Competitive Challenge Canadian Shippers Face From U.S. "Mega" Railroads Key Factor Behind CN's Productivity Drive.

MONTREAL--(BUSINESS WIRE)--Oct. 27, 1998--CN (ME:CNR.) (TSE:CNR.) (NYSE:CNI) Canadian National is intensifying its drive to improve productivity to meet the profound competitive challenges posed to Canadian shippers by United States rail industry consolidation, says CN President and Chief Executive Officer Paul M. Tellier.

Tellier, speaking to the Board of Trade of Metropolitan Montreal today, said CN cannot ignore the competitive muscle of newly-created, and newly-forming, rail giants in the U.S. because north-south traffic between Canada and the U.S. is growing at about 11 percent annually; this traffic will soon represent more than 50 percent of CN's business.

"Increasingly, our customers compete in the North American marketplace. Our job is to keep them competitive in that market place. To do that we must provide services that are as consistent, as reliable and as cost-efficient as those provided by other railroads to our customers' competitors. No one should be in doubt. Ultimately, it is the customer who shoulders the burden of any failure by us to match the standard of excellence available to his competitors."

The emergence of the "Big Four" U.S. rail carriers from the most recent round of rail mergers in the U.S. will intensify competition for CN and its customers. Example: CSX Corp. (CSX), one of two companies dividing rail carrier Conrail Inc., will soon provide traditional consumers of Quebec paper products in the U.S. Northeast with a new source of products in the U.S. South.

Tellier said there is little doubt that U.S. railroads, which are already significantly more productive than CN, "will emerge as even fiercer and more powerful competitors than they are now" following the latest round of acquisitions. "Falling behind our competitors is not acceptable. The standards by which we are judged -- the standards to which we aspire -- are North American standards. We must anticipate where the U.S. rail industry will be when consolidations run their course -- and act accordingly."

In response to these challenges, CN is compelled to make more intensive use of its assets and to improve service while using fewer locomotives, fewer cars and fewer facilities to do the work. "One result is that we need fewer people to run locomotives, repair rolling stock, maintain facilities or provide supporting management and administrative services."

The competitive and market forces now confronting CN, Mr. Tellier said, provide the context for the Company's decision to take a $590-million special charge, announced last week, to cover the cost of reducing CN's workforce by 3,000 persons over 18 months from mid-1998 to December 1999. "It was a painful, but a necessary decision."

The average cost for reducing each position is about $195,000, reflecting some of the finest employment benefits available in Canadian industry. A clerk earning $45,000 a year with eight years service can elect to take a lump sum payment of $65,000 or receive employment security and collect annual payments of about $40,000 for up to six years. A clerk eligible for five years bridging to retirement can expect to receive more than $200,000 in income protection, including fringe benefits and lump sum separation payment upon retirement.

CN is doing more to improve its ability -- and the ability of its customers -- to compete in the NAFTA market place than by pursuing productivity improvements alone. CN's proposed merger with Illinois Central Corporation (IC) and new marketing alliance with IC and Kansas City Southern Railway Company (KCSR) will offer Quebec shippers, for example, new trade opportunities in rapidly growing north-south markets. Shippers already recognize the benefits of the merger transaction and marketing alliance.

Tellier said Alcan Smelters and Chemicals Ltd. believes the single-line service opportunities flowing from the CN/IC merger will improve the speed and consistency of transit times for shipments of aluminum ingots from Quebec to Kentucky.

Forest companies, including Abitibi Consolidated Inc., Alliance Forest Products Inc., Kruger Inc., St. Laurent Paperboard Inc. and Tembec Inc., have also voiced support for the merger and CN/IC/KCSR marketing alliance. "In other words, they have concluded that the strategy is important to them and to their employees."

The CN/IC merger will unite CN with IC -- the most efficient U.S. Class 1 rail carrier -- thereby connecting the Atlantic, Pacific and U.S. Gulf coasts with a single "Y-shaped" network. CN and IC meet in Chicago, with virtually no overlap in networks.

The CN/IC/KCSR marketing alliance today offers shippers coordinated, through-train service between Canada, the U.S. Midwest and U.S. South, and a connection to Mexico's largest rail system.

"We're moving quickly to bring the benefits of the marketing alliance to Montreal shippers," Tellier said. "We're ready to do more if traffic warrants. Here are some of the possibilities. For intermodal: direct service between Montreal and Dallas, serving markets in Toronto and Detroit. This means two-day service from Montreal to Memphis, and three-day service to Shreveport, La., as well as Dallas.

"For our merchandise customers: direct train service between Toronto and Shreveport. Eastern Canada and Quebec shippers will be able to tap this service. It will give them faster transportation to the Mid-South U.S., Gulf Coast and Mexico."

The CN/IC merger, announced in February 1998, must be approved by the United States Surface Transportation Board. The STB has scheduled its vote for next March. The CN/IC/KCSR marketing alliance took effect in April 1998.

Subject to STB approval of the CN/IC merger, CN will proceed with an access agreement with KCSR to exchange certain haulage and trackage rights in the southern U.S. This access agreement would pave the way for CN to invest in automotive, intermodal and transload facilities in Dallas and Kansas City. KCSR would have an opportunity to invest in similar facilities in Chicago and Memphis.

Canadian National Railway Company serves all of Canada and the U.S. Midwest, including the ports of Vancouver, Montreal and Halifax and key cities of Toronto, Chicago, Detroit and Buffalo, with connections to all points in North America.