Railway Highlights

Mr. Hal Linton, President of The Canadian Club of Toronto, introduced the speaker.

MR. LINTON: To introduce our speaker of today, it is difficult to use anything but superlatives. Words and phrases such as these seem to attach themselves to Donald Gordon-sincerity, courage, energy, drive, mental capacity, ability to think things through, a leader who inspires others to get things done. Let me remind you of the main steps in his Horatio Alger career:

-First, the formative years here in Toronto in the Bank of Nova Scotia, where he rose at the age of 29 to be assistant manager of the main office, having started at the lowly job of clerk.

-Then, having caught the eye of Graham Towers, to Ottawa and the Bank of Canada.

-Next, chosen to set up the Foreign Exchange Control Board.

-Then to the Wartime Prices and Trade Board when his great ability first became known to and appreciated by the public.

-Back to the Bank of Canada after the War.

-and at the beginning of 1950 Canada's Number One Problem Job, President of the Canadian National Railways.

But enough of that, as he himself would say.

When a man who has made his mark in the outside world returns to his home town, his friends think not only of what he has accomplished, but of what he was like when he was among them. For example, Donald Gordon will always be remembered in this city for the period when he was learning and practising the art of public speaking. When he was with the Bank of Nova Scotia, the bankers association organized a course in public speaking and carried it on in co-operation with the Extension Department of the University of Toronto. After a year of that, Mr. Gordon and a few others felt that the course was so beneficial to them that in 1932 they formed the Thirty Club, an organization that is still active, meets regularly in the Board Room of the Canadian Bank of Commerce and over the years has given an opportunity for selfimprovement to many men of this city.

I'm told that when the "member for Aberdeen" stood up to speak in the Thirty Club there was always much ribbing and heckling, but with his forthright manner and his Scotch wit no one ever spoke him down.

I am also told that after he moved to Ottawa his interest in public speaking continued because, busy though he was, he became president of the Ottawa Canadian Club and holds the record of being one of the finest presidents that club ever had.

Gentlemen of the Empire and Canadian Clubs, I now give you the president of the largest railway in North America, a big man with a big job, Mr. Donald Gordon.

MR. GORDON: It is a happy occasion for me to be here today and to have the opportunity of speaking, in effect, to two audiences at once. I appreciate your kind invitation. As leaders of your community, your active interest in Canada's railways is of the greatest importance.

Most adult Canadians, when they think about railways, recognize that they are important features of our economy, that they have many advantages as movers of goods, that they have been with us for a long time, and are likely to be with us even longer. Scarcely a day passes without some item of interest about the activities of railways being reported in the press. We read of actual or proposed changes in freight rates, of curtailment or enlargement of services, of new equipment, of labour agreements and so on. The impact of railway actions taken from time to time is discernible in much of our business and personal life.

Today I want to give you some further food for thought but in doing so I will not address myself to any one aspect of railways. I will, rather, try to give you a broad sweep of the business in which I am one of your representatives. The individual parts of the picture that get publicized from time to time are often meaningless or distorted unless they are set against the background of the whole.

A review of railway highlights on an occasion such as this must of necessity be brief. I shall have to leave out fine points, since details would tend to dilute the antidote to fragmentary thinking about railways which I want to administer to you. It will be no surprise, I am sure, that my remarks concern primarily the Canadian National Railways. Let me invite you, therefore, as joint owners and users, to consider the major problems that face the CNR today.

Our basic task is to ensure that the CNR is an efficient, successful business organization as well as a good servant of the public. Broadly speaking, like any other business organization we face the problem of balancing revenues against costs to yield a profit. Leading aspects of this challenge can be seen in our wage bill, in the sources of factors bearing on the growth and shrinkage of our nationwide rail system. If you have an understanding of this complex situation, then the reading of a newspaper story, the purchase of a ticket, or the shipment of a carload of freight will take on a more intelligible significance.

