Back On Track: Canada’s Rail Industry

Not that long ago, the rail industry in B.C. looked like it was headed the way of commercial fishing. Trucking was gobbling up market share. Derailments seemed like a weekly occurrence.  Canadian National Railway Co. (CN) and Canadian Pacific Railway Ltd. (CP) were digging up sections of unused track, while bureaucracy and stale thinking made the companies sluggish and unwieldy.

Not that long ago, the rail industry in B.C. looked like it was headed the way of commercial fishing. Trucking was gobbling up market share.

Derailments seemed like a weekly occurrence.  Canadian National Railway Co. (CN) and Canadian Pacific Railway Ltd. (CP) were digging up sections of unused track, while bureaucracy and stale thinking made the companies sluggish and unwieldy.

Nowhere were rail’s hard times more evident than in Prince Rupert, the western terminus of CN’s northern branch line. Charles Hays, president of the Grand Trunk Railway, founded Prince Rupert more than 100 years ago as an alternative port to Vancouver. His original plan envisioned a bustling port city of 50,000, with people loading ships with raw goods brought by rail from across Canada and bypassing the mountainous terrain that still plagues CP to the south. Before the western half of the Grand Trunk was finished in 1914, however, Hays drowned on the Titanic. His dream went down with the ship, with Prince Rupert getting nicknamed Hays’s Orphan; today its population sits at around 15,000. By 2003 shipping into the Port of Prince Rupert’s coal and grain terminals, which have a combined capacity of 20.5 million tonnes, had fallen to a mere four million tonnes.

A lot has changed in five years. This year CN is expecting Prince Rupert’s less-than-year-old container port to reach capacity. Grain and coal shipments are up for the fourth straight year. And the trends are echoed in Vancouver, B.C.’s other port, with both ports driving Canada’s two big rail companies to record numbers. CP now ranks second only to CN in operating ratio (a measure of efficiency) among North America’s seven major rail companies, with both CN and CP enjoying healthy and growing earnings. Warren Buffett and Bill Gates are investing in rail; safety is improving; and the fat is being trimmed, with thousands of jobs having been eliminated. “The outlook for the rail industry has never looked better,” says Dave Farrell, a rail watcher and transportation lecturer at UBC. Leading the pack, he says, are CN and CP: “They are the best-run rail companies in North America.”

One of the key reasons for this rail turnaround is B.C., and the fact that the province is perfectly situated to capitalize on an explosion of Pacific trade. While increased demand for Canadian raw products – potash, coal, grain and petroleum products delivered by rail to B.C.’s ports – is part of that success story, the bigger driver for growth is container traffic. Most of that trade is still one-way: between 1995 and 2006, Canada’s imports from China grew from $4.6 billion to $34.4 billion, while during the same time total exports to China grew at a more modest rate: from $3.5 billion to $7.6 billion. But either way, it’s big business for B.C.’s container ports. Last year Vancouver’s container terminals moved 2.3 million 20-foot equivalents units, a shipping measure better known as TEUs – a 49 per cent jump over 2003 – helping Vancouver overtake Seattle and Tacoma as the fourth-busiest container port on the west coast of North America behind Los Angeles, Long Beach and Oakland.

Meanwhile, up the coast, CN says Prince Rupert’s container port, which opened last October, should reach its capacity of 500,000 TEUs this year. The $170-million facility – built with funding from the Prince Rupert Port Authority, CN, Maher Terminals LLC (a terminal operator) and the provincial and federal governments – is the North American port closest to Asia (thanks to the curve of the Earth), cutting three days on the water compared to L.A. and up to a week in unloading time, more than making up for a slightly longer overland route. As well, the newly amalgamated Vancouver Fraser Port Authority is tendering a new container-specific terminal and is finishing a third berth in Delta. The Pacific Gateway Strategy – a federal initiative, supported by the province, to capitalize on transportation of goods through B.C. – estimates a 300 per cent increase in container traffic between 2005 and 2020. Rail remains the only viable way to move those containers over long distances.

Before containers came around, things weren’t so smooth for the railways. In the 1950s, trucking started to eat into the rail business, offering more flexibility and competitive prices. Trains only ran when they were at capacity, so there were no guarantees when merchandise would arrive. As well, the old side-door boxcars were inefficient: they had to be loaded and unloaded manually, with the goods then again loaded into a truck or ship. Containers, invented in 1958, were a one-stop deal: a truck, boat or train can move them as is. Fill them at the source – with TVs assembled in Japan for a Wal-Mart in Chicago for instance – and they don’t have to be unloaded until they arrive at the warehouse.

The drop-and-load simplicity revolutionized how goods were carried on the rails, knocking old-style boxcars into history. Whereas container use has doubled between 1996 and 2006, boxcar use has, over the same time frame, remained flat.

With demand for Asian-made goods in North America increasing by 40 per cent since 2000 and with rail companies offering increasingly efficient service, west coast U.S. ports have started to strain under all the activity. In recent years, ships waiting to offload containers in Los Angeles and Long Beach ports have regularly had to wait up to a week just to dock, forcing shippers to look north where there’s still excess capacity. The fastest and easiest way to get what’s shipped to the east coast of the U.S., where it’s needed, is by rail and through B.C. ports.

