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Globe Investor Canadian Pacific cuts deep as Hunter Harrison makes his mark

Canadian Pacific CEO Hunter Harrison

Christinne Muschi/The Globe and Mail

Canadian Pacific Railway Ltd. is slashing close to a quarter of its work force over four years, as recently arrived CEO Hunter Harrison aggressively carves out costs to create a more competitive railway.

Approximately 1,700 jobs will be eliminated by year's end through layoffs, attrition and the use of fewer contract positions, with up to a total of 4,500 jobs by 2016 – about 23 per cent of the current 19,500 employees and contractors.

The job cuts are the centrepiece of a sweeping restructuring plan that aims to change CP's reputation as one of North America's least-efficient railroads. U.S. hedge fund manager Bill Ackman and his company, Pershing Square Capital Management, won a fiercely contested battle this spring to gain control on the railway's board and install Mr. Harrison, a highly regarded railway manager, as its new chief executive officer.

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With his folksy manner, Mr. Harrison emphasized that making the company more streamlined was his first job.

"This is clearly, initially, a cost-takeout story," he told financial investors at a presentation in New York. "We were clearly, in my view, top heavy," he added, noting that 28 to 30 per cent of employees were in non-union, management positions. "That's far too much."

He doesn't see labour negotiations getting in the way of the job cuts. "None of this is dependent upon some breakthrough that's not being expected with labour," Mr. Harrison said.

CP had already begun to slim its rail network this fall.

This included reorganizing and speeding up its Vancouver-to-Chicago and Vancouver-to-Toronto intermodal container schedule, while closing four switching yards in Toronto, Winnipeg, Calgary and Chicago.

The company is undergoing a "rationalization" of its yards, Mr. Harrison said. As a railway largely geared toward hauling bulk commodities, such as grain and potash, hump yards for decoupling cars and rebuilding trains are needed comparatively less often than by rivals such as Canadian National Railway Co. which devotes more of its business to hauling a greater variety of freight.

However, Mr. Harrison told investors Tuesday that he is interested in increasing the breadth of what CP transports, given that merchandise shipping (which can include anything from oil to auto parts) currently represents only about a fifth of CP's overall business.

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Also part of the restructuring is more efficient use of its trains. CP will be increasing its trains' length and efficiency, in order to haul more with fewer trains. The company is also closing intermodal container terminals in Obico near Toronto, Schiller Park near Chicago, and in Milwaukee, as it continues to streamline operations.

"I would emphasize to you that the rationalization of the hump yards and the siding [train-length] extensions and the reduced train starts are two of the most significant initiatives," Mr. Harrison said.

The company also plans to look more critically at its property costs and real estate holdings. This will include moving its headquarters out of leased, downtown Calgary office space and relocating by 2014 to offices that CP owns at its suburban Ogden Yard.

These service improvements will enable the company to get by with 195 fewer locomotives and 3,200 fewer leased freight cars, CP said Tuesday.

"I am excited about what we've achieved to date, but we have only just started this journey to being a more competitive railway. We will continue to drive our service offering while focusing on taking unproductive costs out of the business," Mr. Harrison added in a press release outlining the plan.

"We see a strong earnings profile and solid free cash flow picture emerging."

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The plan projects growth in annual revenue of 4 per cent to 7 per cent over the next four years, and annual capital spending of $1-billion to $1.1-billion up to 2016.

"It takes in this business a little bit of dreaming. You've got to be a visionary," he added in his presentation to the investment community. "The first thing I did when I came to this organization, or any organization, was to take the map [of the railroad's network] home at night and starting saying, 'What if? What if we could do this? What if we could do that?'"

CP will release more details of its restructuring in New York on Wednesday morning.

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