Canadian Pacific Railway is looking within for profit by improving its existing network, while its larger rival wants to build a multibillion-dollar line to tap iron ore exports. The different approaches CP and Canadian National Railway are taking reflect each railroad’s position on opposite ends of the profitability spectrum, with the former the least profitable major railroad in North America and the latter ahead of the pack.
E. Hunter Harrison, CP’s new CEO, aims to make the smaller of the two railways more profitable by adopting some of the same practices he used successfully as head of CN: tighter scheduling, asset utilization and operation efficiency.
Shippers leery of tighter scheduling will have some time, though, as Harrison makes the necessary tweaks to infrastructure and tests his staff to see if they are ready for the next phase of productivity advances, said Tom Finkbiner, senior chairman for the Intermodal Transportation Institute. “If he finds he gets pushback, he will change people,” Finkbiner said.
CP terminal complexes haven’t changed much since the 1960s, and some facilities aren’t handling enough to make it worth keeping them on the network, Harrison said, according to a Seeking Alpha transcript. We’re probably going to see fewer terminals and maybe smaller and configured in different ways,” he said.
“We’re running some (speed) trial tests as we speak to improve transcontinentally, our intermodal operation,” he said during a second quarter earnings call. Harrison, who is also looking at moving underutilized sidings to reduce capital costs, said he might give a more detailed plan on how to improve operations in late fall.
“We believe that if the new management’s objectives are achieved, we will start to see dramatic improvements in metrics like train velocity, terminal dwell, train load, and locomotive and car productivity, over the coming quarter,” John Larkin, managing director at investment research firm Stifel Nicolaus, wrote in a July 30 research note.
With its network already efficient, CN wants to tap the boom in iron ore exports by building a rail line from the Port of Sept-lless on the Gulf of St. Lawrence to northern Quebec and Labrador. The project would require the construction of at least 310 miles, and the exact length of the line and cost, which ranges from $3 billion to $6 billion, depends on how many mines take part in the project. Six major mines, including Labrador Ore Mines, Cliff Natural Resources and Cap-Ex Ventures, already have agreed to work with the railroad on an economic feasibility study.
Iron ore exports from the region are expected to rise more than 35 percent during the next five years, according to the Newfoundland and Labrador’s Department of Natural Resources. The growth estimates are fueled by China’s wish to diversify its sourcing of the key steelmaking ingredient.
CN’s metal and minerals shipments rose 1 percent year-over-year in the second quarter and 6 percent in the first half of the year. The segment generated $294 million in second quarter revenue, up 9 percent year-over-year, and accounted for about 11.5 percent of CN’s total revenue. Both Canadian railroads have seen more robust volume than their U.S. counterparts because of a healthier home economy, and slumps in coal and grain also have been mellower.
But unlike its rival, CN also is enjoying steady intermodal volume growth, largely because of increased traffic through the Port of Prince Rupert. Container traffic at the British Columbia port hit a monthly high in July, as traffic rose 5.5 percent year-over-year to nearly 49,000 20-foot-equivalent units. Among West Coast competitors, the port has one of the shortest routes to China and a tiny local market, meaning CN gains most of the volume off the docks for long-haul transport.
Prince Rupert’s growth was key in boosting CN’s intermodal volume 13 percent year-over-year in the second quarter. CP’s intermodal growth, in contrast, was flat in the same period despite the railroad saying it has recovered market share in its key markets. A nine-day strike contributed to a 1 percent slip in total volume hauled by the railroad. The loss of that business, along with costs accrued from the management shakeup, cut profit by nearly one-fifth, to $101 million. Cutting pensions, the linchpin to the strike, is one of the ways CP is working to reduce its operating ratio to 65 percent by 2015, the goal set by activist investor William Ackman.
Canada recently appointed an arbitrator to the dispute between the railroad and the Teamsters Canada Rail Conference, which consists of about 4,800 unionized CP engineers, conductors and traffic controllers. “I’ve had some success with labor, but it’s hard, the change is hard, and it takes time,” Harrison said. “I think we all know as we look at the situation in North America with pensions, something’s got to change.”
Even with already faster train speeds and less terminal dwell time, Harrison warned investors that they shouldn’t expect to see the operating ratio improve dramatically next quarter. But Harrison, who some observers consider the best railroad executive in the industry, said to expect “pretty sustained improvement.” The railroad’s operating ratio worsened by 80 basis points to 82.5 percent in the last quarter.
CN’s operating ratio of 61.3 percent, the best among major North American railroads, was unchanged in the first period. The railroad likely will keep the ratio in the low-60s more than in the mid-60s because CN is keeping its pricing above the rate of rail inflation, Larkin wrote. That steady health forecast emboldens CN to consider a bold multibillion-dollar infrastructure expansion, while CP works to get its house in order.