COSCO’s Antwerp, the first ship to dock at Prince Rupert’s new container terminal, tied up in October 2007 – eight days after leaving China – and was unloaded within 24 hours. It took the three-kilometre-long CN train just four days to get its cargo to Chicago, faster than the company expected. The line is highly efficient, thanks to CN’s $150-million investment in locomotives, extra sidings so trains don’t have to wait long periods to let oncoming traffic pass, bridges and tunnels to allow double-stacked containers to pass through, and other infrastructure. CN also invested $100 million in new fuel-efficient engines. Both the port and CN say the rail line is not meant to service B.C. or even Canada, but to access the U.S. east coast. CN has invested heavily in U.S. infrastructure and in acquiring U.S. rail lines, with a web of dedicated track extending all over the eastern seaboard and south to the Gulf of Mexico.

Now CN is using B.C. goods to solve a long-term problem with rail containers: lack of back-haul capacity. In Canada containers go east full of goods, but usually return empty. Rail companies and shippers don’t make any money with empty containers. In bigger urban areas, containers are filled with goods going to Asia, but it’s a small fraction of what comes the other way, and Prince Rupert has little capacity for container filling. “Any time you can back-haul you’re saving revenue,” says Warren Gill, a transportation industry watcher and professor at SFU. “There’s a lot of potential for Canada to develop new and different exports that could take advantage of back-haul.”

Many of the communities along the Prince George-to-Prince Rupert line are contemplating how to get a piece of this back-haul market. To help spur growth in container-stuffing development – and, in turn, more westbound traffic on their line – CN invested $20 million in a stuffing facility and intermodal yard (a set of tracks for moving containers from train to train, or train to truck) in Prince George, which opened last fall. Already westbound containers are being filled with wood pellets, raw logs, specialty agriculture products and paper products bound for Asia. Seafood from Prince Rupert and Alaska, bailed hay from B.C. and packaged pork from Manitoba – even China-bound McCain Superfries – are possibilities. The Port of Prince Rupert says by 2020 an estimated $2 billion will be generated by rail- and port-associated business along the Prince Rupert route.

New stuffing techniques are also being employed in Vancouver with some success: westbound specialty-grains and wood-product container traffic has increased for the last four years. But what’s really groundbreaking is the new level of co-operation between CN and CP in the Lower Mainland.

Until recently, the two companies were bitter rivals, but when they reached capacity along their lines through the Fraser Canyon and into Vancouver, something had to give. “We thought they would never agree on anything ever,” says Gill. “But when they looked at the capital costs of a double track, they both said, ‘This is stupid.’ ” The two signed a track-sharing agreement, and now eastbound trains run on CP tracks through the high-traffic canyon and westbound trains run on CN tracks. By all accounts, it’s the first rail-sharing agreement of its kind.

Also in co-operation now are the ports of Greater Vancouver. Three major authorities were amalgamated into the Vancouver Fraser Port Authority (VFPA) in January as part of the federal government’s Asia-Pacific Gateway and Corridor Initiative. The one body oversees business and growth, including the building of a third container berth at Deltaport and a proposed new container terminal at Roberts Bank. It’s part of an aggressive expansion in container capacity at the port, which has already expanded capacity by more than two million TEUs since 1995, most of which is moved out of the Lower Mainland by rail. With 2.3 million TEUs moving through the port last year, Vancouver is still tiny compared to L.A. and Long Beach (the twin ports moved 8.5 million and 7.3 million TEUs, respectively, in 2006), but it’s growing faster than either of them. Compared to Vancouver’s 25 per cent increase in TEUs moved in 2006 over 2005, L.A. showed an annual increase of 13 per cent and Long Beach an increase of 8.5 per cent; Seattle, meanwhile, moved five per cent fewer TEUs and Tacoma was flat.

As in most other urban ports, land is limited in Vancouver for more expansion, so the port authority is pushing efficiency and co-operation to deal with an expected doubling of container traffic between 2008 and 2020. Already, Vancouver leads the continent in its ability to store containers in small spaces and in the efficient use of its port berths. Vancouver averages 65 to 70 per cent berth usage, while the industry average is 50 per cent, says Scott Galloway, director of trade development for VFPA: “We run 24-7, 362.” This improves CN’s and CP’s efficiency – and thus their ability to sell their service to businesses in the eastern U.S. Still, it’s not easy to improve efficiency. “There are many links in the chain,” Galloway says. “There are trucks, warehouses, ships, terminals, the rail companies. It’s a multi-discipline sport.”

The port is also working with all levels of government to move goods faster from the berths to the rail yards. This includes a proposed dedicated trucking lane on the to-be-built Pitt River bridge that will improve traffic flow between the ports and rail intermodal yards. Right now trucks have to compete with heavy Vancouver traffic from berths in Delta and Roberts Bank, near Richmond, to the train yards in Langley and elsewhere – a journey that can take more than an hour in rush-hour traffic. The port is also experimenting with unloading ships at non-peak traffic times to improve efficiency. Another development is the Roberts Bank rail corridor led by Transport Canada; the expanded rail service, says Galloway, will help strike a balance between rail traffic growth and maintaining quality of life for nearby residents.

