It’s a tale of two railroads, both operating through some of the worst of times in terms of nature’s wrath, but coming through in vastly different shape.
When extremely tough weather conditions ravaged major North American railroads this year, Canada’s two cross-country carriers were caught more than most. Canadian National Railway and the smaller Canadian Pacific fought heavy snowstorms and avalanches in winter, and then rampaging floodwaters in the spring and summer. And then came the forest fires.
The succession of extreme weather events hit them in Canada and their extensive U.S. operations, giving the railroads little chance to recover from one storm before the next would hit in another region.
The run of storms hit CP hard on the top line and the bottom line. The western carrier’s revenue barely grew in the first half of the year, inching up 1.1 percent, and CP’s net profit fell 40 percent from the first half of 2010, to about $164 million, and was down 23.2 percent in the second quarter.
CP President Fred Green said the carrier suffered 90 separate outages in the second quarter from “widespread and prolonged flooding.”
Canadian National, meanwhile, pushed revenue up nearly 8 percent in the second quarter, and although the net profit for the quarter was up only slightly, the operating profit grew 7.5 percent over last year to $887 million.
Some industry watchers believe the gap in operating performance will have an impact as shippers make routing choices. “The Canadian marketplace has been shaken up by (the first half’s) weather-related disruptions, particularly with the government watching shipper service satisfaction,” said Matthew Troy, a rail analyst at Susquehanna Financial Group.
For the intermodal market, in particular, where rail traffic usually grows at the expense of long-haul trucking, Troy said CP’s woes could mean shippers get closer to its main rail rival, CN. “We see potential for a disproportionate amount of rail-to-rail share shifts in Canada” during the rest of this year and in 2012, Troy said.
That was already taking place in the April-June period, John Larkin at Stifel Nicolaus, said in a report on the railroads. “The company lost some international intermodal volume,” he said. “Some customers endeavored to route freight around CP’s weather-related service issues (or at least customers’ perception of service issues).”
Green said in reporting CP’s second quarter earnings that repairs to tracks and facilities were under way and service levels were “returning to normal,” but some believe it will take longer for the railroad to rebuild shipper confidence.
All major railroads that got caught in flood zones saw their operating metrics suffer. Loads sat longer at terminals, trains moved more slowly, and detours or rerouting added hours or days to delivery times.
CN in Canada and the U.S. Midwest suffered track washouts, train delays and terminal outages. BNSF Railway and Union Pacific Railroad spent tens of millions of dollars rebuilding many miles of U.S. tracks to higher levels and jacking up rail bridges after the long-winding Missouri River had its worst flood since 1993.
For CP, however, river names such as the Red, Souris and Missouri had been costlier battlegrounds, knocking out key parts of its route map over and over.
Green said for 60 of the 90 days in the second quarter, some of the network had been down. For 23 days, its main north-south route to Chicago was knocked out.
That meant CP had to pay other railroads about $4 million to handle its detoured trains on their tracks. Start-stop train movements, extra staging time and routing trains around flood zones cost an extra $5 million just in fuel costs.
And with lower velocity making it harder to turn equipment around, CP paid more in per-car rental fees. But its trains ran more cars at higher weights to boost CP’s productivity level, and it managed to increase revenue despite weaker volume.
CN gained in the meantime. As CP reported an 8 percent decline in intermodal traffic in the second quarter year-over-year, CN’s box counts grew 10 percent, its biggest gain across major cargo groups.
By July 12, CP’s entire track network was running again. Green patted his engineering and repair crews on the back and reassured shippers. “It’s been an extraordinary first half,” he said, “and while we’re all frustrated, the level of commitment has been outstanding.”
Cherilyn Radbourne of TD Newcrest said some remaining “areas of concern include CP’s likely tendency to trade service for efficiency in (second half 2011) and the potential for a busy capital program, which is now behind schedule, to affect service and efficiency.”
CP officials said they had quickly recovered some lost grain business by mid-summer and started to see diverted intermodal volume return. Green cautioned that ship line contacts in July were uncertain about the coming peak season, further complicating the outlook for box traffic on his railroad.
What had been lost in intermodal traffic was mostly on that international side, he said, rather than domestic business that competes with trucking. And he knew that after a tough first half, those ocean shippers would watch CP closely in the autumn peak season.
“It’s a journey,” he told analysts. “It will take several months, maybe even a quarter or more, as people test us during the early peak and the fall.”