Halifax - Fredericton
VIA Passenger Train Schedule
Effective 15 November 1981
All times Atlantic Standard

"Ar" means Arrival Time
"Dp" means Departure Time

Mr. Bruce M. Flohr, Chief Executive Officer, Rail-Tex: I last spoke to your committee in 1992 before the Canadian National rail line in Nova Scotia was sold. This committee then, under the chairmanship of Senator Finlay MacDonald, was looking carefully at that whole transaction. We have come a long way since the last time I appeared before this committee.

We very much support Bill C-14. From our standpoint, we are focusing more on how to save rail service in rural Canada.

Today, Rail-Tex is the leading short-line railroad company in North America. Our company now operates 25 railroads, covering 3,475 miles of track in 20 states, two Canadian provinces, and Mexico. Our 1995 revenues were $108 million U.S., with an after-tax profit of $8.3 million. We have assets of $205 million U.S. Our company, over the last five years, has had a 41 per cent per-year compound annual growth rate in revenues.

We are making money in the railroad business. Our Goderich and Exeter railway in Ontario is a 70-mile line purchased from Canadian National in 1992. In Nova Scotia, we operate a 245-mile line, the Cape Breton and Central Nova Scotia Railway, which was purchased from CN in October of 1993. Most recently, we purchased the rail assets of the Central Vermont Railway, a former CN line, running southward 326 miles from East Alburg, Vermont, on the Canadian border, south of Montreal down to New London, Connecticut.

Combined, we have over 650 employees. Three of our 25 railroads have labour unions representing the employees.

Our financial information is on file with the United States Securities and Exchange Commission because our company's stock is traded on NASDAQ [National Association of Securities Dealers Automated Quotations, in the United States]. In fact, The Globe and Mail carries the listing of Rail-Tex stock every day, and I checked that this morning.

In the material I have provided is a brochure that tells a little bit about all 25 of our existing railroads.

As I mentioned earlier, we have purchased three lines from Canadian National. All three have been arm's-length transactions in which we bid to buy the line. Each bid included a purchase price and a per-car fee, or the amount of money that Canadian National pays back to us to cover our costs of bringing the car from the shipper down to the main line of Canadian National.

Canadian National received 100 per cent cash payment for each acquisition, and Canadian National does not guarantee any of our debt. Our debt is with the National Bank of Canada for our Canadian lines. We do not have any minimum revenue guarantees with CN, nor with any of our other railroads. There are no federal or provincial loan guarantees, no tax abatements, and no government subsidy payments on any of our Canadian lines. We like doing business in Canada.

I am deeply concerned that many interested parties, especially shippers, do not understand the real reasons large railroads in North America are selling off their light density branch lines. The ability to sell those lines is another big part of this legislation.

This really reflects the same process that has been ongoing in the North American airline industry for years. The large airlines are turning over the service in the smaller communities to regional airlines or commuter airlines which can operate at lower costs with smaller-sized planes while still providing service to rural parts of Canada and the United States.

The big railroads are selling off their branch lines to downsize for profitability. There is a reduction in wage costs and wage rates, but the biggest change is the improvement in work rule efficiencies because the small railroads do not have the same union craft lines. For a big railroad like CN, a locomotive engineer cannot even wash the windshield on his locomotive. That is another employee's job, a person who belongs to a different labour union. Having no work rule craft line distinctions produces great cost savings by reducing the number of employees working on a rail line.

As an example, on our Cape Breton railroad, 47 employees today are handling 20 per cent more business then when CN operated the line with 110 people. When we acquired the Central Vermont from Canadian National, there were 161 employees. Today, we are operating the same line with 95 employees.

The big railroads also sell off so they can get a higher return on their invested dollar, as was asked of Paul Tellier in the last presentation. They can improve their asset utilization, and they get better service from the little short line. That is all we have to sell.

On our Goderich railroad, Canadian National was going back into Stratford three times a week. The big shipper on that line is Sifto Salt from their big salt mine in Goderich. We are now going five or six days a week, compared with CN's three trips per week.

