By Theo van de Kletersteeg
Canadian National will celebrate its 20th birthday on November 17 as a publicly held corporation whose shares are traded on stock exchanges every day. It was on November 17, 1995 that CN’s shares were first traded on the Toronto and New York Stock Exchanges.
CN’s roots go back to 1832 when a group of Montreal businessmen led by John Molson began to plan Canada’s first railway. That line was completed four years later, operating under the name of The Champlain and St. Lawrence Railroad, and connected the Montreal south shore community of Laprairie with the town of St. Jean through a 23-kilometre stretch of wooden tracks. The line was popular among passengers and quickly became one of few profitable Canadian railways. It was purchased by Grand Trunk Railway in 1872.
Most of the early railways were short lines built to overcome local problems of river navigation. However, it did not take long for longhaul track to be laid by visionary entrepreneurs who wanted to cash in on generous loan and subsidy packages offered by governments to build new railways. Politicians were inspired by their perceived need to encourage national unity, to promote economic development and immigration, and to facilitate westward migration.
This government largesse sparked a tremendous boom in railway construction in about 1849 that ultimately led to vast overcapacity, high levels of debt and insufficient cash flow, resulting in financial failure of most of the railroads. Further aggravating problems brought on by overcapacity, long stretches of rail ways were built in areas of low population density and where there was a lack of economic activity. The straw that broke the camel’s back was the onset of the First World War, which forced the railways to compete for funding with activities in support of the war effort. With most railways mired in debt and unable to meet their operating expenses, they were unable to find the capital to sustain their operations.
Canadian Nation Railway was born through the amalgamation of Canadian Northern Railway and Canadian Government Railways, the latter being the name used between 1915 and 1918 of all federal government-owned railways. Canadian Government Railways consisted of the remnants of Intercolonial Railway of Canada, National Transcontinental Railway, Prince Edward Island Railway, Hudson Bay Railway, and a number of minor branch lines. Grand Trunk Pacific Railway and its parent, Grand Trunk Railway, defaulted on debt, were nationalized in 1919 and 1920, and were absorbed into Canadian National Railway in 1923.
lntercolonial Railway of Canada operated track in Quebec, New Brunswick, Nova Scotia and Prince Edward Island from 1872 to 1918. This railway was first proposed in the 1830s by the government of the Province of Lower Canada to link Montreal with the East Coast for military purposes during times of conflict (particularly during winter) and to provide an alternative trade route to connect the colony with Europe at times when the St. Lawrence River was frozen. However, financing could not be arranged. The company was finally incorporated in 1867 pursuant to a clause in the British North America Act to become one of Canada’s first Crown corporations. It started operations by taking over a few near-bankrupt railways in Eastern Canada, and constructed major extensions to existing tracks. In 1918, Intercolonial was absorbed into Canadian Government Railways, which had been established to operate the remains of failed federal railway assets.
Canadian Northern Railway was founded by Sir William MacKenzie and Donald Mann, two railway construction contractors, in 1895, who purchased the bankrupt Lake Manitoba Railway and Canal Company in 1896, and built large railway sections, mostly in Manitoba, and purchased additional lines reaching into Ontario. In 1899 they consolidated their operations under the name Canadian Northern Railway. The Railway continued its expansion with the purchase of Great Lakes steamships, and construction of railways reaching into Saskatchewan, Alberta, northern Quebec, New Brunswick, and Nova Scotia. In 1903, the federal government asked MacKenzie and Mann to cooperate in the construction of a second transcontinental railway, but they refused. In 1910, a direct line between Montreal and Toronto was built, and in 1912 Canadian Northern constructed a double-tracked mainline through a newly-built tunnel under Montreal’s Mont Royal mountain. By 1910 , the company’s debt load became unmanageable and it became clear that while its rival Canadian Pacific Railway had constructed lines in the most desirable locations in British Columbia, leading to the port of Vancouver, Canadian Northern had chosen to construct lines in more hostile territories that were also less desirable from a commercial point of view. Canadian Northern’s transcontinental railway was completed in 1915, connecting Montreal with Vancouver. However, the financial burdens had become too great, and the carrier was nationalized in 1918. Canadian Northern was folded into Canadian Government Railways, which the government had directed to be managed by the former management of Canadian Northern Railway. A few months later, the government ordered the two merged railways to operate under the brand Canadian National Railway, although the formal consolidation of the two entities did not take place until 1923.
