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
1 The relative importance of each factor input
in the cost structure should be calculated in terms of total costs. But
total costs include not only all operating costs, but also an allocation
for the cost of capital. Measuring the cost of capital is a complex exercise
and not all the information needed to measure it was available. Therefore
total operating revenues were used in this report as a proxy for total
costs under the assumption that net income is equivalent to the cost of
capital.
2 BC Rail Annual Report, 1996.
3 VIA Annual Report, 1996.
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