THE record low temperatures and heavy snowfall that swept across Canada at the beginning of 2018 added to an operational maelstrom enveloping the country’s largest railway, Canadian National (CN). Surging oil production, a large grain harvest and what CN described at the time as “insufficient network resiliency” combined with extreme weather to create a perfect storm which left the railway struggling to deliver sufficient wagons to meet shipper demand.
By February, the issue had reached crisis point. According to a weekly performance update from the Ag Transport Coalition (ATC) for the week beginning February 18, CN supplied only 17% of hopper wagons requested by grain shippers, providing just 693 of the 4112 wagons ordered. This was the 18th time in 20 weeks CN had failed to supply at least 80% of wagons ordered by shippers. The problems were not restricted to CN. Canadian Pacific (CP) fared better than its rival, but only managed to fulfil 50% of grain car orders in the same week of February.
By this stage, frustration among the railway’s customers had begun to boil over. “As grain sits in bins and elevators across Canada, farmers are left unable to market grain; exporters can’t fulfil contracts and customers around the world are questioning Canada’s position as a reliable grain supplier,” Grain Growers of Canada said on February 26. “No other sector would stand for the poor service that the grain industry receives but no other sector is at the mercy of the railways the way the grain industry is.”
On March 5, CN president and CEO, Mr Luc Jobin, resigned and executive vice-president and chief marketing officer, Mr Jean-Jacques Ruest, was appointed interim CEO. Two days later Ruest announced details of a recovery plan to improve grain movement in western Canada and clear the backlog across the network. “We can and we will do much better, and that starts today - no excuses,” Ruest said.
Key components of the recovery plan included:
- offering incentives for operating staff to delay retirement and postpone leave, and for recent retirees to return to work
- deploying qualified managers to operate extra trains
- drafting in extra train crews in western Canada
- leasing 130 locomotives to increase capacity pending the delivery of new traction, and
- investing $C 250m ($US 190m) in line and yard capacity in western Canada.
The number of grain wagons provided for loading increased from an average of 4129 a week in April to 5756 in March and 6158 in May. Demand peaked at 6424 wagons in the final week of April. By the start of May the requirement had fallen to less than 5000 wagons a week nationally and CN had temporarily parked 1200 hopper wagons, which will be made available for any future upswing in demand. ATC says CN supplied 97% of requested grain wagons in the week beginning May 27 with all shippers receiving 80% or more of the wagons ordered.
“The decisive action we took in March to deploy more crews and locomotives has led to dramatic improvements in the movement of western Canadian grain,” Mr Doug MacDonald, CN’s vice-president of bulk said in May.
The Canadian government is also taking legislative action to protect grain producers against disruption to rail services. Under Bill C-49, the Transport Modernization Act, which became law on May 23, each railway will be required to publish a report before the crop year begins in the summer detailing their ability to move the year’s crop, based on initial estimates of the crop yield. They will also be obliged to publish by the beginning of October a winter contingency plan for the movement of grain.
“We expect railways to undertake robust planning exercises to develop these reports, in collaboration with shippers and producers,” transport minister, Mr Marc Garneau, and agriculture minister, Mr Lawrence MacAulay, said in a letter to Ruest and CP president and CEO, Mr Keith Creel on March 9. “These reports will improve transparency in the rail transportation network, enabling supply chain partners to plan their operations accordingly, and helping to reduce the kind of challenges that have arisen this year.”
Grain is not the only sector where CN has faced operational difficulties in recent months. With a sharp upturn in crude oil production in western Canada, rail is under pressure to provide additional capacity, and fast. According to Genscape, which monitors Canadian oil production, crude-by-rail (CBR) shipments in Canada increased from around 50,000 barrels per day in July 2017 to more than 100,000 barrels per day by the end of the year.
CN says it is anticipating further CBR growth through the remainder of 2017 and it has been asking shippers to provide volume commitments and sign up to a minimum 12-month contract.
CN has set its 2018 capital budget at a record $C 3.4bn and this figure includes significant investment in new equipment and infrastructure, which is intended to deliver the long-term network resiliency demanded by shippers.
At the start of June GE rolled out the first of 200 Evolution Series diesel locomotives at GE’s plant in Fort Worth, Texas. CN placed an order with GE for 200 units at the end of 2017, the largest single order for new traction placed by any Class 1 railway in North America since 2014. CN expects to receive 60 locomotives from GE in the second half of this year, reducing its reliance on lease units drafted to accommodate the surge in traffic.
Significantly for CN and CP, Bill C-49 brings a change in the calculation of the Minimum Revenue Entitlement (MRE), which limits the overall revenue Canada’s two largest railways can earn for transporting export grain from western Canada. This is intended to stimulate capital investment benefitting grain shippers. Symbolically, CN announced on May 24 - the day after the bill became law - that it will order 1000 new-generation grain wagons from National Steel Car in Hamilton, Ontario, to modernise its fleet and increase payloads. The 17m-long high-cube wagons will have an internal capacity of 138.8m3, a 10% increase compared with older vehicles. The new wagons will enable older CN-owned and leased cars to be phased out of the railway’s 12,000-strong western Canada fleet, which has an average age of more than 30 years. “With regulatory certainty, we can now make investments that will benefit the entire grain industry,” Ruest says.
CN will also purchase 350 centrebeam timber carriers from National Steel Car, with an option to purchase or lease a further 300 vehicles, and it will lease 350 high-capacity boxcars for wood pulp, paper and metals traffic.
As part of its drive to improve network capacity and supply chain resilience, CN will implement 29 major infrastructure projects this year, including track-doubling and new or extended passing loops and expansion of freight yards in Winnipeg and Edmonton. It aims to complete all 2018 capacity enhancement schemes by the middle of the fourth quarter.
The 2018 capital programme includes $C 210m of infrastructure investment in Quebec, $C 130m in Manitoba, $C 320m in Alberta, and $C 340m in British Columbia.
CN is also investing in intermodal equipment and infrastructure at terminals in Canada and the United States, and is spending around $C 400m this year on the rollout of Positive Train Control across 5600km of its US network.
The publication of CN’s first quarter results on April 23 laid bare the impact of the winter’s operational problems on the performance of the business, but also showed the first tangible signs of recovery. Revenues declined slightly to $C 3.19bn, which CN attributes primarily to a 4% year-on-year reduction in revenue ton-miles (RTMs) caused by poor network resiliency and extreme weather. These factors also contributed to a 9% increase in operating expenses, which reached $C 2.16bn. On the basis of weaker-than-expected first quarter RTMs and a longer-than-anticipated construction period for infrastructure projects, CN adjusted its forecast full-year earnings per share from $C 5.25 to $C 5.10.
Nonetheless, the railway reported improvements in operational metrics for the latter part of the first quarter. Train productivity increased by 4% in March-April, compared with January-February, while yard productivity increased 13%, locomotive utilisation rose 11% and wagon velocity was up 18%.
“With our entire team focused on restoring operational and service excellence for all our customers, CN has turned the corner on a difficult quarter and winter,” Ruest said. “Our metrics show sustained, sequential improvement, and that momentum will build as we continue to expand track capacity, add crews and bring on new locomotives.”
While there are still some clouds on the horizon - notably the uncertainty surrounding the future of the North American Free Trade Agreement (Nafta) - CN has increased its capital spending in preparation for the further strong volume growth the company expects to see in 2019. The signing in May of a new five-year collective agreement with Teamsters Canada Rail Conference for the company’s 1800 train drivers and increased regulatory certainty will also put CN on a stronger footing.