Historical perspective is necessary to understand the CNR's future as a solvent business enterprise. The CNR is a public enterprise as a result of historical accident. It does not represent a "socialist experiment" undertaken by a government seeking to apply a collectivist philosophy. You will recall that, after the first world war, the government of the day was compelled, by the national emergency of several virtually bankrupt railways, to devise a plan for keeping them in operation. The objective was to preserve a network of rail service for Canadians and to protect the credit standing of Canada from the results of the default of railway securities which in many cases had been sold on the strength of government guarantees.

The CNR reflects a decision to achieve this objective in the most businesslike way possible. It is an organization established on exactly the same lines as an ordinary business enterprise. The only difference is that the CNR's shareholders are the people of Canada, represented for most purposes by the Governor-in-Council.

In the three decades of our history as a national railway company, we have, in addition to our earnings, acquired funds both through Parliament and from the public money market by means of government-guaranteed bond issues. These funds met deficits arising from interest charges on huge debts inherited from predecessor companies, enabled us to consolidate overlapping, rundown lines into a rational system, and in general to provide Canadians even in sparsely settled areas with a continental network of low cost transportation. Our unprofitable branch lines have always been one of the distinguishing reflectors of the impact of national economic policy on the CNR. They eat up our profits because their users do not pay their full costs. Nevertheless, it is noteworthy for the record that the Canadian National Railways System, since its inception in 1923, has never failed to meet its actual operating expenses out of its own earnings.

The history of the CNR then is one of continuing compromise between the maintenance of far-flung service and the planning of profitable operations. The influence of our varied rate structure, under which our service is rendered, is very pervasive. Like customs tariffs, our rail rates have affected the location of industry and the size of market areas. The resulting pattern of investment is one that millions of Canadians have a strong personal interest in preserving. It is not something to be tampered with lightly in the short run. Canadian economic history as a whole can, in fact, be viewed as a balancing of factors contributing to flexibility on one hand and stability on the other. Flexibility is necessary for efficiency and stability for security, but the two are inseparable. The CNR is constantly striving for the flexibility needed to maintain a successful business organization, within the requirements of stability of service.

Even within the requirements of stability of service, we operated up until two years ago under the severe financial handicap of heavy debt charges inherited at birth from our original component companies. In 1952, as you will recall, Parliament approved a recapitalization plan which relieved us of part of the old burdens, and gave us a debt structure more comparable to that of an ordinary company. As a result, our true earning capacity was more faithfully revealed in 1952 and 1953 by a modest profit. We were at last breaking even and we had renewed hope that, taking the lean years with the good, we would be able to hold up our heads and build up the confidence of the public and the morale of our employees.

This year's operations, however, are a reminder to us that the capital revision was not in itself enough to give our business future a favourable colour. Like other Canadian and American railways, the CNR has suffered a sharp decline in freight revenues.

Present indications are for a revenue decline in 1954 of not less than $60 million below 1953. Despite far-reaching efforts to reduce costs, it is likely that we shall fail to meet our interest charges on outstanding debt by at least $25 million. I need hardly say that such a result viewed against the efforts of the CNR organization is a crushing disappointment. From a managerial point of view it takes a stout heart to prevent discouragement from sapping our will-power to meet the challenge of the future. Be that as it may, I do not preach defeatism and I refuse to translate the verdict of this year's operations into a gloomy forecast for the future. Far from it. The CNR management is dedicated to an unshakeable resolve to make their railway pay its way like any other Canadian corporation. It will be profitable if human ingenuity and determination can make it profitable.

Nevertheless, a heavy annual loss in a relatively prosperous year is a reminder to the CNR that in spite of our unique history and special place in the Canadian economy, our business future is a straightforward question of costs versus revenues. It is not enough that we merely cover our operating expenses, nor that we merely break even after all financial as well as operating expenses are met. We should be able to rise above borderline solvency and plow some earnings back into capital improvements. Our having to borrow money each year for capital financing means that each year we face bigger interest charges. Obviously, either our costs have to go down or our revenues go up. There are no magic solutions to such economic problems.

