Canadian National Railway Company

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Canadian National Railway Company

935 de La Gauchetière Street West
Montreal, Quebec H3B 2M9
Canada
Telephone: (514) 399-5430
Toll Free: (888) 888-5909
Fax: (204) 987-9310
Web site: http://www.cn.ca

Public Company
Incorporated: 1919 as Canadian National Railway Company Limited
Employees: 22,679
Sales: CAD 6.55 billion ($5.46 billion) (2004)
Stock Exchanges: Toronto New York
Ticker Symbols: CNR (Toronto); CNI (New York)
NAIC: 482111 Line-Haul Railroads; 482112 Short Line Railroads; 483113 Coastal and Great Lakes Freight Transportation; 488210 Support Activities for Rail Transportation; 488510 Freight Transportation Arrangement

One of the six major North American railways, known as Class 1 railways, Canadian National Railway Company (CN) operates the largest rail network in Canada and the only transcontinental network in North America. In Canada, the CN network encompasses 12,900 route miles in eight Canadian provinces, including the nation's five major ports—Vancouver and Prince Rupert, British Columbia, on the Pacific; the key Great Lakes port of Thunder Bay, Ontario; and Montreal and Halifax, Nova Scotia, on the Atlantic. The U.S. network comprises 6,400 route miles in 16 states, connecting the Canadian network to the U.S. Midwest (including Chicago) down to the Gulf of Mexico and the ports of Mobile, Alabama, and New Orleans. The company is also able to offer its customers access to Mexico and the U.S. Southwest through a marketing alliance with the Kansas City Southern Railway Company, with the two networks interconnecting in Jackson, Mississippi. The diversified freight transported over CN rails are well balanced among petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, automotive products, and intermodal services (the movement of trailers and containers on railroad freight cars). CN also holds interests in two overseas railways: 42.5 percent of English, Welsh & Scottish Railway Holdings Limited of Great Britain and 33 percent of Australian Transport Network Limited.

CN was formed in the post-World War I era through the integration and nationalization 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. After 78 years as a Crown corporation, CN was privatized through an initial public offering (IPO) on November 28, 1995. This was the largest privatization in Canadian history, raising CAD 2.26 billion for the government of Canada. Key post-privatization events included the 1999 acquisition of Illinois Central Corporation, the scuttling by regulators of a proposed merger with Burlington Northern Santa Fe Corporation in 2000, and the acquisitions of Wisconsin Central Transportation Corporation (2001), the rail and marine holdings of Great Lakes Transportation LLC (2004), and BC Rail Ltd. (2004).

The Grand Trunk and
Canadian Northern Predecessors

CN was created as a result of the near-collapse of the Canadian Northern and Grand Trunk railways not long after the end of World War I. When a postwar economic depression undermined the railroads' finances, the consolidation provided a way for the companies to avoid defaults on CAD 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 central 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 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 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 American 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, 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 remained CN's largest rail competitor into the early 21st century.

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 end 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 1,200 miles of track, serving Canada's breadbasket 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.

Company Perspectives:

Success in any business depends on motivated people managing valuable assets to deliver safe and reliable customer-focused service while conscientiously controlling costs. These five elements are key to delivering our service and keeping our promise to "do what we say we will do." Understanding how these interconnected elements work together is crucial for everybody in the company, and is part of a concept we call "How We Work and Why."

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. Meanwhile, Canadian Northern completed its transcontinental line from Vancouver to Montreal in 1915.

Post-World War I Formation of Canadian National

By 1916 both Canadian Northern and Grand Trunk were on the brink of receivership. Overextension had stressed finances: Canada had at least 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 one of the country's first Crown corporations, the Canadian National Railway Company Limited, created on June 6, 1919.

