Canadian National Railway System Business Information, Profile, and History

History of Canadian National Railway System

The state-owned Canadian National Railway System (CN) is the largest transcontinental railway in Canada. It was formed just prior to the 1920s through the integration of two of the country's largest railroads, Canadian Northern and Grand Trunk. Although they were not the first railroads to come under government control, these two systems formed the basis of Canada's largest transportation conglomerate, which now also includes real estate and communications concerns.

CN was created as a result of the near-collapse of the Canadian Northern and Grand Trunk railways not long after the end of the First World War. When a postwar economic depression undermined the railroads' finances, the consolidation provided a way for the companies to avoid defaults on C$1.3 billion in loans. It also gave Canada the second largest railway system in the world, with almost 100,000 employees and over 22,000 miles of track, nearly twice as much as its nearest competitor.

Canada's railroads had enjoyed the support of government since the colonial era, when the Grand Trunk (GT) emerged as the dominion's first major railway. Incorporated in 1852, GT soon dominated the railway boom concentrated in southeast Canada between Montreal and Toronto. Close government cooperation came in the form of land grants, loans, and loan guarantees. The railway's first president, John Ross, also held a high government position.

Railroad and government officials, however, envisioned disparate goals for GT--profits for its British shareholders on the one hand and settlement of the vast western territories on the other. The public and private interests in the railway clashed before the end of the decade. In 1858 British Columbia, on the western coast, became a Crown colony and western settlement became government policy. A transcontinental railway would bind the colonies together and prevent American squatters from seizing the territory before Canadians had a chance, and as the dominion's largest railway, the GT would naturally have been the vehicle of choice for this western movement. Expensive construction projects, however, had drained finances to the point that the company could not make interest payments on its loans, and shareholders--who had yet to receive the dividends promised at the company's inception--would not agree to what they saw as a losing venture. Under pressure from both the government and the company's investors, Ross and most of his board of directors resigned in 1858. GT's English shareholders sent Edward Watkin, a British railway executive who represented England's preeminence in the industry, as Ross's replacement.

Watkin and his managing director, Charles J. Brydges, continued the traditional mix of public and private support for the GT, but concentrated on financial reorganization and capital improvements. By 1865 they had built up traffic by 50 percent, increased net earnings, and made plans to replace iron rails with steel, upgrade from wood fuel to coal, and standardize rail gauges.

As did his predecessor, Watkin had a vision of a coast-to-coast railway that would promote western settlement and bring about Canadian confederation. Two factors stood in the way: shareholders who wanted customers to be settled in the west before they would build a railway to serve them, and the Hudson's Bay Company, owner of the territory between the eastern and western colonies. In 1863 Watkin engineered the takeover of the Hudson's Bay Company by a London-based finance company, bringing the possibility of a coast-to-coast railway even closer. In 1869, however, Watkin was ousted by those shareholders, led by Captain Henry W. Tyler, who opposed investment in the intercolonial railway. The Canadian government bought out the Hudson's Bay Company, and Grand Trunk began an era of eastern consolidation under Tyler.

During the 1880s, Tyler oversaw the absorption of 16 railways and expanded freight service to the United States. His concentration on United States markets was rewarded--25 percent of the railway's earnings came from meat and grain traffic between Chicago and New England. In 1882 GT took over its largest competitor, the Great Western, and in 1888 it assumed control of Ontario's Northern Railway.

In the midst of all this consolidation, Canada's prime minister, John A. MacDonald, gave up his attempts to persuade Tyler and the GT to build to the western coast. Instead he contracted with a new system, the Canadian Pacific Railway, to build a transcontinental railway from the west. This would turn out to be a momentous decision--privately-held Canadian Pacific Railway remains CN's largest rail competitor.

Tyler's 18-year reign at Grand Trunk was brought to an end by economic recession and, as with his predecessors, 20,000 fickle stockholders who blamed him for the loss of government support that, instead, sustained the Canadian Pacific during the 'lean years.' Tyler's successor, Sir Charles Rivers Wilson, hired Charles Melville Hays--an American with railroad experience--to manage the nearly 5,000 miles of Grand Trunk track. Hays brought American management techniques to the still British-owned GT, made such physical improvements as better brakes and improved grades, and rebuilt the suspension bridge over the Niagara River into the United States. All these changes improved service and, by the turn of the century, operating expenses had been reduced by 10 percent. Hays also satisfied English shareholders by enabling the company to finally pay out dividends on its shares. He quickly realized, though, that without service to the west, the Grand Trunk was just a 'feeder line' for the western markets served by Canadian Pacific.

Formidable competition also came from the Canadian Northern railroad, owned by William Mackenzie and Donald Mann, partners in Mackenzie Mann & Co. Limited. The men, who met when both were working for Canadian Pacific, acquired their first railway in 1896, after they had decided to branch out on their own. Concentrating on the prairies to the north, Mackenzie and Mann built up the Canadian Northern by consolidating many small 'farmer's railroads' into a system that offered transportation to 130 communities, with the motto 'Energy, Enterprise, Ability.' They built connecting lines with the help of provincial grants and controlled 1200 miles of track, serving Canada's bread basket by 1902.

