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The tragic accident in the Quebec town of Lac-Mégantic was the major transportation story of the past week.  As of tonight, the death count is at 33 but it will likely reach 50 people when all the bodies are found.  In addition, much of the downtown of that town area was destroyed as 72 tanker cars of the Montreal, Maine and Atlantic Railway Ltd., carrying crude oil, caught fire as they came off the tracks.

Rail transportation in Quebec, Canada dates back over a century.  The rails have been a key element in the history of commerce in this Canadian province.  The railway has been hauling iron ore, pulp and paper and other commodities for many years.   But the sharp decline in the United States housing market, as a result of the Great Recession, reduced the demand for Quebec’s lumber.  This motivated the MM&A Railroad and others to shift their focus to the movement of crude oil via rail.

The transportation of crude oil via tanker car goes back to the days of John D. Rockefeller.  The rail industry is now hauling more crude oil than it did in those days.  Trains transported a record 97,135 carloads of crude in the first quarter of 2013.  That’s 166 percent more than during the first quarter of 2012 and 922 percent more than the rails handled during all of 2008.

Union Pacific, the largest US railroad, tripled the amount of crude it moved the previous year.  BNSF, America’s second largest railroad, is now transporting 650,000 barrels a day versus almost none five years ago.  Canadian Pacific Railway expects to haul 70,000 carloads of crude in 2013, up from 500 in 2009.

While moving crude oil by pipeline still costs about half to one-third of what it costs to move it by rail, trains don’t require long term contracts or need to wait for pipelines to be built.  While pipes stretch only from point A to point B, refiners can access nearly any market in the United States or Canada by rail.  Flexibility and the ability to easily shift delivery markets to maximize revenue, has been encouraging oil companies to increase the leasing of rail cars.

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Pierre Berton, the late, famous Canadian author noted in his book, “The Last Spike,” that CP Rail has held a respected place in the country’s history.  He wrote that “no other private company, with the single exception of Hudson’s Bay Company, has had such an influence on the destinies of the nation.” For most of the past 15 years, CP Rail faced stiff competition from CN Rail as Paul Tellier and Hunter Harrison led the company’s move from a bloated government run enterprise to a highly profitable public company.  In fact CN’s operating ratio of 61.3 is not only the best among the major North American railroads, it is one of the best of any company in the transportation industry.

The fact that CP Rail lagged so far behind CN Rail and the other class 1 railways in North America led the activist investor Bill Ackman, of Pershing Square Capital, to launch his “palace revolt” proxy battle that resulted in the replacement of CP’s former President with Hunter Harrison, whom he brought out of retirement to drive the railway’s profit improvement.

As we pass through the last quarter of this year, Canada’s two largest railroads are heading down separate tracks.  With an operating ratio is the low 80’s, Mr. Harrison has embarked on a series of actions to reduce costs through improved asset utilization.  This is another way of saying that CP Rail is planning to move its equipment more quickly and efficiently, to become Canada’s second “precision” railroad.   It is seeking to accomplish this by undertaking a series of initiatives.  These include:

  • Building trains at CP’s intermodal terminal in Vancouver with blocks of cars for long haul destinations. This reduces stops and streamlines connections.
  • Increasing average train lengths to 7,000 to 12,000 feet
  • Speeding up the fueling of trains
  • Improving daily scheduling
  • Investing $1.2 billion in 2012 and $1 billion in 2013 on key infrastructure projects
  • Working with customers at both ends to improve coordination

The net result of these changes is that CP Rail now provides 4 day transit times between Vancouver and Chicago and Toronto.  These changes represent half of the transcontinental trains that CP launches daily across its network.  Mr. Harrison is not expecting an overnight drop in the company’s operating ratio.  He told Bloomberg News that he is targeting about 65 percent in the next four years.

Shippers appear to be taking notice of improved service on both major Canadian railways. 

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