Intermodal shippers tapping the two major Canadian railroads can look forward to better service — and likely more competitive pricing on lanes in which the carriers compete — in 2013.
Two major forces are changing the intermodal networks of archrivals Canadian Pacific and Canadian National railways. Larger container ships are spurring CN to strengthen its connections to major ports and to expand its terminal network, giving shippers faster and expanded access to U.S., Canadian and foreign markets.
CN also plans to increase service to Detroit in 2013 and build on its steel-wheel interchange with CSX Transportation, strengthening shippers’ reach into the eastern U.S., particularly in the Ohio Valley. Before the interchange began in the spring, shippers had to pay for costly drayage to haul loads between the two railroads.
“As the shipping industry gets bigger ships, we need to give them a bigger market,” said Jean-Jacques Ruest, CN’s executive vice president and chief marketing officer. “Only so much cargo can go through Calgary and Edmonton. The focus in 2012 and 2013 is to give them more destination markets.”
E. Hunter Harrison, the second major force, is shaking up CP’s operations, work force and culture in an effort to make North America’s least profitable railroad a leaner and fiercer company. The railroad this month said it would cut nearly a quarter of its work force over the next four years and look to sell some of its lines. CP will keep annual capital spending between $1 billion and $1.1 billion, with much of the spending funneling toward extending siding, an effort aimed at reducing crew starts by running longer trains.
Harrison hasn’t wasted any time since taking over the railroad in late June after activist investor William Ackman wrested control of the company through a fierce proxy fight. Harrison, a much-lauded railroader, closed four hump-switching yards and three intermodal terminals, and removed 195 locomotives and 3,200 leased railcars from service.
The former CN chief also sped up intermodal service to Vancouver, British Columbia, from Chicago and Toronto.
Harrison, who helped make CN North America’s most profitable railroad, aims to lower CP’s operating ratio to the mid-60s by 2016. CP, which has steadily lost business to its larger rival, had an operating ratio of 74.1 percent in the third quarter.
The changes CP announced this month are just the beginning, said Tom Finkbiner, senior chairman for the Intermodal Transportation Institute. Harrison is getting his network in the right spot for more precision railroading, meaning shippers will have less flexibility on scheduling but will likely enjoy more competitive service and pricing.
“I think that what we’ve learned over the last 30 years is that to try to make the (railroad) more flexible, you degrade the whole system,” Finkbiner said. CP “has some freight commitments that were more difficult to do, and it degraded the whole network.”
CP’s changes go beyond the tangible, including the cutting of 4,500 positions and possibly selling Delaware & Hudson railroad in the U.S. Northeast. Harrison, who got his start in the industry as a carman-oiler, wants to change the CP culture. He has pushed out executives accused of being more concerned about the railroad’s image, instead of sharing his passion for railroading.
“Now one of my evaluations initially was that we were clearly, in my view, top-heavy,” Harrison said during a Dec. 4 call with investors. “We had too many non-union officers, managers, supervisors, leaders, up to the range of 28 percent to 30 percent. That’s far too much.”
Harrison has promoted “top talent that has been buried under a layer or two deep in the organization” and pushed employees to make changes that cut costs and improve service, Stifel Nicolaus analyst John Larkin wrote in a Dec. 6 research note. CP will move its headquarters from downtown Calgary to railroad-owned Ogden Yard, allowing the railroad to save money and remind employees “what this business is about,” said Harrison, who never believed its headquarters needed to “be downtown in glass towers.”
As one of the world’s best-run railroads, CN doesn’t require such a restructuring and can focus on building on its intermodal successes. One of those is grabbing business from an undisclosed shipping line historically attached to CP this year, and the other is signing a significant contract with a large U.S. retailer entering Canada next year.
Growth at the ports of Prince Rupert and Port Metro Vancouver has been key to gaining more intermodal business, with container traffic in the first 10 months of the year rising 44 percent and 8.3 percent, respectively. To tap the growth, CN next year will continue its construction of five extended sidings on Edmonton, Alberta-Prince Rupert British Columbia, corridor, Ruest said.
But more volume requires more intermodal terminals, and the $220 million Calgary Logistics Park will give shippers access to a modern facility and more than 2 million square feet of warehouse capacity when it opens next month.
With CP slimming down into fighting shape and CN bulking up, shippers will have a front row seat in 2013 to a rare contest. No matter the victor, intermodal shippers likely will win.