(The following article by Brent Jang was posted on the Globe and Mail website on April 21.)
TORONTO — Canadian National Railway Co. posted a record first-quarter profit as it kept costs under control and enjoyed brisk demand for moving everything from cars to soybeans.
The stellar showing by Canada’s largest railway is the latest indication that the continental rail industry’s rally over the past 30 months still has room to run, analysts said yesterday.
“We view CN as the quality railway in all of North America, and the biggest reason is how they’re continually improving their profitability,” said Daniel Ortwerth, an analyst at Edward Jones & Co.
Mr. Ortwerth said the bullish economy and the rising tide of international trade have helped CN and other railways. “The rail industry in general has awakened to the need to improve its service levels and it’s done this at an opportune time.”
CN reported yesterday that it made $362-million or 66 cents a share in the latest quarter, up 21 per cent from $299-million or 52 cents for the first three months of 2005. Revenue rose 8 per cent to more than $1.8-billion.
The Montreal-based company’s operating ratio — a key indicator of productivity that measures operating costs as a percentage of revenue — fell to 66.2 per cent from 69.2 per cent a year earlier. A lower operating ratio is better, and the latest figure marked a record first-quarter performance by CN.
The railway had 21,656 employees at the end of the first quarter, down 3 per cent from a year earlier.
Hunter Harrison, CN’s president and chief executive officer, said freight rate increases helped bolster revenue. “An impressive start to the year and I’m looking forward to more of the same,” he said during a conference call from Memphis.
CN holds its annual meeting today in Memphis, where it will be spending $100-million (U.S.) to improve its freight-switching operations in the U.S. distribution hub.
All seven of CN’s key commodity groups thrived in the first quarter, including higher grain shipments for Canadian canola and U.S. corn.
Booming Asian trade and a rally in commodity prices have translated into robust demand for rail services. Mr. Harrison said a container terminal opening at the Port of Prince Rupert in northern British Columbia in October, 2007, will be important in expanding trade lanes into Canada.
“Prince Rupert is the place where people are going to want to be,” he said.
The tracks haven’t all been smooth for CN. The company faced criticism for high-profile derailments last year, but countered that it remains committed to rail safety. Earlier this week, CN said it will be helping to promote a public safety campaign next week designed to reduce the number of deadly collisions at railway crossings.
Analysts say financial results released by CN and Union Pacific Corp. are further evidence of the industry’s resurgence.
Omaha-based Union Pacific, North America’s largest railway, reported yesterday that it posted a record first-quarter profit of $311-million or $1.15 a share, up from $128-million or 48 cents a year earlier. Revenue rose 18 per cent to $3.7-billion.
So far, the railways have been able to weather soaring diesel bills by passing on higher costs to their customers. But one potential spoiler to the party could be next month’s U.S. public hearings into fuel surcharges in the rail sector.