Naturally the spectacular decline in freight traffic I have mentioned has drawn attention to the revenue side of our immediate situation, but we would be myopic indeed not to acknowledge that cost factors are of equal importance. Even if the present reasonably favourable outlook for the Canadian economy in 1955 is justified by events, all indications point to a continuing, if lessening, decline in railway earnings. The CNR is going to have to trim its costs even further than it has or face another annual deficit.

More than most other Canadian businesses we have been suffering from a severe squeeze between rising costs and revenues held down by less elastic railway rates. Our physical plant and operating efficiency are good by any standard. They have never been better than they are right now. But every improvement we have made has gone either to our employees as higher hourly earnings, which have risen 132% since 1939, or to our customers through the maintenance of a relatively low level of rates--our revenues per ton-mile of freight have risen only half as much as wholesale prices in the same period. These groups not the company, have been plucking the fruits of increasingly efficient management. Our problem is essentially to get into our own orchard for a share of the crop.

In its relatively large wage bill, the CNR faces the challenge of the high-wage society. We have no choice but to accept it. To maintain our power to compete for desirable employees in the labour market and to ensure harmony in our labour relations, the CNR must keep up with Canadian wage scales. In such a dilemma our only realistic recourse is to strive to reduce labour costs per unit of output, a technique which has been dramatically successful in many manufacturing concerns.

Broadly speaking, I see two lines of approach to the reduction of our labour costs per unit of transport service--first, technological development, or new "tools of the hand"; and second, managerial progress, or new "tools of the mind". Many new projects of course, involve both of these elements.

On the first point, I cannot predict what technological developments will be exploited to make railways more efficient. Who knows, we may even have atomic power in our locomotives before the century has run its course! Already the acquisition of diesel locomotives has resulted in a reduction of our operating expenses, as compared with steam costs, of about $85 million. By 1957 this reduction may well reach $145 million and will represent a saving of about $35 million a year, a 20% return on our investment in the equipment. Fuel costs on diesels are from one-third to one-half what they are on steam locomotives and they have the additional advantage of being able to run many more hours each day, even if the seductive charm of the diesel klaxon has proved fatal to the occasional bull moose. Improvements in terminals and traffic control have raised our efficiency. New developments are continually being churned up for consideration, and I am glad to report that the CNR is keeping abreast of progress in this field of technological development.

On the side of managerial progress, we all have much to learn in the elusive art of forging new "tools of the mind". These tools have to be strong, in many cases, to shatter the chains of administrative tradition, especially where these have become in effect, bonds of love. Organizations the size of the CNR, with about $3 billion in assets, and a labour force of 125,000 pose special problems in human relations. Of primary importance in such large concerns is their "structure"-the skeleton of lines of authority, job specifications, and the relationship of one office to other offices. The CNR is pushing ahead its programme of rationalizing its structure. We are drawing new functional charts to help us study our organizational problems. We are building up a new, highly mechanized personnel records system to give us more up-to-date information on the number and disposition of our various classes of employees. A statistical planning team is searching for ways to develop more current and better indicators of our costs. Our executive and other training programmes are designed to help keep the CNR supplied with capable employees at all levels. One of the most encouraging features of our training is the co-operation we are developing, through it, with our trade unions.

I would like to stress the need we see for a professional approach to administration, both in planning and in supervision. Enthusiastic amateurs are not enough. The professional administrator must be a man of action and also a thinker who can exploit his experience in solving new problems without too many self-doubts and without wasting time.

Here, then, is our technological and managerial strategy for coping with our large wage bill. It does not envisage "defeating" our employees either individually or in groups. On the contrary it welcomes their co-operation in developing new instruments for service and new methods of eliminating the administrative confusion which make people unhappy in their work. Over the years we believe this approach must pay off in increased returns for our wage dollar. It will help ease the pressure of costs. It is our response to the challenge of the high-wage society.

Turning now to the revenue side of our cost versus revenue coin, I must say we face a more imponderable picture, one less amenable to solutions of the CNR's own devising. Our freight traffic is the mainstay of our system. It produces about three-quarters of our revenues. Both it and our passenger service pose special problems, and both are squeezing us relentlessly.