The principal predecessor of the current CN was Grand Trunk Railway (GTR), founded by Sir Francis Hincks, an Irish-Canadian politician and businessman. The company was formed in 1852 as Grand Trunk Railway Company of Canada to build a railway between Montreal and Toronto, and was mostly financed by British investors. Grand Trunk proceeded to purchase and build railways from Portland, Maine, to Chicago, through Quebec and Ontario. The first section of line between Montreal and Sarnia via Toronto, Hamilton and London went into service in 1856. Construction ending in 1859 of the Victoria Bridge, spanning the St. Lawrence River at Montreal, allowed completion of the system extending to Eastern Quebec and Maine. However, connections to Chicago were not completed until 1879. Within months of completing the entire network, almost half of the traffic carried on the Grand Trunk system originated from the Chicago area. Operational efficiencies were greatly enhanced when the railway completed construction of the St. Clair River Tunnel in 1891, which did away with the need to ferry rail traffic between Sarnia, and Port Huron, Mich.
Sir Hincks, though, was not as savvy as perceived and in 1860 control of the company moved into the hands of the company’s British investors. The company’s head office moved to London, England, where it remained until its takeover by Canadian National Railway in 1923.
Soon after Confederation, the government asked GTR to build a rail link to the Pacific, but its management refused. This led the government to pass the necessary legislation to create Canadian Pacific Railways. In 1903, recognizing that it had made a mistake in refusing to build an extension reaching the Pacific, which prevented it from taking advantage of the business of transporting immigrants to points west of Ontario, GTR convinced the government of the day to help Grand Trunk Pacific Railway (GTPR), a subsidiary of GTR, construct a line from Winnipeg to Prince Rupert. The government agreed, and also agreed to fund 100 per cent of the cost of constructing a government-owned line from Winnipeg to Moncton to be operated by GTR upon completion. The latter line was known as National Transcontinental Railway. The (GTPR) line to Prince Rupert was completed in1914, and National Transcontinental Railway’s line to Quebec City was completed the following year. Crossing difficult terrain caused construction cost overruns, and a sparse population along the line to Prince Rupert created fewer business opportunities than anticipated. GTPR was unable to raise new financing during the First World War which caused its parent company (GTR) to renege on its commitment to lease NTR upon completion. Unable to resolve its financial difficulties, GTPR was nationalized in 1919 and added to CNR’s portfolio in 1920. National Transcontinental Railway was merged with Canadian Government Railways
GTR fell under government control in July 1920 but was not absorbed into Canadian National Railway until January 1923. At the time GTR was merged into Canadian National Railway, GTR operated a network of about 125 smaller railway lines in Canada and the U.S., totaling some 14,600 kilometres.
Consolidation of numerous insolvent railways
Canadian National Railways was created by an order of Privy Council in 1918. The assets and operations of Canadian Government Railways and well as those of a number of railways that were in various stages of insolvency or receivership, including all of those mentioned previously, were merged into it. By 1923, CNR had become the largest railway in the world, operating more than 35,000 kilometres of track. It also had become Canada’s largest business enterprise, employing more than 100,000 people.
Living in 2015 and enjoying all of the luxuries and transportation options that modern life has brought us, we cannot overestimate the tremendous importance of the railways in the economic development of Canada, and the life of each and every citizen. In the days of no roads or dirt roads, long-distance travel was limited to those who were privileged, adventuresome and/or courageous. Commerce was carried out on a very limited scale and generally restricted to trading within limited geographic areas, or in areas where transportation to market via waterways was possible.
