Doing More With Less

Doing More With Less

Copyright 2004, Traffic World, Inc.

One lesson Canadian National Railway says it learned in the first quarter of 2004 is that it can be more productive with less people.

Although the month-long strike by the Canadian Auto Workers Union cut the railroad''s intermodal quarterly revenue by $17.8 million, the railroad says the strike highlighted new opportunities for major job cuts. CN said it was able to maintain "near-normal" service after replacing 5,000 striking workers with 2,000 managers.

As a result, CN President and CEO Hunter Harrison said the company likely would cut 500 positions in the next 12 months and another 700 within 18 months. "When managers leave the office and go out on the ground, there''s always lessons to be learned when we get closer to the business," said Harrison.

Harrison announced the cuts as CN released a financial report that included $155 million in profits in the quarter, down 17 percent from the same period last year. Revenue of $1.07 billion also was down, 4 percent from $1.1 billion, due largely to a higher valued Canadian dollar and lost intermodal revenue, CN said.

The good news was that operating expenses also decreased, down seven percent from $829 million to $770 million.

CN said the decrease largely reflected the impact of the stronger Canadian dollar on U.S. dollar-denominated expenses and lower labor and fringe benefits expenses and equipment rents. Partly offsetting these decreases were higher depreciation and amortization expenses and the impact of higher fuel prices on fuel expense.

CN once again illustrated why it''s regarded by many as the industry leader in efficiency, recording an operating ratio of 72.5 percent, 2.5 points better than first quarter 2003 and the lowest among the Class 1 railroads despite the impact of the strike. In addition, operating income of $292 million increased six percent from a year earlier.

"CN''s intermodal revenues have recovered since the strike and we anticipate continued strength in Canadian grain and forest products volumes during the balance of the year," Harrison said.

"CN beat our (estimates) the old fashioned way, through $12.6 million in higher revenues and $20 million in lower expenses," said Morgan Stanley''s Jim Valentine. "CN''s impressive first quarter results confirm our thesis that railroads with more fluid networks and higher service levels will efficiently accommodate the surge in demand, raise customer rates at a faster pace, develop meaningful amounts of operating leverage and grow higher quality earnings at a faster rate than many of the other companies in our universe in 2004," he said.

The first quarter wasn''t as positive for CN rival Canadian Pacific Railway. CP profits nose-dived 77 percent from last year, from $76 million in 2003 to $17.8 million this year. The decrease was due to a net loss of $10.4 million in foreign exchange on long-term debt in the first quarter of 2004, CP said, compared with a net gain of $47.4 million in the same period a year earlier.

CP''s operating income in the first quarter was $86 million, compared with $87 million in the same period of 2003. The company said the Canadian dollar''s 16 percent year-over-year gain against the U.S. dollar hurt operating income in the first quarter.

"The worst avalanche in eight years and severe weather early in the quarter hit us hard in our western corridors over a two-week period," said CP President and Chief Executive Officer Rob Ritchie. "With heavy freight volumes fully consuming available capacity, there was no opportunity to recover the lost volumes in the quarter. However, we staged a comeback that saw our railway running more efficiently than ever, and exited the quarter with very strong business fundamentals."

Ritchie said overall business in revenue ton-miles increased by 17 per cent in March over February, and average train weight went up 5 percent. "This momentum has carried into the second quarter," he said.

CP''s intermodal revenue increased 12 percent, helped from business temporarily shifting over as a result of the CAW strike, and from higher volumes at the ports of Vancouver and Montreal.

While CN plans to cut jobs, CP says it will hire train crews to meet an anticipated surge in demand across most of its business lines in the short-term. CP customers, meanwhile, can expect to see rates increase.

"Despite these measures, we expect capacity in some areas of CP''s network to remain tight in the medium term, particularly for bulk and intermodal traffic on our western corridors," Ritchie said. "In addition, current market conditions are favorable for CP to deliver price increases."

In the United States, Burlington Northern Santa Fe Railway''s first quarter - like Norfolk Southern''s a week earlier - benefited from strong economy. The western carrier increased unit volumes in each major business group.

Freight revenue for the first quarter grew 11 percent to $2.45 billion compared with $2.2 billion in the first quarter of 2003.

The railroad''s consumer products business had a record first quarter with revenue up 9 percent to $927 million. BNSF said it saw increased volumes in its international, truckload and perishables sectors and an overall increase in revenue per unit. Agricultural products also posted record revenue, up 22 percent to $438 million, as a result of strong U.S. corn and wheat harvests coupled with increased export demand for grain.

Coal revenue for the first quarter increased $35 million, or 7 percent, to $520 million driven primarily by two new long-term coal contracts, and industrial products revenue rose 10 percent to a record $563 million, reflecting increased business in the construction products, building products, and petroleum products sectors, BNSF said.

Operating expenses rose 10 percent in the quarter over first quarter 2003 to $2.08 billion, driven principally by a 9 percent increase in gross ton miles handled and higher depreciation expense.