By 1896 all of Canada was booming; prime minister Sir Wilfred Laurier heralded the arrival of 'Canada's Century.' That year Grand Trunk's Charles M. Hays was finally able to announce the railroad's plan to open a line to the Pacific at the port of Prince Rupert. Grand Trunk Pacific (GTP), created as a subsidiary, was Hays's strategy for breaking out of the corner into which the railroad had been backed and ensuring Grand Trunk's future. He had tried to buy out the Canadian Northern, but Mackenzie and Mann hoped to build their own transcontinental railroad. In 1902, however, it was Mackenzie's turn to suggest that the two exchange traffic instead of building duplicate track, but by then Grand Trunk was too deep into GTP. The competition between Grand Trunk and Canadian Northern would prove to be the ruin of both systems.

The Grand Trunk Pacific line was completed in 1914, but it was an empty victory. The Panama Canal opened that same year, drawing a steady stream of traffic from Vancouver and making that city into a major port, while Prince Rupert languished. In addition, British ships no longer enjoyed the strong presence in the North Atlantic that they once did, further reducing traffic for Prince Rupert and GTP. The event that might have helped to keep Grand Trunk in private hands had it been undertaken 20 years earlier was now contributing to its failure.

By 1916 both Canadian Northern and Grand Trunk were on the brink of receivership. Overextension had stressed finances: Canada had over twice as many railway miles per capita as the United States, much of it duplicating service. A royal commission recommended nationalization of the two, including Grand Trunk's subsidiary, GTP. It took four years to bring the former competitors together--in addition to the National Transcontinental and the Intercolonial, two government lines--to form the Canadian National Railways.

The amalgamation brought together over 90 different railways. The system was divided into four geographical regions: the Atlantic, with headquarters in Moncton; the Central, headquartered in Toronto; the Grand Trunk Western, a United States system, with headquarters in Detroit, Michigan; and the Western region, headquartered in Winnipeg. Each region had its own general manager and superintendents. CN's officers were all drawn from the various systems, which helped to unify the previously rival railways.

The reorganization was directed by David B. Hanna, former vice president of the Canadian Northern. Despite the C$1.3 billion debt assumed by the newly formed system, Hanna began a program to rehabilitate the railroad's physical property and bring it up to par with that of the Canadian Pacific. His task was made more difficult by a postwar industrial recession, a flu epidemic, and history-making bad weather, but the program was supported by Prime Minister Mackenzie King's Liberal government and the healthy economy of the 1920s. Hanna also began to focus on new markets for CN, especially Asia and Europe. The Canadian Government Merchant Marine, a shipping arm of the CN created in 1919, helped open Asian markets and increased the level of competition with Canadian Pacific, which was already well established in the Pacific basin.

By 1923 Grand Trunk had been officially assimilated into the Canadian National system and Sir Henry Thornton became president. Thornton continued to improve lines and equipment, reduce expenses, and improve service.

CN began to compete with Canadian Pacific for the Asia-to-New York silk trade in 1925. Competition between the two was fierce--every hour saved between the two coasts meant higher profits, because insurance on raw silk, a perishable commodity, ran as high as 6 percent per hour. The CN's 'silkers'--those trains carrying the precious cargo--traveled at speeds up to 90 miles per hour and took precedence over all other trains, including express passenger lines. They averaged just four days to cross the continent. The largest CN silker ran in October of 1927. The 21-car train carried 7,200 bales of silk worth C$7 million. The success of CN's Asian freight service was encouraging, but the worldwide depression that began in 1929 brought an end to that optimism.

Caught in the midst of trying to increase both the quality and quantity of services, the railway was shocked by the severity of the unexpected depression. In 1930 the support of the Liberal government was lost and by 1932 Thornton was forced to resign and business had been curtailed. By that time the system's earnings had fallen 40 percent below those in its peak year of 1928, and CN was carrying only half the traffic it had two years earlier. A smaller-than-normal grain crop and a drop in the Japanese silk trade worsened the effects of the Depression.

1932 was the low point of the Depression for Canadian National, with operating revenues decreasing a further 20 percent from those of the previous year. The Depression was not the only force moving against the CN: new modes of transportation were quickly being developed to compete with the outdated railway system. Passengers preferred the convenience of buses, cars, and airplanes; shippers preferred the lower-cost, specialized services of the trucking industry.

Trade picked up after 1932, when the British empire employed such protectionist measures as quotas and increased customs duties on non-empire trade. Although business was generally improving by 1936, the Depression and decreased Asian trade brought about the demise of the Canadian Government Merchant Marine. A brief trade war with Japan was settled in 1935, and CN enjoyed good trade relations with that country until 1941, when the United States, Britain, and Canada froze all Japanese assets during World War II.