The amalgamation brought together over 90 different railways to form a system divided into four geographical regions: the Atlantic, with headquarters in Moncton; the Central, headquartered in Toronto; the Grand Trunk Western, a U.S. 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 CAD 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. Now fully formed, CN stood as one of the world's largest railroads with more than 22,000 miles of track and more than 100,000 employees. CN also operated express services, a telegraph company, a chain of hotels, and a steamship line. On the railroad side, Thornton continued to improve lines, equipment, and service and also reduce expenses. To entertain train travelers he established the first radio network in both Canada and North America in 1923. Ten years later the network was sold to the federal government, and it would evolve into the Canadian Broadcasting Corporation.

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," 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 1927. The 21-car train carried 7,200 bales of silk worth CAD 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.

Key Dates:

1852:: Grand Trunk (GT) railway is incorporated.
1896:: Canadian Northern begins building its railway system.
1914:: GT completes its transcontinental railway, from Moncton, New Brunswick, to Prince Rupert, British Columbia.
1915:: Canadian Northern finishes its transcontinental line from Vancouver to Montreal.
1917:: Canadian Northern is taken over by the Canadian government.
1919:: The Canadian government incorporates Canadian National Railway Company Limited (CN) as a Crown corporation, which includes Canadian Northern and a number of other railroads.
1923:: CN completes takeover of GT, creating one of the world's largest railway networks with more than 22,000 miles of track.
1992:: Canadian and U.S. rail holdings are consolidated to create CN North America; Paul Tellier is named CEO and begins major cost-cutting effort.
1995:: Canadian National Railway is privatized through a CAD 2.26 billion initial public offering (IPO).
1998:: CN and Illinois Central Corporation (IC) enter into a marketing alliance with the Kansas City Southern Railway Company.
1999:: CN acquires IC for CAD 2.4 billion; company agrees to a $6 billion merger with Burlington Northern Santa Fe Corporation (BNSF).
2000:: The U.S. Surface Transportation Board issues moratorium on rail mergers, scuttling the BNSF deal.
2001:: Wisconsin Central Transportation Corporation is acquired.
2004:: CN completes two acquisitions: the rail and marine holdings of Great Lakes Transportation LLC and BC Rail Ltd.

1930s Through 1950s:
Financial Travails, Wartime, and Labor Strife

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 Great Depression.

The year 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.

In the meantime, in another quirky aspect of CN's history, the Canadian government in 1937 established Trans-Canada Air Lines (TCA) as a national airline and made it a subsidiary of Canadian National Railway. TCA, renamed Air Canada in 1964, remained a CN subsidiary until 1977 when it became a direct subsidiary of the federal government.

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 and to make its first profits. 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 CAD 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.

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.

Deregulation and Increasing Autonomy: 1960s–80s

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.

In 1976 the Canadian government formed Via Rail Canada Inc. as a nationwide passenger rail service. Via Rail gradually began taking over responsibility for passenger train operation from both CN and archrival Canadian Pacific, a process largely complete by 1979. This relieved both railroad companies of the burden of running unprofitable passenger services.

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 expenses had been covered, costing Canada's railways CAD 300 million per year.

The legislative changes freed capital for investment in such technical improvements as double tracks that prevented bottlenecks, speeded rail traffic, and improved the system's ability to compete with U.S. railroads. The late 1980s also saw CN enter the stack-car market. Having a stack of two freight containers required hefty investments in new lift equipment and higher tunnel clearances, but the added capacity increased efficiency and helped CN compete for lucrative contracts to transport Asian auto parts.

In 1987, 46-year CN veteran Ronald Lawless was appointed president and CEO of the transport company. Over the course of his five-year tenure, the executive oversaw a series of massive cutbacks, slashing employment from 100,000 to 40,000; eliminating over 40 percent of the railway's CAD 3.4 billion debt, and divesting (per a 1988 government order) the corporation's hotel, telecommunications, and trucking operations.