We have improved car supply. Rail-Tex has 3,480 cars today. Many of those are brought to Canada to haul grain. I will tell that story later.

We provide better management supervision of the activities. We certainly caused the line to stay alive rather than being abandoned. We actually generate more business. The big railroads, not just CN or CP but all the big railroads in North America today, are selling their traffic under the 80/20 rule where 80 per cent of the business comes from 20 per cent of the customers. They pay real close attention to the Ford Motor companies of the world but the little shipper does not even get a telephone call any more. That is where we get our business.

For the first three months of this year, our business is up over 8 per cent over last year, and the big railroads' business for the first three months is actually down 3.2 per cent. That is how hard we work at bringing shipments back to rail.

We also focus on the short haul.

We won a Golden Freight Car award back in 1982 for a 14-mile haul of steel from a shipper to a receiver. It took 35 trucks a day off the highway.

On our Goderich railway, we came in and charged the shippers down around Centralia - the small elevators in that area - a half a cent a bushel less than the trucker was charging. For each shipping season, generally around August and September, we have taken 900 trucks off the highway going through downtown Goderich down to the grain elevator during their peak tourist season. The grain elevator has increased its rail car unloading from a two-car spot to a 25-car spot.

We are taking wood chip cars and wood rack cars to Nova Scotia. We were astounded in Nova Scotia that the two paper plants were not bringing any wood fibre in by rail. It was all coming by truck. We are now hauling pulp wood and wood chip into those paper plants by rail. We got the trucks off the highway. We can beat the trucks, even at short haul.

What do the shippers think about this? In 1989, the Interstate Commerce Commission in the United States did a survey of shippers that had been on a large railroad. The large railroad sold the line to companies like ours. What did the shippers say? Of the 382 responses, only 5 per cent reported worse service and 52 per cent reported improved service. As far as freight rates are concerned, 12 per cent reported higher rates and 20 per cent saw lower rates. The large shippers saw very little change, but small shippers saw significant improvement.

Many people do not realize there is a death spiral to a branch line. If a big railroad does not want to continue service to rural areas in Canada or the United States, it will cut back on track maintenance and the speed of the trains. Then it will cut back from daily service to weekly service. It will not supply the railroad cars. It will literally cause the branch line to die. Companies such as ourselves want to get in fast enough, before all the business is driven off to truck, so that we have a chance of making it.

We tried to buy a rail line in Ontario for over four years. It runs from Stratford up to Owen Sound. It was during the time the NDP was in power when there was successor rights legislation in Ontario. This meant that we would have had to take all the existing CN rail unions. We worked very diligently to accommodate rail labour in this case. We could not come to an agreement, and all that track has now been torn up. We would have continued to operate approximately 150 miles north of Stratford and then take the rest of the rail and build into Kincardine where the Bruce energy centre is located. An active industrial activity in that area will take the waste heat from the Bruce energy centre to do everything from processing alfalfa to processing canola beans. They are growing tomatoes in hothouses. They could have used rail service, and it is all gone because of the issue of successor rights.

I mentioned earlier our Cape Breton-Central Nova Scotia railway and how the employees there went from 110 to 47. Of the 47, 45 are former Canadian National employees who were all working for labour unions. I include in my testimony a publication with interviews from the employees of that railroad, all former Canadian National employees, talking about how wonderful it is working for a new company. One of them is the former local chairman of the Brotherhood of Locomotive Engineers, the person who drives the train. He talks about how he really likes his new job. He gets to go down off the locomotive and do line switches. He even make sales calls. We give all of our employees business cards. He likes the variety of the job. I thought if there was one person whose work habits would be hard to change, it would be the locomotive engineer. They sit in the nice, warm, dry seat of the locomotive all the time. However, this gentleman loves to do other things. He also says that he does not need a guaranteed job provision in his labour contract when he sees the new owners trying to bring more business back to rail. That is his guarantee of a job. He sees our traffic growing rather than shrinking.