The railways changed all that: they connected people, allowed remote lands to be settled, and made it possible for international commerce to develop. Without the railways, Canada’s development would have taken an entirely different path.
Seen in that light, it should be no surprise that governments did not spare any effort or money to encourage construction of the various railway networks and, later, the development of CNR. CNR’s role was a mix of social and economic development: carrying on profitable operations was not high on the list of priorities. Still, between 1923 and 1929 (at the peak of an economic boom, just before the Depression), CNR managed to reduce its operating ratio to 82.5 per cent from 114.5 per cent (“operating ratio” refers to the percentage of revenues composed of operating expenses).
By 1929, CNR had expanded to include the operation of a dozen or so steamships and ferries, more than 100,000 kilometres of telegraph lines, 10 hotels, 57 merchant marine vessels and radio stations from coast to coast (the radio networks eventually became the basis for the formation of the Canadian Broadcasting Corporation). In 1937, CNR expanded into transcontinental air service through the creation of Trans-Canada Air Lines, which eventually became the present-day Air Canada.
At the time of the incorporation of GTR’s assets, CNR’s President was Henry W. Thornton, an American who had started his railroad career working as a draughtsman for Pennsylvania Railroad in 1894 at age 23. Competent and likeable, he was quickly promoted, and became General Superintendent of Long Island Rail Road in 1912. In 1914 he became General Manager at British Great Eastern Railway Company Ltd., having been brought in to modernize the railway. When war broke out, Thornton demonstrated an uncanny knack for getting supplies and men moved to the Front in his position of Inspector General of Allied Transportation, which later made him a Knight Commander of the Order of the British Empire. In 1922 Thornton was named President and Chairman of CNR, having been asked to modernize and amalgamate different lines. Thornton was the first President to bring efficiencies to operations that had a long record of losing money. He introduced diesel locomotives and brought a new vision of leisure travel to the railway, as he introduced onboard radios and other passenger comforts, in addition to constructing hotels and resorts along the routes. However, his costly makeover of the railway and lavish personal lifestyle made him political enemies, resulting in his ouster by a new Conservative government in 1932, and his death soon thereafter. Ultimately, his contributions to Canadian business and culture were recognized and his reputation restored. In 1992 he was inducted into the Canadian Railway Hall of Fame.
First glimmers of sustainable profitability
While CNR’s operations continued to be a burden on the taxpayer, things did turn around after the 1974 appointment of Robert A. Bandeen as President. Bandeen had first been hired in 1955 by CNR as an economist, but rose to the position of V.P., Great Lakes Region in 1971, in which position he reorganized CNR’s U.S. assets under the umbrella of Grand Trunk Corporation. Once appointed as CNR’s President, Bandeen created a more entrepreneurial spirit and reorganized the railway into distinct business units. He also moved to sell non-core assets such as CN Hotels and trucking subsidiaries. In addition, he reorganized activities that required ongoing government support under different umbrellas, such as CN Marine, Via Rail and Terra Transport. Robert Bandeen was made an Officer of the Order of Canada in 1980.
By 1976, CNR reported its first profit from operations in 20 years. Many positive achievements were made during the late 1970s and in the 1980s, including the 1978 recapitalization, and the divestiture of a number of non-rail business units such as trucking, passenger rail service, ferry operations, CNCP Telecommunications, Air Canada, CN Hotels and real estate assets. In addition, partial deregulation allowed the gradual abandonment or sale of unprofitable branch lines, and enabled the company to exit rail operations in Newfoundland and PE.I. during the late ‘80s.
By 1985, CNR’s freight traffic fell precipitously, and some of the familiar problems of the past once again began to haunt the railway. In 1987, passage of the National Transportation Act had been hoped to provide the railways with greater freedoms but instead made things even more difficult for them by deregulating freight rates. During this period of time, a number of CNR executives and politicians had pondered the possibility of privatizing CNR. However, this option was usually dismissed out of hand, given CNR’s unprofitable history, its highly bloated and overprivileged workforce, its heavy debt load, its continuing requirement to provide services at uneconomic prices, and its executive suite that was generally seen as suffering from a Crown corporation culture.
