Canadian Pacific Railway Ltd.'s chief executive officer is firing back at Bill Ackman's plans to overhaul the freight carrier, saying the U.S. investor activist is being far too aggressive with targets to cut costs and raise revenue.
Mr. Ackman and his hedge fund Pershing Square Capital Management LP have launched a proxy battle to elect a minority of new directors at CP and replace CEO Fred Green with Hunter Harrison, the former chief at Canadian National Railway Co., the sector's most efficient train operator.
A letter to employees from Mr. Green on Friday indicates CP is digging in its heels and preparing for a long fight that comes at a crucial time for the historic railway. In issuing the letter, Mr. Green made his first public response to a stream of criticisms from Pershing Square since last fall.
Calgary-based CP's operating ratio, a key indicator of productivity that measures costs as a percentage of revenue, is the worst among North America's Big Six railways. But Mr. Green said New York-based Pershing Square is being unrealistic in pressing for huge productivity gains within three years.
"Contrary to what Pershing Square has stated, we do not believe that an improvement in OR [operating ratio]from 78 in 2010 to 65 in 2015 is achievable," Mr. Green said in the four-page letter. "This pace of improvement, from this starting point, has never been achieved by any railway management team. In fact, it took Hunter Harrison seven years to lower CN's OR from 75 to 65 during a strong economic period and one in which CN significantly grew revenues through acquisitions."
Analysts say CP needs to become more efficient by reducing expenses and increasing revenue while overcoming the challenges of winter weather and steep grades through the Rockies. A lower operating ratio is better.
In the first nine months of 2011, CP's ratio was 82.4 per cent, compared with CN's industry-leading 63.1 per cent.
Mr. Green said CP is accelerating its strategic overhaul and expects to improve its operating ratio to the low 70s within three years, "with further benefits to be realized in 2015 and beyond."
He said CP chairman John Cleghorn and other members of the board met recently with shareholders to reassure them that Canada's second-largest railway is "holding all employees accountable for delivering continuous improvement" to bring CP's operating performance in line with its peers.
CP's efficiency plans include running longer, faster trains, upgrading the line from Edmonton to Winnipeg, decreasing the amount of time that freight is kept at rail yards and operating new, fuel-efficient locomotives on key routes such as those through the Rockies.
Ed Harris, a former top CN executive who joined CP's board of directors last month, endorsed Mr. Green's views.
In a testimonial contained in Mr. Green's letter, Mr. Harris said Montreal-based CN has "twice the proportion of sidings and double track," while "CP has to contend with greater geographic challenges" because its trains have to climb and descend through more difficult terrain in the Rockies than CN encounters.
Sidings, sections of track located to the side of main rail lines, give workers more flexibility to reposition trains quickly.
Mr. Green said CP's customers have been receptive to the company's recovery strategy. "These productive relationships are key drivers of our company's growth, as demonstrated by the progress we have achieved in our grain, coal, potash, crude oil and merchandise businesses," he wrote.
His letter also carried endorsements from Jim Prokopanko, CEO at potash producer Mosaic Co., and Don Lindsay, CEO at coal miner Teck Resources Ltd.
"As CP's largest customer, we've been pleased with their dedication to ensuring that we get the rail service we need and their deep understanding of our current and long-term needs," Mr. Lindsay said.
Pershing Square, which began acquiring CP stock last September, is the railway's largest shareholder after investing $1.4-billion for what is now a 14.2-per-cent stake.
"Even though we did not choose to be the target of Pershing Square's public demands, there is a silver lining. The situation shines a spotlight on CP as we continue with our efforts to achieve superior performance for the benefit of both our customers and shareholders," Mr. Green said in his letter to staff.