This same story was told in the November 1995 publication of the Canadian Reader's Digest. I did not bring a reprint with me, but I will supply a copy of that reprint to the committee because it relates to outsiders talking to our employees and, I think, getting a very impartial opinion of how things work.

The problem that we faced in the past and that the legislation seeks to correct is the length of time for the approval process. When we signed the agreement with CN to buy the Goderich railroad, it took us 19 months, over a year and a half, from when we signed the agreement until we finally received approval. First, we needed federal approval; then we needed provincial approval. With respect to the Nova Scotia line, the same thing happened, but we cut the process down to 12 months.

This legislation eliminates federal involvement in the sale of a rail line. We definitely support that part of the legislation because it is not fair for the shippers to be in limbo for a long period.

Although the Nova Scotia line took 12 months to finalize, we have been in the court system in Canada for over two years, first before the labour board and then through the court of appeal. It was only three months ago that we finally won in the Supreme Court. We did not have to take back the former union structure. The Brotherhood of Maintenance of Ways fought that.

There still is successor rights legislation provincially in British Columbia and Saskatchewan. There was successor rights legislation in Ontario, but it was recently removed. However, this legislation does not address the issue of successor rights for rail lines on which VIA operates or rail lines which cross provincial boundaries.

Especially in the prairie provinces, the natural layout of those rail lines crosses provincial boundaries, and we will not be able to acquire some of those lines as long as legislation mandates successor rights on federal undertakings which cross provincial boundaries. We are only buying rail lines within a provincial boundary.

We are not anti-union. I mentioned that we have three railroads where the employees have chosen to unionize, and one of them is in Goderich. However, we are an anti-craft line because we believe the person who runs the train can also wash the windshield.

We are disappointed that the legislation does not go into successor rights. I was one of the stakeholders that helped write the legislation, and this was an area where we did not prevail.

I will be happy to answer questions on captive shippers, but I think you had a good dialogue with Paul Tellier [Chairman of Canadian National] on that issue.

There are two other issues I do wish to talk about. One is with respect to testimony before the House of Commons committee.

The shippers said they do not like the provision that a short-line railroad only outlets to a single, large railroad, and there should be access rights or trackage rights to go to another large railroad. If CN were to sell a line to us, we would have the right to operate over the CN and eventually to connect with the CP. The legislation does not permit this, and I totally oppose anything that would affect this, even though the shippers have been pushing for it.

Of our 25 railroads, only 10 outlet to a single carrier, two of those being our largest. We willingly negotiated the agreement. We are in partnership with the big railroad. They want the traffic, but they want it delivered to them more efficiently than they could bring it down to the main line system. We have an excellent relationship with CN. They do not dominate what we are doing.

The concerns of the shippers simply are not justified, and I ask you to talk to the shippers on our rail lines to determine if they feel that CN is dominating us in any way. It simply does not happen.

We will willingly buy more lines that only outlet to one large railroad. In fact, in the United States, the United Transportation Union is trying to get similar running rights legislation passed. The UTU is supporting this because they know that if it ever were enacted, the big railroads would stop selling their branch lines to avoid giving up that long haul traffic to another large carrier. The UTU is doing this to stop the sale of branch lines, which really means allowing branch lines to go through this death spiral.

I believe this legislation goes a long way to continuing to preserve rail service to rural Canada. It is similar to the situation in the United States. The provincial laws provide protection on how they want to treat the buy-sell of a railroad, but they do not go far enough to addressing the successorship rights. At some time, Canada must address that issue.

I will be happy to answer any questions.

The Chair: Mr. Flohr, what do you see as the total market potential for short lines in Canada?

Mr. Flohr: Right now, we see about 10,000 miles of light density branch line. In fact, I give talks to many shipper groups here in Canada. I will lay a Canadian $20 bill on the podium.

The Chair: We want an American.

