Railway profits don’t impress unhappy customers

A lack of competition is good for shareholders but not shippers

grain railway cars

Robust financial results posted by CN and CP for the first quarter of 2014 aren’t winning applause from customers who have suffered a winter of unpredictable freight service.

“CN and CP already have the vast majority of the business in Western Canada, and they are focused on reducing costs to improve their operating ratios,” says Wade Sobkowich, executive director of the Western Grain Elevators Association. “This manifests itself as worse service for their customers.”

The railways are preoccupied by creating value for shareholders through streamlining their operations, “but this does not necessarily translate to an efficient system for railway customers,” he added.

CP posted its “best first-quarter financial results in company history” with a 16 per cent rise in net income to more than $217 million, said CEO Hunter Harrison.

CN’s net income was $623 million for the first quarter of 2014 compared with net income of $555 million for the same period last year, said CEO Claude Mongeau.

The performance drew fawning praise from stock market analysts, but Sobkowich said it comes at the expense of captive shippers.

“Unlike the railways’ customers, shareholders can come and go, an activity which, in part, drives share values. Therefore, the railways are focused on shareholder returns above all else, including customer service.

“What we are experiencing amounts to a transfer of wealth from railway customers to railway shareholders,” he added. “Competition is absent, and the legislation is inadequate to provide the proper disciplines for decent rail capacity and service for shippers in all industries, primarily those that are captive to rail.”

A massive and late Prairie crop last year combined with a long and harsh winter to create a mammoth backlog in rail shipments that could cost farmers more than $7 billion in lost sales and lower prices, grain companies say. Other sectors haven’t calculated the financial damage.

After months of complaints about poor rail service from grain farmers and companies as well as other western commodity shippers, the government issued a cabinet order in early March ordering the railways to ramp up grain shipments to 500,000 tonnes a week by mid-April or face $100,000 a day fines. To date, the railways have met the targets.

The government has also brought in C-30, the Fair Rail for Grain Farmers Act, which would enable the Canadian Transportation Agency to order the railways to compensate any shipper for losses resulting from a carrier’s failure to live up to the terms of a transportation contract. The government rejected four Liberal and nine NDP amendments to increased fines and subject the railways to more competition.

While the arrival of warmer weather has improved grain transportation, there remains a shortfall of 68,000 rail cars, Sobkowich said. “We are still not seeing enough capacity for shipping to the United States or Eastern Canada, and we are still having difficulty getting trains spotted at locations of our choosing — i.e. where the product is for a particular vessel.”

Harrison didn’t mention his company’s unhappy customers when he bragged “CP delivered solid results in a period that was severely impacted by extraordinary cold and severe winter weather conditions. Despite a slow start to the year and the reduced capacity that limited our ability to meet strong customer demand, we still have the utmost confidence in our ability to achieve our financial targets for 2014.”

CN’s Mongeau at least acknowledged the weather had “reduced our capacity to serve our customers.” With spring at hand, “CN’s recovery is now well underway, with key safety, operating and service metrics returning to pre-winter levels.”

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