Will Railroads Merge in the East?

THE steel bands of Canada's two big railroads, which have physically and emotionally bound this huge nation together from coast to coast, are nearing a breaking point.

Buffeted by a long recession and intense competition from trucking, many analysts say there is too little traffic to support two railroads in the eastern part of Canada. Some say only one can survive.

Now Canadian Pacific Rail System, a subsidiary of shareholder-owned Canadian Pacific Ltd., has proposed buying all of government-owned Canadian National Railroad's rail assets east of Winnipeg for $1.4 billion (US$1 billion).

If approved, the buyout deal announced on Thursday would be a boon to CPRS and stem the flow of CN red ink subsidized by the government. But it would also shake rural eastern Canadian communities as rail links are cut. And it would recast Canada's historical commitment to a national railroad - one of the original inducements that helped bring the nation together in 1867.

``This offer will allow CN to reduce its debt substantially and permit the federal government to commercialize half of its largest Crown [government-owned] corporation,'' says Barry Scott, chief executive officer of CPRS. ``It is a singular opportunity for both the Canadian government and Canadian taxpayers.''

While the Canadian National and the Canadian Pacific have prospered in western Canada by hauling bulk goods such as grain, lumber, and coal over long distances, both companies have struggled in the East. There, the high costs of operating two separate, roughly parallel sets of tracks have been compounded by fierce competition from trucking. If the bid is successful, CP is expected to abandon one of the lines.

The losses have been particularly bad in the last five years, during which time the two railroads posted a combined $2 billion in red ink. Since about 1985, the federal government has been studying the problem.

But there has only been, for about the past year, a concerted push by the railroads themselves to finally fix the problem.

The CPRS and CN were deep in merger talks until July, when the two broke off. Now the CPRS has entered Plan B. To allay concerns of shippers who fear lack of competition, the deal stipulates that CN would still be allowed to market and set prices for transport services in the East - though the actual movement of goods would be executed by CPRS.

`Grave and immediate crisis'

Until the merger talks ended, CN chief executive officer Paul Tellier had been one of the most vocal proponents of combining the two railroads in the East. ``Too few Canadians realize that their nation's railways face a grave and immediate crisis,'' he said in a Feb. 15 statement that also suggested ``prompt and radical change.''

CPRS's cash offer, however, is less than one-half CN's $2.9 billion book value. CN has had at least six profitable months. And Mr. Tellier's most recent comments suggest that he may be having second thoughts. ``Our plan is showing results,'' he said in a statement. ``We recorded a profit of $100 million in the first half of this year, compared to a loss of $33 million during the same period a year ago, and the results for the second half of the year look equally promising.''

Under the CPRS plan, about 2,500 jobs would be cut as the newly combined CPRS operation reduced its work force to 16,500 by 1995. The two companies say they already plan by 1995 to abandon or sell 25 percent of their 8,200 miles of track east of Winnipeg, with more cuts to come in following years. But the rate of abandonment will be much faster under one owner, analysts say.

Ottawa's resistance

Despite what seem to be clear financial advantages to the CPRS and to Canadian taxpayers, Ottawa has resisted combining the two operations and cutting track for political reasons. Cutting rail service to hundreds of communities in the East promises distinct political hazards.

Beyond the worry of losing votes in those communities, news reports here have hinted that the Liberal government of Prime Minister Jean Chretien may fear that job cuts or lost rail links would play into the hands of Quebec's new separatist government.

Ottawa is trying to build a case for Quebec to remain in Canada, pending a referendum on separation that the new separatists Parti Qucois government has promised to hold next year. The PQ is said to be looking to highlight areas in which Quebec suffers at the expense of the rest of Canada. But some analysts don't think that the separatists will make hay with this deal.

``I don't think whoever is in power in Quebec City will make much of a difference,'' says Marc Gaudry, an economist at the University of Montreal who specializes in transportation issues. ``You can always make cannon fodder, but something has to be done to keep one [rail line] going.''

Mr. Gaudry suggests that any bid by the PQ to defend having two railroads in the province will make PQ leader Jacques Parizeau look like a big spender who wants to use taxpayer dollars to subsidize unprofitable enterprises. Others say the Quebec separatists will see the flip side of the coin in this proposal.

``From Quebec's standpoint, it's a win,'' says a CPRS executive who asked not to be identified. ``Putting this offer in only three weeks after separatists were elected means this is a vote of confidence by the private sector.... We're not flapping our wings anxiously about the possibility of separation. We're saying its going to be business as usual no matter what happens.''

Because CN is owned by the federal government, approval is now being sought from Minister of Transportation Douglas Young. Some commentators read Ottawa's reaction as cool because of the brevity and word choice of a government spokeswoman. ``It is an unsolicited proposal,'' she said. ``The government will announce its policy decision in due course.''