After tough quarter, CN says it's ready for whatever comes next

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A Canadian National train on the former Elgin, Joliet & Eastern passes under CN's former IC line in Matteson, Ill., in May 2020. CN's second-quarter earnings were battered by the impact of the coronavirus.
TRAINS: David Lassen

MONTREAL — As some segments of Canadian National’s traffic bounce back, railway executives say they’ll be ready for whatever comes next: Rising volumes or a second wave of the coronavirus pandemic that would hammer the company’s earnings.

“Whether or not the world goes back to normal in six months or we have a prolonged pandemic, we have the team to get this done,” CEO JJ Ruest told investors and analysts on the company’s earnings call on Tuesday.

The second quarter was unprecedented across the board. CN’s operating income tumbled 53%, to $785 million, as revenue declined 19%, to $3.2 billion. Earnings per share, adjusted for the impact of one-time items, slumped 26% to $1.28.

The railway’s operating ratio, also adjusted for the impact of one-time items, was 60.4%, which was 2.9 points higher than last year’s second quarter. Absent the adjustment, CN’s operating ratio was 75.5%.

CN’s volume sank 16% on a carload basis, or 18% when measured by revenue ton-miles, the preferred metric of the Canadian railways. 

CN responded to the sharp downturn in traffic by running fewer but longer trains, closing yards and shops, furloughing 4,000 employees, and storing a third of its locomotive fleet and 20,000 freight cars. 

Train length and weight reached record levels, Chief Operating Officer Rob Reilly says, as fuel efficiency improved 2%, also to record levels. Train starts (minus-21%) were down more than the reduction in revenue ton miles (minus-19%).

Some of the changes to CN’s operations will be permanent. 

“The idled locomotive shops and switching yards will remain closed,” Reilly says. “We will continue to improve train size year-over-year.”

The closed yards are at Battle Creek, Mich.; Jackson, Miss.; Garneau, Quebec; and Kamloops, British Columbia. CN reduced mechanical shop activity at more than 20 locations and shuttered four locomotive shops at unspecified locations.

There were some traffic bright spots despite the pandemic-related downturn.

CN set records for Canadian coal, grain, propane, and wood pellet exports via West Coast ports in the second quarter, says James Cairns, senior vice president for rail-centric supply chain. CN expects to see continued growth of carload commodities through the Port of Prince Rupert, B.C., this year.

CN set monthly records for Canadian grain shipments for the past four months. The railway will invest in 1,500 new high-capacity hopper cars set for delivery next year. The cars will be able to handle 20% more wheat and 40% more canola than older cars.

Intermodal volume through Prince Rupert likely will set a record this month and August looks strong as well based on scheduled sailings from Asia, says Keith Reardon, senior vice president for consumer supply chain.

CN’s refrigerated container service for food products grew during the quarter, as well, and containerized export of Canadian grain grew 60%. CN’s interline intermodal service with CSX Transportation, linking the ports of Philadelphia, New York and New Jersey with Toronto and Montreal, also grew during the quarter.

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