Two major strikes in the late 1980s marred a decade-long record of good labor relations. The Associated Railway Union's 50,000 members walked out over wages, pensions, and job security in August 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 reduced traffic that had already been siphoned off by competitors in the trucking and U.S. rail industries. Lingering regulatory constraints and high taxes further hampered the company's fiscal performance. 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 U.S. 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 of annual sales.

1992–95: Cost Cutting and
Privatization Under Tellier

But in spite of Lawless's various cutbacks and reorganizations, an internal study completed in 1990 showed that CN was still one of North America's least competitive railways. Revenues declined 22 percent from 1988 to 1992, when the company suffered a CAD 893.7 million loss. When Lawless was called away to wield his budget axe at Via Rail in 1992, CN hired Paul M. Tellier as president and CEO. It did not take the new executive long to assess the situation. In 1993, he warned that the company's annual losses would continue to surge, reaching CAD 1.5 billion by 1998, unless drastic measures were taken. Although some questioned this career civil servant's knowledge of the rail industry, Tellier was able—by 1994—to effect CN's first profit since 1990. It was not an easy task.

Tellier first cut employment at all levels. To show fiscal leadership and decentralize management, he slashed administrative layers by half in some cases. By 1993, he had reduced overall payroll to 32,700 employees. Although these layoffs cost CN CAD 80 million in 1993 alone (the company was obliged to buy out unionized workers' employment security contracts at an average of CAD 80,000 each) they promised increased productivity in the years to come.

Tellier even initiated merger negotiations with longtime rival CP Rail in 1992. When those talks broke down, the two firms tried to work out a deal to combine their beleaguered eastern operations, which together had lost over CAD 2 billion in recent years. More than one industry analyst had noted that overcapacity, especially east of Winnipeg, was a serious and ongoing threat to both players' profitability. A 1993 review by the National Transportation Act Review Commission asserted that "oversized rail networks" had plagued the industry in general since the 1920s; at CN in particular, 90 percent of its tonnage traversed only one-third of its total trackage. Nonetheless, late in 1994, Transport Minister Douglas Young put the brakes on CP Rail's CAD 1.4 billion offer to purchase CN's eastern assets, noting that the purchase price undervalued the property by at least 50 percent and threatened to reduce competition as well.

After years of denying that CN was being groomed for a launch on the public markets, legislation to that very effect was introduced in May 1995. The bill proposing Canadian National's privatization restricted individual share ownership to 15 percent and called for the creation of an employee stock option plan. In light of Quebec's flirtations with succession, the legislation also required the company to maintain its headquarters in Montreal and remain bilingual. Unlike previous IPOs of nationalized businesses, this one did not restrict share ownership to Canadians. The sheer size of the offering, at least CAD 1.6 billion, was expected to overwhelm the Canadian stock market. The federal government anticipated an estimated CAD 1 billion return on the sale.

Before being ready to go to market, however, CN still required some "primping." As part of an effort to cut debt by 50 percent, and therefore make its massive stock flotation attractive to domestic and international investors, the firm sold to the government its real estate holdings, which included the CN Tower in Toronto and 85,000 acres of property, for about CAD 500 million. Thus, prior to the offering, the company's only significant nonrail holding was wholly owned subsidiary Canac, which was involved in worldwide consulting on transportation and in project management.

These final moves enabled CN to proceed with the offering, which was completed on November 28, 1995. All of the company's shares were sold to investors via the Toronto, Montreal, and New York stock exchanges. Through an employee stock ownership plan, 42 percent of the shares went to CN employees. The offering raised CAD 2.26 billion ($1.65 billion) for government coffers, representing the largest privatization in Canadian history.

