Threat of Canadian rail strike hurts Canadian National’s quarterly earnings

MONTREAL – Canadian National today cut its financial forecast for the year as volume growth slowed in the second quarter due to a collapse in lumber traffic and trucking companies diverting international intermodal containers to U.S. ports in anticipation of a possible rail strike in Canada.

CN’s operating profit fell 3% to $1.6 billion in the second quarter, while revenue rose 7% to $4.3 billion. The operating ratio rose 3.4 points to 64%, reflecting higher labour costs and fuel prices, as well as the impact of congestion in the Vancouver Corridor due to track work.

“This was a challenging quarter for us,” CEO Tracy Robinson told investors and analysts at the railroad’s earnings call on Tuesday afternoon.

Volumes rose 7% on a ton-mile basis sold, or 3.7% on a carload and container basis. However, in late May, customers began rerouting shipments for fear of strikes, and in June, lumber volumes began to decline.

The changes in international intermodal volumes mainly affect containers for the US, which CN handles from the ports of Vancouver and Prince Rupert in British Columbia, says Chief Commercial Officer Remi G. Lalonde. The containers were diverted to ports on the US West Coast to avoid disruptions caused by a strike.

CN now expects earnings per share to grow in the mid- to high-single-digit percentage range, compared to around 10% growth in the previous forecast. The new forecast assumes no work stoppages at the rail or ports this year.

The Teamsters Canada Rail Conference, which represents CN train drivers and conductors, has authorized a strike. The Canadian Industrial Relations Board has suspended the strike while it reviews which goods are deemed essential and must continue to be transported during a work stoppage. A decision is expected by August 9.

Due to a combination of planned and unplanned track work in the Vancouver Corridor, CN experienced congestion in and around the Directional Running Zone it shares with Canadian Pacific Kansas City in the rugged canyons of the Thompson and Fraser rivers in British Columbia.

The work stoppages, which halted traffic for four to eight hours, occurred as CN was moving record numbers of trains to and from Vancouver, said Derek Taylor, the railroad’s chief field operating officer.

“We added additional train launches as planned to cover growth and were successful in rolling out these volumes overall,” says Taylor. “However, our operating metrics reflect the fact that we were hampered throughout the quarter by ongoing track maintenance in the critical Vancouver Corridor. There was not a single week in the second quarter where there was not some form of planned or unplanned maintenance in the Directional Running Zone (DRZ).”

CN and CPKC coordinate maintenance in the DRZ, where westbound traffic uses CN’s main line and eastbound traffic uses CPKC. However, the necessary unplanned work on the single-track main lines caused disruption. CN was more affected by the track work, Taylor says, because its trains accounted for two-thirds of the traffic that passed through the DRZ that quarter.

CN’s auto speed for the quarter, measured in auto miles per day, fell 3% to 210 miles per day. This month it has rebounded to nearly 220 miles per day as track work at the DRZ was completed.

Congestion in the Vancouver corridor has significantly increased CN’s personnel costs, including reassignments, empty flights and expenses away from home, says Chief Financial Officer Ghislain Houle.

CN is closely monitoring a forest fire near Jasper, Alberta, that shut down mainline service today.

CN maintained its three-year financial and volume guidance despite the second-quarter setbacks. CN-specific growth opportunities — including international intermodal on the West Coast, frac sands and propane traffic, renewable fuels transportation and a fuel facility in Toronto — remain intact and will come online as planned, executives said.

CN’s earnings materials are available online.