1996. Other costs were related to the use of capital. Municipal taxes, leasing and depreciation accounted for around 15 per cent of the railways' revenues. The share of equipment rentals was six per cent, about the same as depreciation.

Total factor productivity of the Canadian railway industry improved by 24 per cent from 1992 to 1996, with a 3.7 per cent gain in 1996. The most important source of total productivity gain in Canadian railways continues to be labour productivity. As a result of strong productivity gains, unit costs have declined by 18 per cent since 1992. In 1996, the drop in unit costs reached 2.7 per cent. Lower unit costs have allowed the railways to both reduce prices and improve their financial performance from the returns of the early 1990s.

Table 10-7 lists cost and efficiency indicators of Canadian railways.

Profitability

Canadian railways have shown significant improvements in financial performance in recent years. In the Canadian operations of rail freight, the industry average operating margin almost tripled, from 6.9 per cent of revenues in 1993 to 20.2 per cent in 1997. Table 10-8 presents highlights of the Canadian railway industry's financial performance for the period 1993 to 1997.

On a system basis, the profits of both CN and CP increased significantly in the last two years. In 1996, the two railways' combined system total operating income (excluding special charges) amounted to $1.1 billion, an increase of 39 per cent over 1995. Combined net profit rose to $529 million in 1996 as opposed to a total loss of $2 billion in 1995, which was due to special charges for organization restructuring and write-down of assets. The two railways again showed significant increases in profits in 1997, with a combined system operating income of $1.5 billion, up 30 per cent from 1996.

Canadian National Railway

Since its privatization in 1995, CN has been successful in the capital markets, due mostly to its improved profitability. From 1993 to 1997, CN's operating margins have more than tripled, from five per cent of operating revenues in 1993 to 18.5 per cent in 1997. Despite this improvement in operating margins, however, net profits were significantly affected in 1995 and 1996 by special charges associated with restructuring and asset revaluation. These charges amounted to $1,453 million in 1995 and $381 million in 1996.

The benefits of restructuring started to show in 1997, with sharp increases in operating income from $610 million in 1996 to $807 million in 1997. The higher profitability was attributable to labour productivity gains, lower overall unit costs, and strong growth (9 per cent) in total operating revenues. This growth in total operating revenues resulted mainly from higher traffic volume in grain, automotive and intermodal traffic. Net income was $421 million in 1997, up from $296 million in 1996.

Figure 10-12 plots CN's operating and net incomes from 1993 to 1997.

Canadian Pacific Railway

CP Rail's profitability also significantly improved in recent years, with operating margins doubling from 7.2 per cent of revenues in 1993 to 17 per cent in 1997.

In 1995, the railway underwent a major organizational restructuring program, which incurred a special charge of $1,143 million and a net after-tax loss of $930 million. Following cost reductions and restructuring, however, its operating ratio declined to 86 per cent in 1996 from 90 per cent in 1995. Even though revenue growth was flat in 1996, operating income increased to $531 million, up 39 per cent from $382 million in 1995 (excluding special charges) due to the improvement in operating ratio. Figure 10-13 shows CP's operating and net incomes from 1993 to 1997.

In 1997, CP started to report its financial results under the US accounting principles (USGAAP). Under this approach, CP's profitability was higher, with an operating margin ratio at 21.5 per cent of total revenues. CP's system total operating income was $802 million in 1997. If adjusted for the Kansas City and Corn Line sale, CP's freight revenues grew by seven per cent in 1997, mainly because of increases in grain shipments, coal, sulphur, fertilizers, intermodal and automotive traffic.

Regional Carriers

The average operating profit margin of regional carriers was higher than that of national carriers from 1993 to 1995, a period in which both CN and CP were undertaking major restructuring of their operations.

Regional carriers' services are essential to local industries, particularly in the mining and natural resources sectors. As such, these carriers' profitability is closely related to the performance of their clients. For example, BC Rail's profits were affected by lower production levels of the forest and coal industries in 1996.Note 2

RaiLink, a rail shortline operator, became a publicly traded company on April 1, 1997. RaiLink became profitable in 1997, reporting $11 million in operating revenues and $2.5 million in operating income in the first half of 1997, with an operating ratio of 76.8 per cent (or an operating margin of 23.2 per cent). Its net income for the six months was $1.3 million, compared with a loss of $0.5 million for the corresponding period in 1996, when the operating ratio was 91 per cent. Figure 10-14 illustrates operating margins for rail freight carriers from 1993 to 1997.

Investments

Both CN and CP have increased capital expenditures since 1993, mostly on new locomotives, to improve efficiency and customer services.

In 1996, capital expenditures of the two main railways' Canadian operations totaled $694 million. CN's capital expenditures,$464 million, mainly included the acquisition of new locomotives, additions to rolling stock and other equipment, and roadway renewal. CP's capital expenditure level was down in 1996, following the acquisition of a significant number of locomotives in 1995. Figure 10-15 shows CN's and CP's capital expenditures from 1989 to 1997.

The two major railways significantly increased their capital expenditures in 1997 with a combined system total amount of $1.4 billion, of which about $884 million was invested in their Canadian operations. Their investment programs in 1997 were still focused on new high-horsepower locomotives.

At the end of 1996, total net fixed assets of CN and CP amounted to $10.1 billion, including $492 million held under capital lease. Property investments consisted of 65 per cent track and roadways, 22 per cent rolling stock, six per cent buildings and seven per cent other properties. About 93 per cent of CN assets were in Canada, with the remaining seven per cent in the US, while CP had relatively more investments in the US, about 28 per cent. Table 10-9 compares railway net fixed assets as of the end of 1996.

VIA Rail

Passenger revenues from VIA operations (excluding subsidies) accounted for two per cent of total industry revenues. In 1997, VIA generated total operating revenues of $188 million, an increase of 7.4 per cent from 1996.

Although rail passenger services are still subsidized, the cost recovery ratio has significantly increased in recent years, from 33.8 per cent of total operating expenses in 1993 to 49.4 per cent in 1997. Total government subsidies to VIA were $229 million in 1997: $196 million in operating funding and a total of $33 million for capital funding and reorganization charges. These funds are based on the annual operating budgets approved by the government.

Since 1993, the subsidy to VIA has declined by $119 million. The downward trend is expected to continue, as VIA has set its financial goals to further reduce total subsidies to $170 million by 1999Note 3 through cost reductions and revenue growth strategies. Table 10-10 shows VIA Rail revenues, expenses and government funding from 1993 to 1997.

VIA's labour costs fell by $71 million between 1992 and 1996. At 42 per cent in 1996, the labour share of operating revenues was down five percentage points since 1992. Between 1992 and 1996, strong productivity gains of 47 per cent were observed. The average annual labour cost per employee at VIA is the second highest in the transport industry. Unit labour costs fell 28 per cent over the period.

In 1996, fuel costs represented 4.4 per cent of VIA's operating revenues. From 1993 to 1996, fuel costs increased as a result of higher fuel prices and slower efficiency gains. Another major cost item is marketing (12 per cent).

Depreciation and payments to other rail carriers each accounted for ten per cent of VIA's operating costs.

Table 10-11 lists the cost and efficiency indicators of VIA for 1993 to 1996.

In keeping with the reduction of subsidies, VIA's price increases have exceeded general inflation trends, except for a hiatus in 1995. In the past two years, VIA prices rose annually by 4.6 per cent against 1.7 per cent in the economy. In spite of these increases, VIA's output has been growing, albeit at a slower pace (Table 10-12).

NOTES