Post-Privatization Efficiency Drive and
Acquisition of Illinois Central

Although CN suffered a CAD 1.08 billion loss in 1995 stemming from special charges of CAD 1.45 billion—primarily representing a writedown of the value of assets, most notably in the troubled eastern Canadian part of its network—1996, the firm's first full year as an investor-owned company, was its most profitable year in history. CN was able to post an operating profit of CAD 610 million and a net profit of CAD 142 million on revenue of CAD 4.16 billion, despite a special charge of CAD 381 million taken in the fourth quarter. The charge was taken in connection with plans to lay off an additional 2,250 workers in 1996 and 1997. A reduction in labor costs of CAD 95 million helped CN lower its operating ratio to 85.3 percent in 1996, compared to the 89.3 percent figure for the preceding year. Tellier had placed an emphasis on lowering CN's operating ratio, a key yardstick of a railway's efficiency, and profitability, that compared expenses with revenues (the lower the figure the better).

Another aspect of Tellier's efficiency drive was to eliminate unprofitable track and reduce the amount of overcapacity in the railway system. Thousands of miles of track were sold or abandoned in the mid- to late 1990s. He also invested heavily in information technology to allow CN to cut turnaround times, improve service, and operate with thousands fewer railcars. By 1997 Tellier had cut the operating ratio to 78.6 percent, which while much improved was still higher than those of the top U.S. railroads. In October 1998 CN announced plans to cut an additional 3,000 jobs, earning Tellier the enmity of many workers and union leaders.

Tellier also staked the future of Canadian National on the growth in north-south traffic of industrial products, automobiles, and commodities such as forest products engendered by the North American Free Trade Agreement (NAFTA), which took effect in 1994. He told Barron's in 1999, "We want to be the NAFTA railroad." To that end, he engineered the $2.4 billion acquisition of Illinois Central Corporation (IC), completed in July 1999. The Illinois Central had been chartered in 1851 as the first land grant railroad in the United States. By 1999 it had grown into a 3,450-mile railroad, and the most efficient one in North America, its operating ratio in 1997 standing at 62.3 percent. Its trackage extended south from Chicago to New Orleans. This made a perfect fit with CN's system, which traversed Canada from Vancouver to Halifax and reached into the United States as far as Chicago. Combined, the two systems totaled 18,700 miles—the fifth largest in North America—and comprised the only railway on the continent connecting the three coasts of the Atlantic, Pacific, and the Gulf of Mexico. The resulting Y-shaped system had little overlap, which eased the concerns of regulators troubled by other recent rail combinations that had disrupted rail service and upset customers. It also meant that no significant layoffs were necessary from the combined workforce of 24,600.

In April 1998, after the merger had been announced but well before its completion, CN and IC entered into a deal that extended the reach of the combined system to the U.S. Southwest and into Mexico. The two companies reached a marketing alliance with the Kansas City Southern Railway Company (KCSR) through which CN could offer its customers coordinated interline train service throughout the three networks. The KCSR system ranged from Springfield, Illinois, where it could interchange with CN/IC, through Kansas City and Tulsa, Oklahoma, and then into the south, where another major interchange was established in Jackson, Mississippi. KCSR track also ranged west into Texas, including both Dallas and Houston, and the alliance also offered shippers access to Mexico's largest rail system, Transportacion Ferroviaria Mexicana, S.A. de C.V. (Grupo TFM), which was in a separate alliance with KCSR.

Following the acquisition of IC, Tellier remained president and CEO of CN, but he ceded control of day-to-day operations of the railroad to the former head of Illinois Central, E. Hunter Harrison, who was named executive vice-president and chief operating officer. Unlike Tellier, Harrison was a veteran railroad man, having entered the industry in 1964 as a carman/oiler. He was given much of the credit for making IC such an efficiently run railroad, particularly by implementing "scheduled railroading," whereby freight trains were operated on a more precise schedule than had been typical. Under Harrison, CN too would become a scheduled railway, enabling it to considerably increase its usage of locomotives, freight cars, and train crews.

