CP Rail Leaves Montreal
Ever since the first CP train pulled out of Montreal on June 28, 1886, bound for the new province of British Columbia, Canadian Pacific has played a dominant role in the nation's corporate mythology. And so last week, when CP Ltd. announced that it was moving its railway headquarters from Montreal to Calgary - part of a countrywide reorganization that will eliminate 1,450 white-collar jobs - reaction was swift. In the West, commentators hailed it as a sign of a major power-shift westward, proof that Calgary is a city on the move. In Montreal, locals bemoaned another blow to an economically beleaguered community and criticized the timing of the announcement, less than a month after the Quebec referendum. And yet, CP's announcement appeared to be based not on nation-making or breaking but on simple business realities. David O'Brien, president and chief operating officer of the railway's parent company, CP Ltd., pointed out that 80 per cent of CP Rail's business is in Western Canada. "It was a business decision that arose out of a need to consolidate and reduce staff and to be closer to the centre of our business," insists O'Brien. "In the Canadian way, it can be taken apart and viewed very politically - but this was not a political decision."
In fact, the CP announcement - coming just days after the $2.2 billion privatization of Canadian National Railways in the biggest initial public offering in Canadian history - is just the latest development in a massive reconfiguration of the country's rail industry. Both CN and CP have faced fierce competition over the years from American railways and from truckers, especially in Central and Eastern Canada, where the two railways say they have been losing money since the late 1980s. And both have gone through several waves of downsizing and cost reductions. "The railway business is a very mature industry and traffic isn't growing very much," observes Bill Waters, an associate professor of transportation at the University of British Columbia in Vancouver. The railways, Waters adds, have been forced to become more efficient to improve their returns.
Investors apparently think the two companies are on the right track. At the end of the week, CN shares were trading at $20.88 - $4.63 above the offering price on Nov. 17, privatization day. CP shares were at $24.75 - $1.50 above their closing price before the restructuring announcement. Still, some analysts expressed concerns about the industry's long-term prospects. "I think the railways are making valiant efforts to improve productivity and I think they're making gains," said John Heads, director of the University of Manitoba's Transport Institute. But Heads warned, "They've still got a long way to go."
In the meantime, the CP reorganization will have personal, not just corporate, consequences. The latest moves will save the company about $100 million a year by eliminating a quarter of its executive, managerial and other administrative staff. In Montreal, the company is abolishing 484 jobs and relocating another 226 to Calgary; in Toronto, 353 jobs will be abolished and 287 moved. Workers will also be laid off or transferred from Vancouver, Winnipeg, Minneapolis, and Albany, N.Y. And even those workers who expect to be offered new jobs in Calgary face difficult decisions. Réal Paquette, 42, a mechanographic clerk who has worked for CP in Montreal for 23 years, expressed concern about abandoning his family's roots in Quebec. "I worry about being all alone there, about being an expatriate," said Paquette. Eric Paul Magnan, a 26-year-old crew dispatcher in Montreal, says that he, too, is fairly confident he will be offered a transfer. Still, his girlfriend's family is in the city "and they are very important to her," he says. "And she would have difficulty speaking English. But if I lose my job, she can't support us both - there are choices to make and it's not easy."
In addition, many Montrealers seemed convinced that CP had delayed its announcement until after the referendum to avoid influencing the vote. CP officials denied any such connection. And most commentators appeared to accept that the move itself was firmly rooted in business considerations. Even Daniel Paillé, the Parti Québécois industry and commerce minister, agreed that was the case. But Paillé noted that supporters of the No side had argued during the referendum campaign that separation would bring job losses. "Even though the answer was No," he said, "cp cut anyway - it gives us an idea of the value of what was said during the referendum campaign." CP Rail will continue to employ 2,540 people in Montreal.
Calgarians, naturally, were delighted with CP's move. The company plans to transfer 732 employees to Calgary and to hire about 100 additional staff locally. Civic boosters were eagerly calculating the potential property tax windfalls and other spinoffs from the move. Mayor Al Duerr expressed sympathy for the "people involved in this decision." But he said that Calgarians "have been through some very difficult times ourselves," and "are now reaping the benefits of past sacrifices." He pointed out that after CP takes up residence in the city, 92 of Canada's top 750 companies, measured by annual revenues, will be headquartered in Calgary. That would put his city second only to Toronto, with 118, and ahead of Montreal, with 89.
In addition to consolidating administrative staff in Calgary, the reorganization will make the CP Rail System a wholly owned subsidiary, rather than merely a division, of CP Ltd. That will give the railway direct access to capital markets and expand its options in such areas as mergers or joint ventures. But the CP Rail of the future will be a much smaller version of its former self. When the current reorganization is complete by the end of next year, CP Rail will have trimmed its payroll to about 21,000 employees, down from 34,800 in 1985. The company has also knocked about 3,200 km out of its roughly 32,000-km-long track system.
But both railways still face challenges - especially now that several U.S. competitors are seeking to merge in the hope of finding even greater efficiencies. Both Canadian railways have been cutting costs, and both are currently profitable. But their operating ratios, a key industry yardstick that measures the railways' operating expenses as a percentage of revenues, are hovering in the 90-per-cent range. Most of the major American railroads boast stronger performances, with average operating ratios of 80 per cent or lower. In part, that is because the Canadian industry has had to maintain branch lines in low-traffic areas. Although both companies do well transporting bulk commodities over long distances in Western Canada, there are problems in the eastern portion of their operations - where there is fierce competition from trucking over shorter distances, and excess rail capacity. In 1994, CN and CP executives spent months in fruitless negotiations to merge those eastern operations. When that failed, CP tried unsuccessfully to buy cn's eastern unit outright.
As part of CP's reorganization, the company is forming a new eastern operating unit in Montreal that will be responsible for the Montreal-Chicago corridor and the Delaware & Hudson Railway, a CP subsidiary in the northeastern United States. And some analysts last week suggested that CP could be positioning itself to eventually abandon or sell those unprofitable operations - a possibility that concerns consumer groups. David Glastonbury, president of Transport 2000 Canada, an Ottawa-based advocacy group for public transportation, points out that CP created an Atlantic unit several years ago and eventually sold those operations. "If it didn't pay, we could see the same thing happening for the eastern organization they are setting up," insists Glastonbury.
Company officials counter that they are committed to rebuilding their eastern business through new technology and other efficiencies. And they say that the creation of what will essentially be a regional railway will allow the group to focus more closely on the unique challenges that operation faces. Still, O'Brien concedes that "whenever you're losing large sums of money, you have to start looking at your alternatives." That might include sharing some lines or other facilities with CN, but it could also lead eventually to a revival of the old merger talks. "Our judgment 18 months ago was that some form of consolidation between CN and CP in the East probably made the most sense," O'Brien said last week. "And I don't know of anything that would change that judgment." However monumental the developments in the railway industry this month have been, it seems clear that the reconfiguration - and downsizing - of Canada's railways is far from complete.
Maclean's December 4, 1995