Deploying precision scheduled railroading (PSR) is an art and a process, and the operational model shouldn’t be blamed for poor rail service, Canadian Pacific President and CEO Keith Creel told investors during a second-quarter 2022 earnings call Thursday.
“To truly integrate and implement a PSR railroad, it’s a very well thought-out process …,” Creel said. “You’ve got to have the right number of crews. You’ve got to have the right number of locomotives. You’ve got to have the right number of cars. You’ve got to have the physical infrastructure. So it’s not just as simple as implementing and integrating.”
CP was one of the first Class I railroads to deploy PSR, so its implementation of the controversial model is considered more mature. Hunter Harrison, who served as CEO at CP, rival Canadian railway CN (NYSE: CNI) and CSX (NASDAQ: CSX), as well as the Illinois Central Railroad, deployed PSR at CP when he was its head in the mid-2010s after serving as CN’s CEO. Creel served with Harrison at CN, and he worked at Illinois Central.
One of the problems that the U.S. Class I railroads encountered when deploying PSR was that the COVID-19 pandemic hit when those railroads were still figuring things out, according to Creel.
But once they reach the head count levels they need and get the infrastructure and terminals ready to accommodate longer trains, the implementation of PSR will improve service, Creel said.
“I think in the end, we’ll look back and we’ll say this was a good thing. Hard to say that now,” Creel said. “… I’ve done this for over 20 years, and I didn’t get it all right either. We made some mistakes along our journey at Canadian National and Canadian Pacific and even Illinois Central. But we learn from those. We bake those into the way we railroad today, and I think you can produce a better outcome.
“I think we’re proof positive of that. We’ve managed this cycle with PSR … . We’ve created an infrastructure and a rhythm and an ability and respect with our customers and our trust with our customers that we’re helping them win in their marketplaces as we win for all stakeholders, and we’re doing it as a PSR railroad.”
CP still anticipates an early 2023 approval from the Surface Transportation Board for its planned merger with Kansas City Southern. Shareholders of CP and KCS approved the $31 billion deal in December, and the merger has been with STB for review.
STB plans to hold a three-day hearing with various stakeholders about the merger.
To prepare for the integration, CP and KCS have been running test shipments on an interline basis in intermodal, grain and metals, and there have been “very progressive and exciting exploratory discussions about new opportunities in export potash,” Creel said.
KCS’ footprint extends into Mexico via Kansas City Southern de Mexico.
“We ran now six, seven trains that have come up from Lazaro [Cardenas in Mexico] all the way to Chicago with seven-day transits. That’s West Coast-competitive,” Creel said. “We continue to run domestic [intermodal] moves out of Chicago … that are going to the border at Laredo with 90-hour transit times. CP and KCS have also run several grain trains from Manitoba to as far south as Mexico with “super impressive cycle times.”
Both CP and KCS continue to make capital investments in areas such as additional sidings, which will expedite the integration and related synergies, executives said.
“As I go through business unit by business unit on a weekly basis with my team looking at those synergies as we talk to those customers, I continue to feel very confident that [in] 2023, that coming out of the chute, there’s going to be a significant opportunity to sort of hit that plan as we’ve described,” said CP Chief Marketing Officer John Brooks.
As CP looks to the second half of the year, it expects favorable grain volumes that could be shipped into the fourth quarter and into 2023 because of a late harvest, “strong global demand” for agriculture nutrients and potash and “strong results” for intermodal, according to Brooks.
“We’re watching the news and hearing all the reports and Walmart and others being pretty cautious. We’re talking to our retailers. Our domestic team is talking to our retailers every day,” Brooks said. “And actually, I’m still quite optimistic. We see this year continuing to be strong in both of those books, domestic and international. And then we’ll see what plays out in 2023. But frankly, I’m still optimistic that at least [for] the first part of that, we continue to see a tail on the strong demand that we’re realizing right now.”
Q2 2022 financial results
CP posted a net profit of CA$765 million ($597 million), or 82 cents per diluted share, in the second quarter of 2022, compared with net profit of $1.25 billion, or $1.86 per diluted share, in the second quarter of 2021.
Second-quarter total revenue rose 7% to $2.2 billion, while operating expenses grew 8% to $1.33 billion amid higher fuel costs.
Reported operating ratio was 60.6% in the second quarter, compared with 60.1% from a year ago, while adjusted OR was 59.7% in the second quarter compared with 55.3% year over year.
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