In freight competition the railways are in a paradoxical situation. We depend on the top twenty-five percent of CNR freight traffic to carry our uneconomic operations. The paradox of transportation is that highway transport trucks, whose costs are from two to five times ours in proportion to distance, have been cutting into this crucial high-rate traffic. It is not that trucks carry so much. For-hire carriers moved only 9% of 1952 road-rail freight. But the revenue they earned doing it was 25% of total road-rail freight receipts. We need some of this revenue to ease the pressure of costs. Our problem is to get it.

If the railways are to survive as a healthy and solvent industry they must be able to cut freight rates on traffic vulnerable to truck competition and bid to regain lost business. The Montreal-Toronto freight rates recently announced are a case in point. I want to make it very clear that these new rates are not loss rates. They more than cover railway costs and they are competitive rates. We were moving virtually no goods at the old Montreal-Toronto rates and we expect to make money, not lose it, as a result of the recent reductions. Any increase in this particular traffic yields us net profits.

Such additional revenue as we get from rate reductions will help relieve the pressure of rising costs. This explains the apparent contradiction, which has been mentioned in the press, between our cutting certain freight rates while at the same time resisting further wage increases. We hope to be in a better position to meet our existing wage bill out of additional revenue coming from traffic secured by these rate reductions although, I regret to say, this revenue will not be anywhere near large enough to offset the effects of the 1954 decline in general freight volume.

Let me turn now for a few minutes to our passenger revenues which constitute our second major income problem although they equal only about one-tenth of our freight receipts. Even with allowance for the fact that freight and passenger trains share railway facilities the railways still lose many millions of dollars each year by being in the passenger business. To put the matter bluntly, human freight is a losing proposition all over North America. It is particularly unprofitable in Canada, which leads the world in its number of miles of track per capita, and where an increasing preponderance of inter-city personal travel is by automobile or bus.

However, it is part of our public duty to provide a passenger service and so we are in it to stay, apart from seeking to abandon exceptionally unprofitable trains. Consequently, if we are to cut our losses we must increase our volume. We are doing many things in an effort to meet that objective. Standards of safety and comfort make our passenger equipment expensive, but our $59 million worth of new passenger equipment is first rate. We hope to attract more traffic with it and retire old, unpopular rolling stock. We know our dining car service is too expensive to be popular despite the fact we lose money on every meal served. Here again, however, we are changing equipment and service in an effort to reduce prices and encourage volume patronage. With improved schedules we hope to add to the advantages of dependability and comfort available on a good train. The ability of railways to carry people under adverse climatic conditions has already earned us many "foul weather friends". What we need is a new group of fair weather friends, and they would be most welcome.

The broad problem of the peak load explains the seemingly unavoidable losses in passenger traffic. There has to be enough equipment for busy periods. This means a large investment in rolling stock. Then, at off-peak volume, equipment lies idle, revenues plummet, and the carriers lose money. This is especially true of equipment in suburban service for commuters, which is utilized only in rush hours.

I want to interject here a comment on our commuter rail service, which is sometimes criticized. All railways are keenly aware of the value of good public relations and naturally would like to meet all demands for service. We do the best we can, and have made recent and expensive improvements in, for example, equipment on the Oakville-Toronto run. But even the recent 100% fare increases will not meet our costs. A full year under the new fares will still leave us about $200,000 short of even out-of-pocket expenses on the Oakville-Toronto run alone. And this figure excludes general system charges which by rights this line should also share. How far can a national system go in subsidizing suburban life? I feel that the metropolitan areas are going to have to solve their own transportation problems in the long run and the CNR is anxious to do all it can to co-operate with metropolitan authorities on this problem. Railways are not designed nor intended to provide service for short-haul passenger traffic. At present we are in effect using a steam roller to crack walnuts.

