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CP Rail's efficiency strategy goes full steam ahead

CP Rail’s efficiency strategy goes full steam ahead

Udo Weitz/Bloomberg News/Udo Weitz/Bloomberg News

Canadian Pacific Railway Ltd. says its efficiency strategy is starting to pay off as heavier and longer trains powered by new locomotives help the company recover from a shaky first half.

The railway has been gaining momentum since mid-August, CP chief executive officer Fred Green said in an internal memo to employees just three days before an activist hedge fund disclosed that it had become the company's largest shareholder.

William Ackman, the CEO at Pershing Square Capital Management LP, met with CP executives last week to discuss a strategic review of the railway's underperforming operations.

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Shortly before Mr. Ackman revealed New York-based Pershing's 12.2 per cent stake in CP, Mr. Green assured staff that the railway's setbacks were temporary and largely due to severe winter weather slamming Western Canada and the U.S. Midwest, followed by spring flooding.

In a note dated Oct. 25, Mr. Green said Calgary-based CP is "back in its rhythm" and gearing up to tackle winter.

"We have also had success in performance metrics with the ramping up of both train weights and lengths" during the third quarter, he said.

CP has been on a hiring spree. The freight carrier had 16,675 workers at the end of September, or 663 more than a year earlier, and it will hire another 500 employees this winter.

The company is also upgrading its equipment, with plans to gradually deploy more than 90 new fuel-efficient locomotives by the end of March.

"We will continue adding in resources such as people and equipment to ensure we can be ready to react to swings in both operating conditions and customer demand," Mr. Green said. "With this nimbleness, a return to more typical seasonal conditions and a solid winter plan, we're targeting improvements in Q4 [fourth quarter] in service productivity and financial performance."

CP wants to protect its strengths in moving coal and potash, as well as nurture growth areas such as transporting crude oil inside tank cars by rail, notably from the Bakken oil formation in North Dakota and Saskatchewan. The railway is also keen to move more ethanol from the U.S. Midwest to consumer markets in the U.S. Northeast.

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"We feel generally positive about our prospects in both the bulk commodities and energy," Mr. Green said.

The company's operating ratio, a key indicator of productivity that measures operating costs as a percentage of revenue, has worsened. A lower operating ratio is better, but CP had a ratio of 82.4 per cent in the first nine months of this year, compared with 77.8 per cent in the same period last year.

Mr. Green said in a separate memo that the cost-cutting campaign titled Execution Excellence for Efficiency, or E3, is a multiyear effort. CP must "remain focused on our steady march towards a low 70s operating ratio in the next two to four years," he said.

But the E3 endeavour lost some steam when one of CP's key executives assigned to spearhead the productivity drive departed in the summer. Brock Winter, a senior vice-president, retired after 35 years at the company. "Brock was charged with assessing our current technological state and consolidating the various thinking within the railway on what future innovation and applications would allow us to drive the digital railway of the future," Mr. Green said.

Mr. Winter's retirement marks the second departure of an executive tasked with helping whip CP into shape.

Ed Harris, a former top executive at rival Canadian National Railway Co., stepped down from his position as CP's executive vice-president of operations in April, after only one year. Mr. Green promoted Mike Franczak to replace Mr. Harris, who agreed to stay on in an advisory role to smooth the transition until the end of December.

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About the Author

Brent Jang is a business reporter in The Globe and Mail’s Vancouver bureau. He joined the Globe in 1995. His former positions include transportation reporter in Toronto, energy correspondent in Calgary and Western columnist for Report on Business. He holds a Bachelor of Commerce degree from the University of Alberta, where he served as Editor-in-Chief of The Gateway student newspaper. Mr. More

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