The years of World War II provided a boom in transportation that enabled Canadian National to make interest payments on all of its publicly held debt. At the close of the 1940s, however, the company's debts began rising, freight volumes were falling, and passenger service appeared doomed. Donald Gordon, a banker and chairman of the World War II War Prices and Trade Board, was selected as president of CN. Gordon invested in the conversion from steam to diesel and modernization of the aging railway's physical properties--three-fourths of the system's locomotives were over 30 years old. In 1952 the Canadian government gave Gordon the debt relief he needed. Recapitalization cut the system's interest charges by more than C$22 million per year.

In addition to the financial difficulties facing CN, there were growing problems on the labor front. Technological advances made within the rail industry cut staffing requirements: automation of train control and clerical operations decreased the need for office staff, while diesel locomotives and higher capacity freightcars allowed carriers to operate longer and heavier trains and lengthened the distance between service stops, affecting train and repair personnel. While rail management worked to maximize productivity gains, rail labor unions fought to save their members' jobs.

Tensions between management and labor came to a head several times during the 1950s. A strike by 120,000 Canadian railway workers in August 1950 brought rail transport to a halt, shutting down traffic from coast to coast. A government injunction sent the strikers back to work within two days. Other strikes were threatened during the 1950s, but arbitration kept the trains running.

Donald Gordon accomplished many goals during the 1950s and 1960s. These achievements included decentralized management, replacing old rolling stock with new specialized containers, adding road transport to CN's roster of services, introducing computerized processes, and improving employee training. In spite of these measures, the railroad was still commonly viewed as a tool for national development, rather than a profit-making venture. As technology continued to diminish the role of railways, Canadian government and CN officials allowed the system to become mired in deficits. Changing regulations, irregular funding, and other political machinations were often caused by party changes. These issues limited CN's ability to grow and diversify in an age when the company could not afford to be confined to rail transport.

In the late 1960s deregulation and revision of government support put CN on the road to stability and increased profits. The National Transportation Act of 1967 removed nearly all the constraints on rates that had bound both the CN and Canadian Pacific. The legislation also compensated railways for unprofitable passenger services and branch lines that had been deemed necessary for the public welfare. CN was able to end its unprofitable passenger service in Newfoundland in 1969 as a result of the new law.

During the 1970s, CN's management concentrated on increasing autonomy and profitability. The organization of profit centers improved managerial accountability and highlighted areas of government-enforced losses. CN also concentrated on diversification, spreading the company's interests into telecommunications, hotels, and oil exploration. This measure took pressure off the company's slowing railway business.

Much of the railway's success in the 1980s was credited to increased independence from government constraints. The 1983 Western Grain Transportation Act brought an end to the 84-year-old Crow's Nest Pass Act, which had fixed shipping rates at 1925 levels. Only 20 percent of the actual transportation costs had been covered, costing Canada's railways C$300 million per year. The legislative changes helped Canadian National invest in such technical improvements as double tracks that prevent bottlenecks, speed rail traffic, and improve the system's ability to compete with United States railroads. The late 1980s also saw CN enter the stack-car market. Having a stack of two freight containers required investments in new lift equipment and higher tunnel clearances, but the increased capacity helped CN compete for lucrative contracts to transport Asian auto parts.

Two major strikes in the late 1980s marred a decade-long record of good labor relations. The Associated Railway Unions's 50,000 members walked out over wages, pensions, and job security in August of 1987. By the sixth day of the strike, government legislation that levied fines against workers who stayed off the job ended the stoppage. The legislation came in handy less than a week later, when 2,500 members of the Brotherhood of Locomotive Engineers threatened to strike. In an effort to head off labor disputes, CN established a forum for labor and management in 1991.

The early 1990s proved to be less financially stable for Canadian National than the previous decade. A recession, combined with heavy competition and some lingering regulatory constraints, hampered the company's earnings. To improve profitability, Canadian National's gas and oil subsidiary, CN Exploration, was privatized in 1991 and the proceeds from the sale were used to reduce the federal deficit. Early in 1992 the railway combined its United States subsidiary, the Grand Trunk Corp., with its Canadian rail interests, thereby creating CN North America. The reorganization was part of an effort to exploit continental markets, provide more efficient, cost-effective service to CN's shippers, and increase cross-border business, which stood at about 25 percent.

Despite struggles and setbacks throughout much of the century, by the early 1990s Canadian National had developed into a highly-diversified company. To offset the slowdown in the rail industry, the company had invested in such non-transportation interests as real estate, communications, consulting, and tourism. These ventures should help to smoothly pave the way for Canadian National as it moves into the next century.

Principal Subsidiaries: Canac International Inc.; Canac International Ltd.; Canadian National Railway Company; Canadian National Telegraph Company; CN Tower Limited; CN North America; CN Real Estate.