Mr. Flohr: It is worth more, yes. I will bet them the $20 bill that if their factory is now served by a one-train-per-day railroad, that within the next five years, they will be served by a short-line railroad company, because that is what is happening all over North America.

The big railroads do best by putting 100 cars behind four locomotives over a long haul. The little guy does best by bringing that traffic down to the main line. I foresee, in Canada, that the two main-line railroad systems will ultimately be owned by CN and CP while everything else will go to small railroad operators, companies us or like Tom Payne and the Central Western.

Senator Atkins: I sat through the hearings on the Truro to Sydney line. One of the major questions then was maintenance. When you talk about reducing the number of employees from more than 100 down to 42, it is surprising to me that you are able to continue the level of maintenance expressed throughout those discussions. Is the standard as high if not higher?

Mr. Flohr: We believe the standard is as high and, in some cases, actually higher than before. We made big savings in situations like this: A train crew would go on duty at Sydney and drive the train down to Havre Boucher, roughly 120 miles. They would get off the train, rest, and then, the next day, take another train back east into Sydney. They worked for about four and a half hours but were paid the equivalent of ten hours' pay.

Now we run the train from Sydney all the way down to Stellarton with one crew, about 200 miles. They are being paid about nine hours' pay. They do more work for the same amount of pay. They get rest at Stellarton and go back to Sydney after their rest. We have literally cut the train crew costs in half. We pay them for eight to nine hours' work, and they actually work those eight to nine hours.

In the track maintenance area, we are using some outside contractors to do heavy repair work. They will come in and change out a large number of ties. However, Canadian National left that railroad in very good condition. We are now doing just continual maintenance of the line.

Senator Atkins: Have you reduced the number of people working on the line?

Mr. Flohr: No. The net result is that we have not reduced the number of people working on the line. We simply changed the organization of how they do the work. We actually have more people working on locomotives right now than CN had when they were operating the line.

Senator Atkins: If this legislation goes through, it is a big opportunity for you to increase the number of short lines in this country.

Mr. Flohr: Let us just say it provides an easier opportunity. We acquired lines under the existing legislation, and it did work. We were very patient for the 19 months and 12 months. This will simplify the process. We remain interested, but there is a lot of agony that goes on with both the federal hearings and the provincial hearings. I think that agony is unnecessary in this particular case. This will simplify the process immensely.

Senator Atkins: The notion exists that CN is responsible to its board of directors and its shareholders. CN will be selling off more of its rail lines.

Mr. Flohr: I agree, yes.

Senator Atkins: Is that a good thing?

Mr. Flohr: Yes, and we see a real opportunity for us here. We want to buy more rail lines here in Canada.

Senator Atkins: Do the shippers see that as an opportunity for them? I know it turned out to be that way in the Truro-Sydney line, but what about these western lines?

Mr. Flohr: We do not agree with some of the things Canadian Pacific has said about their prairie lines. CP is publicly stating that they would prefer to move all the grain to large, very efficient elevators already existing on the main line of Canadian Pacific. Then they can tear up the rail lines going out to the smaller elevators.

We would rather see the smaller elevators exist so that the farmer can bring the grain in from his harvesting machine, have a place to dump it quickly close by, and then we can move the grain from those small elevators, four or six cars at a time, down to the big elevator. It will sit in the big elevator for six to nine months until it is sold into the world market-place.

In Goderich now, for a half-cent less per bushel than the truckers charge, we will haul it down to the big elevators. That has become very popular with the farmers in Goderich. We are doing the same thing in the state of Kansas. Canadian Pacific is missing an opportunity. It will be fighting a lot of opposition from the farmers. It would be much better for them to sell these grain branch lines to companies like ourselves and let us haul it down to the big elevator with just shuttle trains moving back and forth.

We bring a number of our covered hopper cars here. Last year we brought over 60 up to Goderich just for that two-month period in August and September, shuttling the grain from places like Centralia into Goderich. As soon as that movement was over, we took the same covered hopper cars and moved them to Michigan to haul edible beans from small, rural elevators down to the big elevators. It is the same sort of concept. That is the one area where we do not agree with Canadian Pacific on their abandonment policy in the prairie provinces.

