(The following article by Brent Jang was posted on the Globe and Mail website on March 30.)
TORONTO — Canadian National Railway Co. has kept earnings chugging ahead in recent years in the face of hurricanes, derailments, mudslides and high fuel prices, but a strike last month pierced the railway’s financial armour and prompted a rare profit warning yesterday.
CN forecasts that its first-quarter earnings a share will be 5 to 10 per cent lower than a year earlier because of a strike in February and the harsh winter that disrupted operations. Montreal-based CN posted a $362-million profit, or 66 cents a share, in the first quarter of 2006.
Since the former Crown corporation listed on the Toronto Stock Exchange in 1995, it has surprised analysts by staying on track financially, despite frequent adversity. Yesterday marked CN’s second profit warning in 12 years.
Recent landslides in Western Canada have slowed efforts to restore operations to normal after the strike by the United Transportation Union ended Feb. 24.
Before the strike, extreme rain and snowy weather in the West had already hampered the railway.
CN issued yesterday’s notice as chief executive officer Hunter Harrison continued his efforts to repair the damage from labour tensions.
In an internal letter to CN managers, Mr. Harrison said supervisors must do their part to create a new conciliatory atmosphere.
“If you find a situation where we have made a mistake and breached a collective agreement provision, admit it and resolve the claim,” he wrote.
CN management is clashing with the UTU over productivity measures. CN sets daily standards, seeking to fill all available slots for train traffic by carefully assigning locomotives, crews and maintenance work to focus on moving shipments on time. The UTU counters that employees are constantly under the gun, facing a stream of deadlines in an effort to meet CN’s targets as a “precision railroad.”
Mr. Harrison said the freight carrier is developing new ways to address employees’ concerns because “our existing grievance system fosters an adversarial approach to problem solving.”
Rail-dependent manufacturers, chemical producers, forestry firms, farming groups and miners curtailed or halted production during the strike in February.
The UTU will release results of the ratification vote on April 10. In a memo this week to union members, UTU international president Paul Thompson urged CN workers to approve the tentative, one-year labour pact.
Rotating strikes could hit CN if the contract fails to win approval, he cautioned.
“I am hereby authorizing that such strike actions should be resumed without delay at 5 p.m. EDT on April 10, 2007,” if UTU members vote against the deal, Mr. Thompson wrote.
During the strike, about 600 railway managers filled in for 2,800 conductors and yard service employees, who marshal trains and switch tracks.
Mr. Harrison said management “must once again prepare ourselves for the risk of service disruptions. That means that many of you would be called upon once again to step up and do what is necessary to provide service to our valued customers, and to protect our franchise.”
He added that workers are misguided if they think they can forge a better labour pact than the one already on the table.
Despite the bumpy start to 2007, CN still plans to attain its goal of diluted earnings a share growth of at least 10 per cent for the full year.
CN shares fell 63 cents to $51.18 yesterday on the TSX.
Cliff Mackay, president of the Railway Association of Canada, noted that both CN and Calgary-based Canadian Pacific Railway Ltd. endured a rough winter.
“This last winter was short but very severe, particularly on the West Coast and B.C. Interior,” Mr. Mackay said in an interview.
Fadi Chamoun, an analyst with UBS Securities Canada Inc., said CN’s prospects for the rest of this year still look bright, with plans to open a new container terminal at the Port of Prince Rupert in British Columbia in the fall.
Mr. Chamoun acknowledged the weaker-than-expected profit for the first quarter, but played down lingering effects. “We advise investors to look beyond this short-term noise,” he wrote in a research note yesterday.
CN will report its first-quarter results on April 23.