The main problem for the Newfoundland Railway was economics, namely the distance to the mainland. The being narrow gauge was a minor inconvenience but the early 1960s really no more than that namely because of the ability to switch out the bogies on cars as they arrived at Port aux Basques and existing diesel locomotives. The population of Newfoundland is overwhelmingly concentrated on the Avalon Peninsula, and there isn't the economic impetus for there to be branchlines to Trepassey, Argentia, Bonavista or Terrenceville because the populations there are too small to justify rail service unless there is a good reason (i.e. an industry) to justify the line being maintained, and even if you could base this on the fishery (and a fixed link isn't gonna help here, because the distance is so much greater to go via the Strait of Belle Isle and down Quebec's North Shore) the collapse of the fishery in the 1990s is gonna doom the railroad. The building of a fixed link between Newfoundland and Labrador is economically a difficult thing to justify because of the need to build hundreds of kilometres of roads, railways or both to make it work as well.
If you are absolutely serious about a post-1949 way of saving the Newfoundland Railway, first off never allow CN to be privatized or have divisions broken off a la Terra Transport. Next, invest in electrification - Newfoundland has lots of hydroelectric potential, as does much of Canada. If Ontario Hydro and Hydro-Quebec both go down the road of hydroelectricity and Hydro Newfoundland follows, and CN responds to this by massive efforts on electrification, but with the infrastructure being rebuilt at the same time, the Newfoundland Railway is completely rebuilt. With St. John's and Ottawa footing the bill, the track is rebuilt at Standard Gauge (there are few places in Newfoundland where this would even be difficult) and the main line from Port aux Basques is rebuilt at standard gauge, while almost all of the branch lines are abandoned for economic reasons - the Bonavista branch remains to serve fish processing plants there, while a branch is built to Buchans for the mines there and to Botwood to export the ore. All surviving branches are electrified with the main line. The huge initial cost of this initially looks foolish but, just as the railroad is finished in the early 1970s, the energy crisis hits, and efficient facilities, cheap hydroelectric power and modern infrastructure makes the Newfoundland Railway a very efficient operation, and by the late 1970s a profitable one as outgoing minerals, lumber and paper products, fish products, oil industry supplies and slate and granite and pretty much everything coming to the Rock from Canada comes via the railway. CN's investment in a small fleet of large ships for delivering cars to the mainland in the 1970s proves a good investment, as the railway is able to deliver pretty much anything to Newfoundland faster than ships as a result.
As the massive problems with the Cod fisheries began to be apparent in the 1980s and cutbacks were a necessity, the Canadian government in 1984 ordered a huge reduction in the Cod stocks to last ten years, but the job losses in this were almost immediately answered by a massive move by CN and a coalition of several Newfoundland boat-builders, as they announced in the summer of 1984 that Bonavista, one of the hardest-hit communities by the pullback and also one of the easiest places to build something, would shift gears immediately, with the construction of a massive shipyard for CN's Marine Atlantic fleet. The Bonavista Shipyard, opened in late summer 1986, was supplied with everything it needed by the railway, and its first vessel, fast container ship Pride of Newfoundland, launched in September 1988, was the first of a new fleet of ships for CN's Maritime operations. Bonavista-built ships soon gained a reputation as being incredibly durable, and rapid economic diversification, and a steady recovery in the Cod fishery following the limits imposed in 1984, helped Newfoundland's 1980s economic shock rapidly shift to prosperity. Bonavista was soon supplied by steel and aluminum from Newfoundland mills, and the growth of the oil and gas industry in Newfoundland in the 1990s and 2000s proved another source of wealth for the island and another source of traffic for the Railway. Even as the Trans-Canada Highway across Newfoundland was rebuilt in the 1980s, truck traffic across it was fairly minimal - it was cheaper to ship by rail, and CN established piggyback terminals at St. John's, Corner Brook,
CN across Canada had much of the same trajectory. As their huge electrification projects of the 1970s came to fruition, the company's operating deficit disappeared, and economic diversification proved a boon. Cheap hydroelectric power powered CN's thousands of kilometres of lines to prosperity, and Canadian Pacific was soon to follow. Redevelopment of older facilities and chasing of opportunities became a creed in Canada, and much of the new progress could be linked to the railway across the Rock....