Senator Atkins: Do you agree with CN that allowing market forces to prevail will be in the best interests of both CN and the shippers?

Mr. Flohr: We believe that is the case. I do not believe that there are truly captive shippers, as much as I enjoyed your eloquent comments on that.

Nova Scotia Power has two power plants on our line in Nova Scotia. All of their heat comes from coal which is currently being mined by Devco in Sydney. Now that Nova Scotia Power is privatized, they are really working on Devco to drive down the price of the coal, for reasons everyone here will know.

Nova Scotia Power has been out in the world market looking to buy coal offshore to bring into Nova Scotia to power those power plants. It does look like they are now captive to coal and rail with us, but three years from now they might start buying coal from Poland or Australia. We bought 140 rail cars to serve the coal movements for Nova Scotia Power, and they are not at all captive to us because they could start buying coal offshore.

In the case of grain and world market competition, if rail does not keep their price down to make the customer competitive, they will not ship into the world marketplace.

With our railroad, the Old Central Vermont, we are now working hard to bring more chemicals from the Montreal area down into New England, chemicals which had been coming from the Houston, Texas, Gulf Coast area. Now, with NAFTA in place, the chemical producers in Montreal are very price-competitive. There is more chemical movement from Canadian manufacturers going into New England than there is coming from Houston. When the chemical shippers claim they are captive to rail, overall, yes, they probably are, but you can change that source from Houston up to Montreal. One railroad will lose and another railroad will win. That is the marketplace functioning the way it is intended to function.

Senator Atkins: Does this legislation, in your view, create more abandoned lines?

Mr. Flohr: No. This legislation will actually save lines from being abandoned because it creates an easier process for companies like us to come in. It also creates a process that, if a local community or a province wants to buy the line, there is a mechanism in place that would allow various parties to bid on buying the line. Yes, there are some things that I would like to see a little different, but it is not really worth the argument. The legislation is drafted in such a way that the structure of potential branch line sales is adequate and protects all parties.

Senator Spivak: I am particularly interested in the western situation. I am delighted to hear your comments because, in many areas, the cost of trucking is not just the cost of shipping but also the cost of the roads. The taxpayers are bearing the costs of roads which were never designed to carry that kind of truck traffic. There are also safety issues involved.

You mentioned the difficulties in the western provinces. Will there be enough time for you to get in there and get those lines before they are torn up? Why are they tearing up lines? If you have lines now in Owen Sound, you could get in there at a later date. I do not understand that. What is required to give you that time line?

I understand succession rights. I think it would be very beneficial for western grain farmers to have the option, aside from hauling everything 100 miles, of using the smaller elevators. That makes so much sense. I guess that is why it will never happen.

Mr. Flohr: A few more lines may need to be physically torn up before reality sets in. We have had several meetings with the Rural Municipal League in Saskatchewan. In fact, at their fall 1995 semi-annual convention, we were given two hours on their agenda to make a presentation about how Saskatchewan will need to eliminate successorship rights, at least in railroads. If they want to do it in other industries, fine.

We even proposed in Ontario that at least the very small operations should be carved out, those rail lines affecting less than 50 employees. There was much talk about how their highways would be torn apart if more grain trucks operate there. Reality will not set in until several lines are physically torn up.

Senator Spivak: Have you been to Manitoba?

Mr. Flohr: There is no problem in Manitoba. Canadian National or Canadian Pacific has not put any lines on sale yet.

Senator Spivak: Will you aggressively get into that area?

Mr. Flohr: Yes, we will. We are working in Alberta. I personally have been to Edmonton several times. I met with the vice-president, western region, for Canadian National. They are looking at several of the lines in Alberta and Manitoba. There is still the problem, if you look at a railroad map, that many of those lines run more east and west and cross provincial boundaries. There is still a problem of successorship rights on lines which cross provincial boundaries.

