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With demand growing in 2015, significantly leaner Canadian freight firms are taking divergent tracks to balance capacity, efficiency.


North American railways became clogged during the long cold winter of 2013-14 and stayed that way for most of the year.

This year will be a test for rail companies' abilities to get freight moving as they grapple with rising demands from shippers of everything from oil to grain and consumer goods. As always, the wild-card is the winter that is taking hold and can force railways to run shorter, slower trains and leave customers waiting.

The average train speed on North American rails slowed to about 23 miles (37 kilometres) an hour during the past winter. In mid-December, speeds had increased to almost 24 mph, but remain below the 25- and 26-mile-an-hour rates the industry posted in 2012 and 2013.

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Carlo Dade, director of the centre for trade and investment policy at the Canada West Foundation, said railways' pursuit of efficiencies and reduced operating costs has left little spare capacity to meet surges in demand, or to catch up when shipments are missed due to clogged routes.

The Western Canadian economy, rich with such resources as oil, crops, potash and lumber, is characterized by massive swings in supply (say, harvest time) and demand (global buyers of energy or fertilizer).

"With rail, the issue that we face is surge capacity," Mr. Dade said in an interview.

"We have the capacity to move everything that we produce in Western Canada, even if we don't approve the Northern Gateway pipeline, [but only] if we run 24 hours a day, seven days a week and every commodity is lined up for regular shipments at set amounts."

Yves Desjardins-Siciliano, chief executive of government-owned Via Rail Canada Inc., said the congestion has led to deteriorating on-time arrivals as passenger trains are increasingly side-tracked to make way for freight trains.

"Canada's railway business runs on shared infrastructure, that's the way it was built, and 150 years ago a train would be made up of a convoy of [freight] cars and passenger cars attached to a single locomotive. And over time they separated the trains and we're still using the same track," Mr. Desjardins-Siciliano said.

It can take years to build or upgrade railway infrastructure, and Mr. Dade said it is not possible to build a network of terminals, railroads and ports that can match the high points of the spikes. "It's like building a church for Easter Sunday. You don't build a church for Easter Sunday. You could, if you had that sort of money and had the church unused for most of the year," Mr. Dade said.

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The problem, Mr. Dade said, is that railways' pursuits of efficiency has left them less able to cope with surges in freight volume.

Operating ratios, a measure of expenses against revenue, are closely watched by railway investors. The ratio is expressed as a percentage (lower is better), but in the real world a low operating ratio is expressed by quick locomotive-turnaround times, or the number of days it takes to move an empty rail car back to a shipper.

Canadian Pacific Railway Ltd. has whittled down its operating ratio to 62.8 per cent from an industry worst 81 per cent in 2011. Canadian National Railway Co.'s is 58.8, the best in North America.

"We're running operating ratios that don't allow us to have excess capacity. It makes things cheaper to ship but it takes out surge capacity," Mr. Dade said. "The issue is, what is the balance between efficiency and surge capacity?"

In a recent Royal Bank of Canada survey, the number of rail customers that gave a negative review of railway service rose to 77 per cent from 32 per cent the previous year, as network congestion and backlogs angered everyone from grain farmers to lumber companies.

However, Walter Spracklin, an RBC equities analyst, said the scarcity of rail capacity has allowed railways to raise prices, and this will continue in 2015. The survey of major rail shippers in Canada and the United States found more than half expect to pay up to 6 per cent more for rail shipping, a reversal of the trend that once gripped the rail sector for years. Adding to the railways' pricing power is the rival trucking industry's shortage of drivers.

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The RBC survey also found shippers expect to move as much as 5 per cent more freight in 2015.

To handle this expected rise, CN is spending 18- to 20-per-cent of its $12-billion annual revenue on capital projects – half on maintenance and the rest on projects that include doubling sidings and improving yards. The Montreal-based carrier, which has a network that reaches three coasts, has the advantage of owning tracks that skirt the congested the Chicago railyards, where five other major railways interchange freight.

"Given expectations of continued freight volume growth, CN has targeted specific investments to increase network capacity, resilience and fluidity along its Edmonton-Winnipeg and Winnipeg-Chicago corridors, which see the highest freight volumes on CN's system," said Mark Hallman, a CN spokesman.

Calary-based CP is taking a different approach to congestion, creating capacity by cycling rail cars faster and shortening the time locomotives and rolling stock sit at terminal awaiting freight. Late in 2014, the company tried and failed to buy Florida-based railway CSX Corp., which CP said would ease bottlenecks by giving it new routes around Chicago.

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