It’s time to be honest about canada’s railways.
Meaningful competition on either rates or service does not exist for many shippers.
Presentation from January 25, 2024 FAIRR Coalition Webinar
The Railway Association of Canada (RAC) Commissioned a report by CPCS to compare Canadian rail freight rates to other countries.
RAC concludes that Canada has among the lowest freight rates in the world.
They say Canada has a highly competitive freight rail system.
They argue that no further regulatory oversight is needed.
Nothing could be further from the truth.
Here’s what they are not telling you.
The CPCS report completely ignores important variables to make an apples-to-apples comparison.
Length of haul
Length of train
traffic mix
Weight of Trains
operating efficiencies
By failing to address these important matters, the CPCS Report misleads readers and allows no useful conclusions whatsoever.
So what’s the real story on Canadian rail profitability?
return on equity
The amount of CN and CPKC income above their cost of equity is staggering. A firm’s cost of equity represents the compensation that shareholders demand in exchange for owning shares. Between 2013-2022 they earned $53.8B in excess of what Canada’s regulators found necessary for them to achieve financial viability. In 2022 CN’s cost of equity was 7.33% while its return on equity was 23.2%, over 3 times higher than the calculated cost of equity! CP was 8.35% and 21.43%, respectively.
Operating ratio
Canadian-based railways have posted industry leading operating ratios over the ten year period 2013-2022. It is the primary measure of performance in the railway sector and is a term used to describe operating expenses as a percentage of revenue. CN and CPKC are #1 and #2 in North America for operating ratio performance from 2013-22. The smaller the percentage, the more efficient the railway is at making money.
inflation plus pricing
Rail freight rate price increases from 2007-2021 were 36%, outstripping the trucking price index (27%), consumer price index (27%) and commodity price index (4%). That’s almost 10% more than inflation. Both railways have stated in quarterly investor calls this past year that their pricing model is “inflation plus” meaning they intend to continue to raise prices faster than inflation. Shippers can do little to stop them.
The bottom line is Canada’s railways have runaway profits
Did you know…
Long distance hauls with longer and heavier trains and a single type of commodity lead to greater efficiencies and profitability for railways
CN and CPKC’s average length of haul in Canada in 2021 was 1,469km while they were 542km and 791km respectively for their US operations. EU averages ranged from 232km (Italy) to 417km (Spain). India was 585km.
Train length in Canada on average in 2021 was 121 cars vs 81 in the U.S. and 30-40 in the EU.
Train weight in Canada on average in 2021 was 8,418 metric tonnes (MT). Germany’s major railway reports 502MT and India’s 1,738MT in the same period.
CN and CPKC face little or no competition for the vast majority of their traffic. These two railways transport about 95% of all rail traffic in Canada.