Senator Spivak: Regarding offshore coal, you must remember that we need to keep jobs in our economy. If we cannot ship grain from our western provinces, our economy is devastated. We cannot hold that option as a matter of public policy and public interest.

Senator Adams: According to these figures, where CN had 160 employees, you reduced it down to 92. You mentioned that your employees are happy and are not unionized. A few years ago, Mr. Tellier was here and talked about union regulations that would only allow engineers to drive locomotives for about eight hours per day. Between Montreal and Ottawa, although it is only a four-hour drive, they would get eight hours' pay.

Short lines do not have great distances to run. You mentioned some engineers get eight hours, some get ten hours. Do you pay them overtime, or is it straight hours?

Mr. Flohr: We pay by the hour. After 40 hours in any one week, then we pay them overtime. Sometimes they take the train over the territory in five or six hours, and we pay them that amount. However, we guarantee 40 hours a week in a five-day work week. Anything worked on a sixth day or anything worked over 40 hours is overtime.

Senator Adams: According to our figures, an engineer makes about $80,000 per year.

Mr. Flohr: That is correct.

Senator Adams: Your employees are now happier. Do they have any guarantee for retirement? How does that system work?

Mr. Flohr: The retirement system is the existing Canadian retirement system. There is nothing special on that. Our people do receive profit-sharing, which is approximately 15 per cent of their base wage.

Senator Adams: Mr. Payne was here last week and talked about buying an abandoned railway line for about $30,000 per mile. Is that true?

Mr. Flohr: If it is a line in very poor condition with light rail -- that is small, cross-section rail -- the price will be as low as $15,000 per mile. If it has fairly heavy rail and is in good condition, it is about $30,000 Canadian per mile.

Senator Adams: Do you have a problem with that sort of price? Are you still interested in buying more short lines?

Mr. Flohr: No, we have no problem buying at a price like that. The big problem we have, first, is to find enough shippers on the line who will continue to use the line. After we find that there are enough good shippers, then we will go to look at the condition of the rail and the bridges and figure out a purchase price. We have no problem with that as a selling price of railroads.

Senator Adams: You do not have long-distance rail. If you receive a large, bulk order that you cannot cover, do you have some kind of agreement with CN or CP for an at-cost rate for transport by CN?

Mr. Flohr: A shipper could approach us about wanting to make a movement originating on our railroad. In Nova Scotia, it might actually move 240 miles. Then it would go onto CN at Truro and be hauled all the way out to western Canada. CN and ourselves and the shipper will agree that the tariff will be, for example, $4,000. That is what the shipper sees, and the shipper will get its bill from Canadian National. Canadian National then turns around and pays us perhaps $500 for bringing the car from the factory down to the interchange point at Truro. That is a separate agreement between CN and ourselves.

In our agreements with them, we have a standard division of revenue for single-car movements, things that do not happen very often. If there are big movements, such as from Michelin Tire, Scott Paper, and so on, in Nova Scotia, we have special divisions of revenue, especially if we supply the railroad car or if Canadian National supplies the railroad car, but it is a sharing of revenue.

Senator Adams: You are an American company. Because of conflict of interest, you do not have to answer if you do not wish to. What is your percentage of shareholders between Canadian and Americans?

Mr. Flohr: I do not know. That is the easy answer. I do know that some of our employees here in Canada own stock in Rail-Tex and it is listed in The Globe and Mail, but as far as the number of Canadians, we do not even keep track of that.

The Chair: Do you have any problems with liability insurance?

Mr. Flohr: It is expensive, but we can buy liability insurance. In fact, today we are carrying $50 million per occurrence, and this is primarily for something like a major train wreck where you might be handling chemicals and you might have to evacuate a town. Our self-retention is $250,000. We were down as low as $50,000 but we have now moved it up as the company has become larger. We have no problem buying liability insurance.

The Chair: Thank you very much for your presentation.

[Source: http://www.parl.gc.ca/english/senate/com-e/tran-e/02ev-e.htm]