Not everyone thinks growth at the ports and increased traffic on the tracks is keeping up with safety, livability and the environment. “The rail companies have a responsibility to abide by the letter of the law,” says Maurine Karagianis, the provincial NDP’s transportation critic. “But the law is lax. The government is responsible to hold them to a higher standard.” In Delta, she says, the government isn’t listening to residents’ concerns about the environmental impacts of the Roberts Bank rail corridor on Burns Bog, other parkland and on rural farmland. But it’s the track between Prince George and Prince Rupert that really has her worried. At a recent Union of BC Municipalities meeting, Karagianis says, mayors from several towns along the northern CN line tried to meet with the minister responsible for rail, Kevin Falcon, but he refused. “They are worried that no resources have been put in place to deal with events like a derailment or a spill,” she says. “With more traffic, an accident is inevitable. They’re scared.”

Burns Lake council members lobbied CN to meet with them to discuss rail-safety concerns; CN, in response, sent three representatives, who helped the Burns Lake Volunteer Fire Department and police department stage a mock emergency to co-ordinate response efforts. But local council members, when contacted by BCBusiness, seemed more concerned about increased port-bound truck traffic than rail safety; in Burns Lake, trucks have to travel along Highway 16, which runs right through town. Says Tim Palmer, the village’s chief administrative officer: “The council sees the potential for spinoffs from the container port that would drive more truck traffic along the highway.” That concern is echoed up the road in Houston, where the highway and railway tracks split the town in two. Shawn Wells, Houston’s chief administrative officer, says nobody from the province or from CN has approached the town to help them plan for a derailment or other rail-related accident.

“We’ve communicated with the province and CN,” he says. “Their response has been adequate but not proactive.” He admits the town is more concerned with economic spinoffs from the container terminal than safety worries – except when it comes to the highway. He says the province originally figured the container port would only increase truck traffic on Highway 16 by two per cent. Now, he says, they have revised their forecast to 20 to 30 per cent. “Rail safety concerns are reduced, but the concerns are transferred onto the highways – and the rail lines are much safer than the highways,” he says. “Our highway wasn’t built to handle that kind of increased truck traffic.”

While Karagianis says the risk for a serious rail accident should not be overlooked, regular rail watchers such as UBC’s Dave Farrell and SFU’s Warren Gill aren’t worried. They say the companies are doing a good job with safety and maintenance. CP, which is North America’s safest railway (in terms of the number of recorded accidents), is investing $850 million back into infrastructure. CN says it is spending $430 million in Western Canada on maintenance and expansion. “It’s not in their interest for things to go wrong,” says Gill, who notes that the last few years have actually seen fewer derailments. Indeed, despite the widespread perception of regular accidents, the Railway Association of Canada reports that 2007 was the safest year since 2001.

“When you go stand along the tracks in the Fraser Canyon and watch the trains go by, it’s train after train after train. It’s like a highway,” Gill says. “But they don’t have many accidents. They’ve got a lot of money riding on it, so it’s worth it for them to keep it in good shape. I would worry more if they weren’t making money.”

That won’t happen for the foreseeable future, he says. More likely, U.S. rail giant Union Pacific will gobble up CP, forcing CN to find its own partner – probably the Burlington Northern Santa Fe Railway. More investment south of the border, says Gill, would help improve growing north-to-south trade routes. But other rail watchers aren’t so sure. “We won’t see any more major rail mergers,” says Garland Chow, the director of the Bureau of Intelligent Transportation Systems & Freight Security at UBC’s Sauder School of Business. “The U.S. regulators won’t allow it.”

Chow says the biggest hurdle for both rail lines will be infrastructure crunches. Burned several times in the past, CP and CN are shy to add infrastructure unless they know they can make money off it in the long term; the amount of track in Canada has decreased every year since 1996. Chow says that CP and CN view their duopoly position in Canada as leverage: Canadian customers don’t have much power to push them. “Infrastructure costs are huge,” he says. “They’ll have to decide: is it better to expand, improve existing infrastructure or just sit on higher earnings?” Since both companies have growing U.S. markets, they also have to be careful not to get left behind by their American rivals.

Regardless, most analysts agree that the future will be strong for rail in B.C. CP raised dividends this year and Fadi Chamoun, an analyst with UBS Securities Canada, says short-term pain for the two rail companies – due to bad weather, a slowdown in the U.S. economy and high fuel prices – will turn to gain in the mid and long term. He says fundamentals at both companies look strong. Container and bulk traffic is projected to continue to increase.

Cleaner-running engines are coming soon – maybe even fully electric ones. Both companies are more diversified than at any point in their histories. Prince Rupert’s plentiful land and perfect location hold the promise of continued expansion along CN’s northern line. While Prince Rupert may never develop into the northern mecca envisioned 100 years ago by Charles Hays, it would appear that at least part of his continental vision – and B.C.’s long-term rail prospects – are back on track.