By the early 1990s, however, CNR’s problems had become so acute that then Prime Minister Brian Mulroney decided drastic action was needed, and he appointed Paul Tellier as CNR’s President and CEO in October 1992. Tellier had been Canada’s top bureaucrat, and knew nothing about railways. However, his energy, determination and sense of urgency were unprecedented. He quickly replaced most of those in CNR’s executive suite, appointed trusted colleagues from his previous life to key positions, and went to work with a vengeance to restore profitability, and to significantly increase efficiency which would create a new CNR that could be profitable in good times and in bad. From a strategic point of view, his vision was to create North America’s strongest, best-run and most profitable railway.
Tellier rid CN of numerous restrictive clauses in labour contracts that stifled productivity, and did away with provisions that allowed a small army of furloughed CN employees to collect their pay for life without ever having to work again. He also managed to reduce CN’s labour force by one third during a period of just over three years.
Lastly, together with politicians and senior bureaucrats who supported his efforts, Tellier was instrumental in ensuring that new legislation (Canada Transportation Act) would be adopted in a later year to do away with the last vestiges of regulations that had been such obstacles to efficient operations. Following a failed attempt to merge the Eastern rail operations of both CP Rail and Canadian National, Tellier’s team concluded that privatization of the railway was its only hope of creating a strong enterprise, capable of serving all of its stakeholders.
Tellier’s efforts culminated on November 17, 1995, when the government sold its 83.8 million shares of CNR to underwriters at a price of $27 per share, raising $2.2 billion for Canada’s Treasury. That was 20 years ago, and the event marked the birth of today’s CN.
In 1998, CN acquired Illinois Central Railroad (IC) in a game-changing acquisition transaction. Acquisition of IC, which operates a line running from Chicago to New Orleans, turned CN from a transcontinental railway connecting Canada’s East and West to a NAFTA railway connecting almost any point in Canada to the U.S. central heartland and to Mexico (via a marketing agreement with Kansas City Southern Railway), which greatly added to its strategic strength by enhancing its capability to provide single-carrier service. During the following decade, CN made several other acquisitions, most of which were aimed at increasing its capacity in and around its now vitally important Chicago hub, and efficient routing of traffic to and from that hub.
Investors who participated in CN’s IPO (Initial Public Offering) of November 17, 1995, have done very well. From an initial price of $4.27 (adjusted for stock splits), the stock has risen to $79 twenty years later. Including the receipt of adjusted dividends over the course of their investment, the stock generated a 15 per cent compounded annual return to its Canadian shareholders, which is a remarkable feat by any measure. Comparing CN’s returns to shareholders during the past 20 years to those of other class 1 railways in North America, none has even come close to CN’s performance.
During its time as a publicly owned corporation, CN’s revenues, income and free cash flow rose almost without interruption. During the past five years, CN’s revenues have consistently grown must more rapidly than the economy as a whole. For the nine months ended September 30, 2015, CN’s revenues increased to $9.5 billion (from $8.9 billion during the same period in 2014), producing net income of $2.6 billion (equivalent to $3.16 per share). Of all the Class 1 railways in North America, CN is the most cost-efficient, and its cost structure continues to surprise positively. During its most recent quarter, CN’s operating ratio declined to a record 53.8 per cent.
With rail volumes currently being challenged as a result of near-zero growth in the economy, this situation will surely not last forever and one day, hopefully soon, export clients will purchase more of Canada’s lumber, potash, grain, coal, oil and chemicals and all the other products that Canada has successfully sold to foreign buyers in the past, enabling us to import more cars and other consumer goods. If it needs to be moved, CN will find a way to get it to where it needs to go, on schedule, and do well for its shareholders in the meantime.