So far I have spoken of our management programme, our freight rate aims, and our passenger service from the cost and revenue standpoints, but I have been discussing these as if the CNR were a system of one fixed size. In fact is is growing and shrinking here and there, and over the years is very dynamic. Consequently, I must say something about our policy on branch line extension and abandonment-our participation in Canadian economic development--which understandably arouses controversy when the dreams or ambitions of people are curbed by economic realities.

Our policy on branch line or other rail extension is quite clear. We accept the responsibility of providing needed rail facilities wherever we are the logical railway to do so, provided the new line is economically justified. We are constantly on the lookout for new opportunities of growth and for collaboration with businessmen who are considering new industrial locations. New branch lines are usually characterized by initial deficits, which we are prepared to accept for a reasonable period. Even where our analysis of traffic potential reveals poor prospects, we may underwrite part of the cost of a new line if other interests, for example the federal or provincial government, are prepared to provide the rest of the required capital. I feel that these "partnerships" are a good illustration of fruitful collaboration between business and government for developing Canada's wealth.

Similar problems arise as our research reveals trains or branch lines becoming a serious drain on our treasury. History places a heavy hand on us when we seek to abandon service. We do so only when our analysis of all traffic factors fails to reveal justification for continuing. But we must surely be allowed to adjust ourselves to economic decay and to rising competition as well as to new opportunities for sound growth. The Board of Transport Commissioners for Canada has to approve abandonments. The railways cannot stop service on their own authority. But the important thing is not the legal procedure; it is the result achieved. Unless we have flexibility here we cannot meet the larger issues of over-all costs and revenues.

All the various aspects of the CNR I have mentioned--our large wage bill with its demand for progressive management, our freight and passenger revenues which reflect the pressures of competition, and our branch line programme which gives us a key role in economic development--all of these are part of one continental corporation which is striving for a future of financial success as well as public service.

You may ask, "Why should the CNR make a profit?" I would answer that it must do so if it is to reach peak efficiency and provide Canadians with a maximum of service for their transportation dollar. The fact that the CNR is publicly owned is irrelevant to this proposition. Efficiency is not basically a question of ownership but of operating philosophy and employee morale. We North Americans live in a sociological climate steeped in the traditions of business. In this climate of enterprise, employees at all levels of business can understand a demand for productivity and see the need for business controls to measure and encourage it. But exhortations from an executive officer are a poor substitute for the discipline of a profit and loss account, without which administrative problems are robbed of both urgency and clarity.

The history of transportation, especially outside North America, displays ample evidence of the deadening effect which a steady diet of losses and an insatiable demand for uneconomic service can have on railway efficiency. It not only raises transport costs to the public; it tends to debilitate management.

As far as Canada is concerned, we depend on the competition of two large railways, one of which is privately owned, to keep our railway industry on its toes. If railway rate and traffic conditions were such as to condemn the CNR to an endless series of annual deficits, it is not likely that the privately-owned company could long survive as a railway. Those who contend that CNR deficits are unimportant and indeed are to be encouraged are really arguing for the abandonment of both initiative and private enterprise in the railway business in Canada. For many reasons I believe that would be disastrous for those who look to the railways for their livelihood and for those who depend on them for service. The formula for happiness or misery stated by Charles Dickens through the mouth of the inimitable Micawber is as true of a railway as it is of an individual. Revenue simply must exceed expense or misery follows. Without the profit margin there is little incentive to efficiency and no yardstick of its achievement.

I verily believe that no country has more exciting prospects of material development than this goodly land of Canada. That development will not be entirely for the selfish gain of its nationals, for Canada has given abundant evidence of willingness to make material as well as cultural contributions to less favoured nations who want her help. No industry can contribute more than our railways to building Canada's future, for they remain unchallenged as the work horse of our transportation network.

It follows, therefore, that the current problems of railways, the highlights I have called to your attention, merit the intelligent deliberation of all thoughtful citizens and that the efforts of those entrusted with the task of meeting them should be accorded the support of an enlightened public opinion.

THANKS OF THE MEETING were expressed by Mr. James H. Joyce, President of The Empire Club of Canada.