Early 2000s: Failed BNSF Merger,
Several More Acquisitions

The impact of the IC deal was immediately felt as CN posted record profits of CAD 751 million in 1999, up from CAD 266 million the previous year. The operating ratio was down to 70.7 percent by the end of that year. It was from this position of strength that Canadian National agreed to combine its rail systems with those of Burlington Northern Santa Fe Corporation (BNSF) in a $6 billion deal that would have created a new holding company called North American Railways Inc. and the largest railroad on the continent with a network covering more than 50,000 route miles. In March 2000, however, the U.S. regulatory authority over the rail industry, the Surface Transportation Board (STB), issued a 15-month moratorium on rail mergers. The STB was concerned that the CN-BNSF merger could cause irreparable harm to the industry, setting off a "final round" of rail consolidation, the eventual result of which could be just two transcontinental railways. After a U.S. Court of Appeals upheld the moratorium in July, CN and BNSF called off the merger rather than endure a lengthy delay.

Disappointed that the deal was blocked but undeterred from his determination to see CN grow, Tellier completed the acquisition of Wisconsin Central Transportation Corporation (WCTC) in October 2001 for about $800 million in cash plus the assumption of $400 million in debt. CN thereby added about 2,150 miles of track, the key addition being a stretch of track running between Chicago and the twin port cities of Duluth, Minnesota/Superior, Wisconsin, that enabled CN to secure a main link between western Canada and the U.S. Midwest. CN also inherited WCTC's interests in several overseas railroads, including 42.5 percent of English, Welsh & Scottish Railway Holdings Limited of Great Britain and 33 percent of Australian Transport Network Limited.

In the last major moves of his tenure at CN, Tellier announced in November 2002 that the company would slash its workforce by 5 percent, or 1,146 jobs, and take a $173 million charge to settle growing personal injury and asbestos claims in the United States. The reasons for the job cuts were twofold: a drought in western Canada that reduced CN's grain shipping revenue and the efficiency drive that cut the number of locomotives and railcars the company needed, leading in turn to a reduced need for workers. At the end of 2002, Tellier left CN to become president and CEO of Bombardier Inc., the Canadian maker of transportation equipment. Harrison was the choice to succeed Tellier at CN.

The leadership transition was a smooth one as CN posted sharp increases in both profits and revenues in 2003 and 2004, culminating in the latter year in record net income of CAD 1.26 billion ($1.08 billion) on best-ever revenues of CAD 6.55 billion ($5.46 billion). The CAD 17.8 million lost as a result of a monthlong strike in early 2004 by 5,000 CN workers, all members of the Canadian Auto Workers union, was more than offset by the completion of two more significant acquisitions. In May 2004 CN acquired the rail and marine holdings of Great Lakes Transportation LLC (GLT) for CAD 547 million ($395 million). GLT was a group of rail and water carriers that catered particularly to the needs of the steel industry in the Midwest and that provided CN with additional links between western Canada and Chicago. It included the 200-plus-mile Duluth, Missabe and Iron Range Railway Company, an iron ore carrier; the Bessemer & Lake Erie Railroad Company, a transporter of coal, iron ore, and limestone between the port of Conneaut, Ohio, and steel mills in Pittsburgh; and Great Lakes Fleet Inc., a firm that owned and operated eight vessels carrying bulk commodities on the Great Lakes.

In July 2004 CN finalized its purchase of BC Rail Ltd. from the government of British Columbia for CAD 1 billion. The deal gave CN ownership of the BC Rail franchise and the right to operate over its more than 1,400 miles of track under a long-term lease. The province retained ownership of the track itself, but CN assumed responsibility for track maintenance. The BC Rail trackage ran from North Vancouver to Fort Nelson in the far northern reaches of the province. CN immediately announced plans to cut BC Rail's workforce to 950 employees, from 1,380, sparking a great deal of criticism. This acquisition strengthened CN's position in forest products shipping and also enhanced its access to the U.S. West Coast. Industry observers suggested that additional acquisitions were possible given CN's success in integrating the deals, its strong profits and cash flow, and its continued position as the most efficient railroad among the North American majors.